Banco Popular Espanol S.A.

Transcription

1 Primary Credit Analyst: Elena Iparraguirre, Madrid (34) ; Secondary Contact: Lucia Gonzalez, Madrid (34) ; Table Of Contents Major Rating Factors Outlook Rationale Related Criteria And Research JANUARY 12,

2 SACP b+ + Support 0 + Additional Factors 0 Anchor Business Position bbb- Adequate 0 ALAC Support 0 Issuer Credit Rating Capital and Earnings Moderate -1 Risk Position Weak -2 Funding Liquidity Average Moderate -1 GRE Support 0 Group Support 0 Sovereign Support 0 B+/Positive/B Major Rating Factors Strengths: Weaknesses: Sound and resilient franchise in Spanish small and midsize enterprises (SMEs). Better operating efficiency than peers. Higher credit risk than the Spanish banking sector average. Moderate capitalization. Still elevated recourse to European Central Bank (ECB) financing. Outlook: Positive The positive outlook reflects our expectation that Banco Popular Espanol S.A. (Popular) will continue making progress in rebalancing its funding and liquidity position. We expect Popular to expand its stable funding base with new customer deposits and wholesale debt issues and to further reduce its ECB and/or short-term funding resources. This could allow Popular to maintain a liquidity buffer that would comfortably exceed total short-term wholesale funding over the next months. We could revise our outlook on Popular back to stable if the bank proves unable to strengthen its liquidity position or if it shifts toward a more aggressive strategy. The latter could result from the bank engaging in a material acquisition in geographies or businesses where Popular's management know-how is limited. Rationale Our ratings on Popular are supported by the bank's solid and profitable franchise in the Spanish SMEs segment, which JANUARY 12,

3 it has been able to preserve despite financial difficulties in the past few years. This solid position should allow it to continue posting higher margins and better efficiency than the system average. Our ratings also take into account the progress the bank has made in tackling its key strategic challenges. The ratings remain constrained, however, by Popular's weak financials, with meaningful credit risk still embedded in its balance sheet. The stock of problematic assets is very high (equivalent to 29% of gross loans and real estate exposures as of September 2015); capitalization is moderate (we forecast the bank's risk-adjusted capital (RAC) ratio to range between 5.5%-6% over the next months); and recourse to ECB financing remains elevated ( 13.5 billion or about 8% of assets at June 2015). Our ratings on Popular stand at the level of its stand-alone credit profile (SACP). Although we still consider Popular to have moderate systemic importance, the bank's ratings no longer benefit from uplift reflecting our view of the likelihood of the bank receiving extraordinary government support if needed. This is because we now consider prospects of extraordinary government support for banks in Spain to be uncertain, following the country's full implementation of the EU Bank Recovery and Resolution Directive (BRRD). The long-term ratings on Popular also do not benefit from uplift for additional loss-absorbing capacity (ALAC), as we estimate that the bank's ALAC buffer would stand at 1.7% of risk-weighted assets (RWA) by the end of 2017, which is well below the minimum 5% threshold for a one-notch uplift. Anchor: 'bbb-' for banks operating almost exclusively in Spain Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for banks operating mainly in Spain is 'bbb-'. Our economic risk score of '6' for Spain primarily reflects our view that the country has yet to recover from the damaging effects caused by the bursting of the real estate bubble and the long economic recession, which led to an aggregate reduction of 7% of real GDP in five years. As the property market and economy enter into a cyclical recovery, banks are gradually reducing their high stock of nonperforming assets (NPAs) and continue to lower their provisioning efforts. We see this as an ongoing process, though, and we don't expect credit losses to reach normalized levels until Our economic risk score also reflects our view of the private sector's still-vulnerable financial position, despite the significant deleveraging it has already accomplished, as well as the government's limited macroeconomic policy flexibility. Our industry risk score of '5' primarily reflects the Spanish banking system's structural reliance on external funding, which makes it vulnerable to potential shifts in investor confidence. We also think that the extremely low interest rates will constrain the pace at which banks strengthen their profitability and could heighten competition, threatening sensible pricing. The restructuring of the system's weaker players is progressing well, in our view, but is not yet complete. JANUARY 12,

4 Table 1 Banco Popular Espanol Key Figures --Year-ended Dec (Mil. ) 2015* Adjusted assets 157, , , , ,930 Customer loans (gross) 101, , , ,163 93,091 Adjusted common equity 8,460 8,075 7,218 6,027 7,561 Operating revenues 2,365 3,172 3,473 3,995 3,066 Noninterest expenses 1,318 1,959 1,879 1,906 1,394 *Data as of September Business position: Sound and resilient franchise in Spanish SMEs We assess Popular's business position as adequate, reflecting our view that the bank has been able to preserve its solid and profitable franchise within the SME segment despite facing financial strains in recent years, while also making progress in tackling its key strategic challenges. Popular is the sixth-largest banking institution in Spain, holding about 7.6% of the system's loans and 6.0% of deposits as of June 30, Its franchise is particularly strong with SMEs (the bank's share of total SME and corporate lending reached 12.2% in August 2015) and individuals, with which Popular has deep product penetration. The bank's focus in the SME business supports its higher-than-market average margins (customer spread stood at 2.56% as of September 2015), and, as a result, its better efficiency metrics. Furthermore, the bank's focus on traditional commercial banking activities--which generate about 75% of its recurrent revenues--provides stability to its revenue stream. Popular's geographic diversification outside Spain is limited. The only sizable operation abroad is in Portugal, which at June 2015 accounted for about 5.1% of the bank's consolidated total assets and 7.3% of total revenues. Popular faces several strategic challenges: continuing to strengthen its balance sheet, working out its large stock of NPAs, turning around profitability, and redefining its risk appetite and credit culture. In our view, the management team is conscious of the challenges and has put in place initiatives to address them. For example, Popular has increased its focus on working out its large stock of NPAs, investing important managerial resources in this issue. As a result, the bank has managed to accelerate the sale of foreclosed real estate assets, as the Spanish real estate market entered in a cyclical recovery. Total sales of real estate assets of 1.6 billion in the first nine months of 2015 constitute a 61% increase over the same period in 2014, making the bank on track to meet, and even slightly exceed, its 2.0 billion target for the whole year. As this process continues and Popular's cost of risk normalizes, the bank's profitability could gradually recover. We expect the management team to continue focusing on these priorities until the bank's financial profile strengthens and thus we do not envisage the bank undertaking acquisitions at this point. JANUARY 12,

5 Table 2 Banco Popular Espanol Business Position --Year-ended Dec (%) 2015* Loan market share in country of domicile N.A. Deposit market share in country of domicile N.A. Commercial banking/total revenues from business line N.A Corporate finance/total revenues from business line N.A Asset management/total revenues from business line N.A Return on equity (29.25) 6.35 *Data as of September N.A.--Not available. Capital and earnings:the build-up of organic capital remains constrained by still-high provisioning needs We view Popular's capital and earnings as moderate, reflecting our expectations that its RAC ratio will improve only moderately in , rising to 5.5%-6.0% from 4.9% in Our forecast anticipates limited profits, a resumption of cash dividend payments, and modest loan and RWA growth. In our view, the bank's returns will remain constrained by still-high (albeit lower than in prior years) credit impairments, despite the ongoing economic recovery in Spain. This partly results from Popular's relatively low coverage of NPAs, at about 41% as of September Additionally, and notwithstanding Popular's higher margins than domestic peers, we believe that persistently low interest rates will constrain the bank's ability to grow its revenues. We forecast the bank's net interest income as a proportion of interest-earning assets, which exceeded 2% before the crisis, to stay at about 1.55% in Over the past three years, Popular has enhanced its regulatory capital through the completion of two capital increases, the issuance of two additional Tier 1 (AT1) instruments and a series of exceptional capital gains on asset disposals. As a result, the bank reached a comfortable Common Equity Tier 1 (phased in) ratio of 12.65% as of Sept. 30, Our measure of the bank's capital also strengthened over this period--but, as it does for other Spanish banks, this measure remains materially lower than the bank's regulatory metrics. This is mainly the result of the higher risk weighting we apply to several asset classes in Spain, reflecting our view of the still-higher risks posed by the domestic economic environment compared to that of other peer countries. Our RAC forecast for the bank could improve, however, if economic risks in Spain were to ease. We estimate that in that scenario, Popular's RAC ratios could be about 80 basis points higher than current forecasts, which would still not be enough to lead to a better capital and earnings assessment. Our lower capital ratios also reflect our more conservative adjustments to the bank's capital base, such as the deduction of deferred tax assets derived from tax losses carried forward. Following the issuance of a 750 million contingent convertible bond in February 2015, hybrid capital currently accounts for about 19% of the bank's total adjusted capital (TAC), which is not excessive. However, the bank also carries in its books a stock of deferred tax assets (DTAs) resulting from time differences, which JANUARY 12,

6 somewhat weakens the quality of its capital. The stock of DTAs, other than tax loss carry-forwards (which we deduct from our calculation of TAC), was equivalent to a quarter of Popular's TAC, which is lower than that of domestic peers, but high in a global comparison. Table 3 Banco Popular Espanol Capital And Earnings --Year-ended Dec (%) 2015* Tier 1 capital ratio S&P RAC ratio before diversification N.A S&P RAC ratio after diversification N.A Adjusted common equity/total adjusted capital Net interest income/operating revenues Fee income/operating revenues Market-sensitive income/operating revenues Noninterest expenses/operating revenues Preprovision operating income/average assets *Data as of September N.A.--Not available. Table 4 Banco Popular Espanol Risk-Adjusted Capital Framework Data (Mil. ) Exposure* Basel II RWA Average Basel II RW (%) Standard & Poor's RWA Average Standard & Poor's RW (%) Credit risk Government and central banks 31,831 3, , Institutions 8,998 2, , Corporate 42,478 27, , Retail 51,728 18, , Of which mortgage 31,742 9, , Securitization , Other assets 21,707 18, , Total credit risk 157,033 70, , Market risk Equity in the banking book 1,007 1, , Trading book market risk , Total market risk -- 2, , Insurance risk Total insurance risk , Operational risk Total operational risk -- 6, , JANUARY 12,

7 Table 4 Banco Popular Espanol Risk-Adjusted Capital Framework Data (cont.) (Mil. ) Basel II RWA Standard & Poor's RWA % of Standard & Poor's RWA Diversification adjustments RWA before diversification 80, , Total Diversification/Concentration Adjustments -- (10,027) (5) RWA after diversification 80, , (Mil. ) Capital ratio Tier 1 capital Tier 1 ratio (%) Total adjusted capital Standard & Poor's RAC ratio (%) Capital ratio before adjustments 9, , Capital ratio after adjustments 9, , *Exposure at default. Securitization exposure includes the securitization tranches deducted from capital in the regulatory framework. Exposure and Standard & Poor's risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. Sources: Company data as of Dec. 31, 2014, Standard & Poor's. Risk position: High credit risk compared with industry average Our assessment of Popular's risk position as weak reflects our belief that the risk embedded in the bank's loan book is higher than that of its domestic peers', as reflected by the high stock of problematic assets accumulated during the downturn. This higher risk profile is not fully captured in our industrywide calibrated RAC ratio for the bank, which actually overstates the bank's capacity to absorb the unexpected losses that could arise in a stress situation. Furthermore, although Popular managed to stabilize in 2015 its stock of problematic exposures and we expect these to trend down as the economy recovers, we believe that the bank's asset quality metrics will continue to underperform the banking system average in Spain. In our view, weak underwriting standards during the years before the crisis and a high exposure to real estate developers led the bank to accumulate a sizable portfolio of problematic assets. At September 2015, nonperforming loans (NPLs) and real estate assets (foreclosed or acquired) accounted for a high 29% of the bank's gross loan book and real estate exposures. Our expectation is that, in the next few years, the bank will gradually reduce its stock of problematic assets, on the back of a more supportive economy. In 2015, we have seen Popular reporting net outflows of NPLs, while quarterly sales of real estate assets are also on an upward trend. We believe that the bank should be able to comfortably achieve, or even slightly exceed, its target of 2.0 billion sales in equivalent to 8% of total NPLs from real estate developers and foreclosed assets. However, given the size of the portfolio, it will take the bank a number of years until the work-out of these legacy exposures is completed. We also note that Popular's credit loss reserve coverage is significantly below the banking system average in Spain, with reserves representing about 41% of total NPAs in September JANUARY 12,

8 Table 5 Banco Popular Espanol Risk Position --Year-ended Dec (%) 2015* Growth in customer loans (0.81) (1.08) (6.92) Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans (**) Net charge-offs/average customer loans Gross nonperforming loans/customer loans Loan loss reserves/gross nonperforming loans *Data as of September **Includes impairments on real estate assets. RWA--Risk-weighted assets. Funding and liquidity: Usage of ECB funding remains high Popular's funding profile has materially improved over the past few years, thanks to significant develeraging and a growing deposit base, and it is now structurally much more balanced. At September 2015, the loan-to-deposits ratio stood at 114%, down from 149% in December 2012 and about 200% at end Similarly, the coverage of stable funding needs with available stable funding improved to around 95% by Sept. 30, 2015, from 75% in Dec. 31, Wholesale funding sources include repos and ECB borrowings (which primarily fund the bank's securities portfolio); funding provided by Spain's state financial agency ICO and the European Investment Bank (EIB), to be on-lent to the private sector; senior unsecured debt; and covered bonds. Funding costs continue to decline both on the retail and wholesale funding base. Popular gathered new time deposits at a rate of 0.46% in the third quarter of 2015, while the stock was remunerated at an average rate of 1.01%. Similarly, in the wholesale markets, in 2015, the bank managed to refinance 4.3 billion of maturities with an average cost of 3.25%, with 4.1 billion of new issues at 0.95%. The bank's liquidity position is also improving. As of Sept. 30, 2015, broad liquid assets almost fully covered the bank's short-term wholesale funding (0.99x), compared with coverage of 0.78x at Dec. 31, 2014, and 0.5x at Dec. 31, However, we continue to view Popular's liquidity as moderate given the bank's continued use of ECB financing. Total ECB borrowings actually increased in 2015, reaching 13.5 billion in June, or 8% of total assets, up from 10.0 billion in Dec. 31, 2014, and 3.4 billion in Dec. 31, Current balances are, however, below those reported at the end of 2012 (about 20.5 billion). We understand that the additional ECB funding raised in 2015 has replaced repo financing. These two sources fund the bank's 27 billion available-for-sale portfolio, two-thirds of which are government debt securities. Table 6 Banco Popular Espanol Funding And Liquidity --Year-ended Dec (%) 2015* Core deposits/funding base Customer loans (net)/customer deposits Long term funding ratio Stable funding ratio JANUARY 12,

9 Table 6 Banco Popular Espanol Funding And Liquidity (cont.) Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) Short-term wholesale funding/total wholesale funding *Data as of September Support: No notches of uplift above the bank's SACP The long-term rating on Popular stands at the level of its SACP, as we do not currently do not incorporate any notches of uplift for potential extraordinary government support or for ALAC. That is because, first, we now believe that the prospects of extraordinary government support for the Spanish banking sector are uncertain, following the full implementation of the EU BRRD, including bail-in powers, from Jan. 1, Second, we consider that Popular's ALAC buffer is unlikely to exceed our required 5% threshold for one notch of uplift over a projected two-year period. We estimate that Popular's ALAC buffer will be equivalent to about 1.0% of Standard & Poor's RWA at December 2015, increasing to just above 1.5% by end We include in our ALAC calculation Popular's Tier 1 and Tier 2 capital instruments outstanding, as well as the group's new nondeferrable dated subordinated debt issue planned for We believe these issues have the capacity to absorb losses without triggering a default on senior obligations. Our forecasts do not contemplate any further issuance of loss-absorbing instruments, but assume that call dates on existing instruments will not be exercised. Additional rating factors: None No additional factors affect this rating. Related Criteria And Research Related Criteria Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015 Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 Banks: Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015 Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014 Standard & Poor's National And Regional Scale Mapping Tables, Sept. 30, 2014 National And Regional Scale Credit Ratings, Sept. 22, 2014 Group Rating Methodology, Nov. 19, 2013 Ratings Above The Sovereign-Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013 Use Of 'C' And 'D' Issue Credit Ratings For Hybrid Capital And Payment-In-Kind Instruments, Oct. 24, 2013 Assessing Bank Branch Creditworthiness, Oct. 14, 2013 Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013 Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012 Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Methodology For Mapping Short- And Long-Term Issuer Credit Ratings For Banks, May 4, JANUARY 12,

10 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Commercial Paper I: Banks, March 23, 2004 Related Research Popular Ratings Affirmed On Stronger Business Position And Support Review; Outlook To Positive On Improving Liquidity, Dec. 3, 2015 Most European Bank Ratings Affirmed Following Government Support And ALAC Review, Dec. 2, 2015 Credit FAQ: How Standard & Poor's Applied Its Government Support And ALAC Criteria To European Banks In December 2015, Dec. 2, 2015 Rating Actions Taken On Abanca C.B., Bankia, And Banco Popular Following Review of Spanish Banks, April 22, 2015 Banco Popular Espanol 'B+/B' Ratings Affirmed On Strengthening Solvency; Hybrid Debt Upgraded To 'CCC'; Outlook Negative, Feb. 19, 2015 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- Ratings Detail (As Of January 12, 2016) Banco Popular Espanol S.A. Counterparty Credit Rating B+/Positive/B Preference Stock CCC Preferred Stock CCC Senior Secured A Senior Secured A/Positive Senior Unsecured B+ Short-Term Debt B Subordinated CCC+ Counterparty Credit Ratings History 02-Dec Apr Feb Jun Nov-2012 B+/Positive/B B+/Stable/B B+/Negative/B BB-/Negative/B BB/Negative/B JANUARY 12,

11 Ratings Detail (As Of January 12, 2016) (cont.) 15-Oct Aug May Feb Dec Oct Feb-2011 Sovereign Rating Spain (Kingdom of) BB/Watch Neg/B BB+/Watch Neg/B BB+/Negative/B BBB-/Watch Neg/A-3 BBB+/Watch Neg/A-2 A-/Watch Neg/A-2 A-/Negative/A-2 BBB+/Stable/A-2 *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com JANUARY 12,

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