Commentary DBRS Morningstar Takes Actions on 5 Spanish Banks Amidst Heightened Uncertainty Around COVID-19
DBRS Morningstar Summary 15 April 2020 DBRS Morningstar has taken a number of rating actions today reflecting rising uncertainty and risks
for Spanish banks due to the economic shutdown and market disruption resulting from the coronavirus (COVID-19) pandemic outbreak.
We have taken rating actions on 5 Spanish banks: Elisabeth Rudman Managing Director, Head of European FIG - Global FIG Ratings confirmed, but Trend revised to Negative from Stable: Banco de Sabadell, S.A. and +44 (20) 7855 6655 Bankinter S.A. [email protected] Ratings confirmed, but Trend revised to Stable from Positive: Bankia SA and Caja Rural de Granada,
Pablo Manzano, CFA S.C.C. Vice President - Global FIG Ratings confirmed at the current level with Stable trend: Liberbank, S.A. +34 91903 6502 [email protected] See a full list of ratings below (Exhibit 3) and individual press releases for full details. Arnaud Journois Vice President - Global FIG +49 (69) 8088 3526 The pandemic outbreak has led to significant deterioration in the operating environment, for banks [email protected] in Spain and DBRS Morningstar anticipates a major increase in banks' risk exposures over coming months. A national lockdown in Spain will be in place for at least 6 weeks (from 14 March to 27
April), although this is likely to be extended. This included a total lockdown during two of those weeks, when all economic activities were suspended with the exception of essential activities. As a
result, the wide and growing scale of economic and market disruption resulting from COVID-19 poses significant operational challenges and will put pressure on all Spanish banks’ revenues, profits and asset quality, at least for 2020.
Nevertheless, we consider that Spanish banks are at a better starting point now than they were facing the 2012 financial crisis. The banks have made considerable progress in recent years reducing the large stock of non-performing loans (NPLs) and Foreclosed Assets (FAs) accumulated from the past crisis, and risk management processes have also been enhanced. Generally, Spanish banks currently have a good capital position, solid liquidity and stable funding profiles. Before the COVID-19 outbreak some banks in Spain were close to being upgraded. As a result, there are differing rating actions taken today, as some banks were positioned strongly in their rating category and experiencing positive rating pressure whereas others were closer to the bottom of their rating category. In addition, DBRS Morningstar has taken into consideration which banks and business models are expected to suffer more under the current environment. In particular, we highlight four factors:
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1. Exposure to SMEs: Banks with relatively high exposure to SMEs (Exhibit 1) are expected to be more vulnerable to deterioration given this is a sector that is likely to be severely affected.
However, DBRS Morningstar considers that this risk is mitigated significantly by the state guarantees approved by the Spanish government. These guarantees amounts to EUR 100 bn,
which represents 25% of the sector exposure to SMEs and Corporates. For SMEs, this instrument
will cover up to 80% of the credit losses at the banks
2. Mortgage book quality: Riskier mortgage loans will register a significant deterioration amid this sudden and adverse economic shock. DBRS Morningstar considers one indicator of riskier mortgage loans is where there is a greater use of general mortgage moratoriums, which in Spain comprises both public and private initiatives. A public moratorium was approved by the government obliging banks to grant three-month mortgage holidays (including interest and principal) to borrowers who are classified as vulnerable. Eligible borrowers, who need to meet very restrictive conditions, will have payments deferred. In addition, Spanish banks are working to implement an industry-wide mortgage moratorium (for interest payments only) for a wider perimeter of borrowers affected by the COVID-19 outbreak for a period up to 12 months.
3. Region: Banks located in regions in which the economic structure is biased to pensioners and public employees could be relatively less affected given personal income will remain more stable (Exhibit 2).
4. Sector Exposures: Although all sectors are expected to be impacted, tourism, hotels and restaurants will likely suffer the most.
Exhibit 1 SME Exposure To Total Loans Exhibit 2 Pensioners and Public Employees as % of Population
SMES without property collateral SMES with property collateral Asturias 42.1% 20.0% Galicia 40.5% Castilla Y Leon 38.8% Pais Vasco 38.5% 15.0% Cantabria 38.1% Aragon 36.2% Extremadura 35.6% 10.0% Rioja 35.0% Navarra 34.9% Cataluna 34.4% 5.0% Castilla - La Mancha 31.7% Comunitat Valenciana 30.9% Andalucia 30.6% Madrid 30.1% 0.0% Murcia 28.6% CRG
BBVA Baleares 26.7% Bankia Abanca Cajamar Sabadell Bankinter Liberbank
BBVA (ES) BBVA Canarias
Santander 25.6% CaixaBank Kutxabank Sabadell (ES) Sabadell Santander (ES) CaixaBank (ES) 20% 25% 30% 35% 40% 45%
Source: DBRS Morningstar. Company accounts. Source: DBRS Morningstar. INE and Ministry of Economics. Exhibit 1 Cumulative SME loan exposures of Spanish banks. Data using consolidated accounts for the banks. In addition, (ES) refers solely to a bank’s Spanish operations. Last available data. Exhibit 2 refers to the Percentage of >16 Year Old Population which are Pensioners or Public Sector Workers per Autonomous Region.
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In addition, more diversified banks will generally have more flexibility compared to less diversified peers. Lastly, there are some factors specific to individual banks underpinning the rating actions. In
particular, in addition to the COVID-19 impact, we expect additional negative pressure on Bankinter´s revenues, due to the planned transfer of its insurance subsidiary, Linea Directa (LDA).
The full impact of the COVID-19 crisis will likely emerge in the coming quarters, whilst the implications for the medium to long-term will depend on the evolution of the outbreak, the length of the economic shutdown, as well as the transition phase of the recovery. A prolonged crisis could add further downward rating pressure on all Spanish banks. We will continue to monitor the performance of the Spanish banks during this period of stress and all measures to support their franchise and customer base, including the debt moratorium measures. At the same time, we will assess the impact of the unprecedented support measures announced by the Spanish government, as well as several other international authorities and central banks, to contain the economic fallout.
Exhibit 3 Today's Rating Actions and Ratings of all Publicly Rated Spanish Banks
Issuer LT Issuer Rating Previous Trend Current Trend Rating Action Date Banco de Sabadell, S.A. A (low) Stable Negative 15-Apr-20 Bankia SA BBB (high) Positive Stable 15-Apr-20 Bankinter S.A. A (low) Stable Negative 15-Apr-20 Caja Rural de Granada, Sociedad Cooperativa de Crédito BBB (low) Positive Stable 15-Apr-20 Liberbank, S.A. BBB (low) Stable Stable 15-Apr-20
Issuer LT Issuer Rating Previous Trend Current Trend Rating Action Date Banco Bilbao Vizcaya Argentaria, S.A. A (high) NA Stable 01-Apr-20 CaixaBank, S.A. A NA Stable 30-Mar-20 Banco Santander SA A (high) NA Stable 28-Nov-19 Banco Cooperativo Español S.A. BBB (high) NA Stable 13-Nov-19 Abanca Corporación Bancaria S.A. BBB NA Stable 18-Jul-19
Source: DBRS Morningstar. Note: Sorted by Rating Action Date, then by Alphabetical Order.
Related Research
• Europe Macroeconomic Update: Growth Shock from Coronavirus, 6 April 2020 • Navigating Bank Ratings During a Global Pandemic, 27 March 2020 • DBRS Morningstar: Advanced Economies Can Weather the Coronavirus – For A Season, 25 March 2020 • DBRS Morningstar: Sovereigns Taking Action To Mitigate Impact of Coronavirus, 24 March 2020 • Coronavirus Causes Negative Outlook for European Banks’ Earnings in 2020, 16 March 2020
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