DBRS Morningstar Confirms Grupo Cooperativo Cajamar at BB (high), Trend Remains Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Grupo Cooperativo Cajamar (GCC or the Group), Cajamar Caja Rural, Sociedad Cooperativa de Credito (Cajamar), and Banco de Crédito Social Cooperativo S.A. (BCC). The Long-Term Issuer Ratings remains at BB (high) and the Short-Term Issuer Ratings at R-3. The Trend on all ratings reamins Negative. DBRS Morningstar has also maintained the Group’s Intrinsic Assessment (IA) at BB (high) and the Support Assessment at SA3. Cajamar’s and BCC’s Support Assessment is SA1. See the full list of ratings in the table at the bottom of this press release.

KEY RATING CONSIDERATIONS

The Negative Trend reflects DBRS Morningstar’s view that the challenging economic and operating environment resulting from the coronavirus (COVID-19) pandemic will continue to add pressure to GCC’s asset quality and profitability. DBRS Morningstar expects the Group’s risk profile to deteriorate in coming quarters, particularly once moratoria and other government support measures are removed. DBRS Morningstar also notes that the Group has a relatively high exposure to SMEs which may be severely affected in this environment. However we also note that a large part of these are related to the agriculture sector that may be less negatively impacted.

The ratings also reflect the Group’s sound cooperative franchise in Spain, particularly in the agriculture sector in its home markets of Almeria and Valencia, which provides the Group with a stable customer deposit base. The confirmation takes into account that the Group has continued to reduce its problematic exposures, and the Non-Performing Loan (NPL) ratio and coverage ratios are now in line with domestics peers. However, the ratings still consider the Group’s remaining high levels of Non-Performing assets (NPAs) due to foreclosed assets, despite the Group making progress in reducing them since 2013.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating is unlikely in the short-term given the Negative Trend and the economic implications from the global pandemic. The Trend could return to Stable if the Group is able to demonstrate it can manage through the current challenging environment with only limited impact on asset quality and capital.

A downgrade of the Long-Term Issuer Rating would result from a sustained deterioration in the loan portfolio, a prolonged and substantial fall in profitability, or a weakening of the Group’s capital cushions from pre-Covid levels.

BCC‘s and Cajamar’s ratings are equalised with the ratings of GCC. As a result, any positive or negative actions on GCC’s ratings would be mirrored in the ratings of BCC and Cajamar.

RATING RATIONALE

GCC’s IA of BB (high) is underpinned by the Group’s sound franchise position as the largest cooperative bank in Spain, as measured by total assets. The Group enjoys significant market shares for agriculture loans in Spain of around 15% and has meaningful regional market shares in the regions of Almeria (around 45%) and Valencia (around 10%). However, the Group’s national market shares are more modest at around 2.7% for loans and 2.6% for customer deposits at end-2020 (as calculated by DBRS Morningstar).

DBRS Morningstar views the economic disruption resulting from COVID-19 as posing significant challenges and expects pressure on GCC’s profitability. The Bank recorded in 2020 a net attributable profit of EUR 23.8 million, down from EUR 92.5 million in 2019. The Group´s 2020 results were affected by lower Net Fees and lower capital gains on the sale of fixed income portfolios. Notably, the bank reported Net Interest Income up 3% YoY, as the low interest rate environment was compensated by a larger loan book and lower interest expenses. Also, unlike most Spanish banks, GCC recorded a lower level of Loan Loss Provisions (LLPs) in 2020 compared to 2019 (down from EUR 334 million to EUR 311 million). The reduction in LLPs reflects the high level of provisions taken in 2019 as part of the continuation of the balance sheet clean-up. The return on equity (RoE) decreased in 2020 to 0.70%, down from 2.8% in 2019 (as calculated by DBRS Morningstar). During Q1 2021 the Bank reported net attributable income of EUR 14 million down 19% YoY after the Bank booked extraordinary NPA provisions (around EUR 364 million) and intangible asset impairment (EUR 61 million) which were compensated for by an extraordinary capital gain from the sale of its fixed income portfolio (around EUR 460 million). DBRS Morningstar considers that profitability will continue to be pressured in coming quarters due to the low interest rate environment, and the likelihood that the cost of risk will remain high, given the expected challenging environment in Spain in 2021.

GCC’s high level of NPAs remains a key consideration for the Negative Trend. However, DBRS Morningstar recognizes that the Group has continued reducing its problematic exposures in the past 12 months. In addition, GCC made significant progress in reducing the level of NPAs in the years prior to the COVID-19 pandemic, with the Bank reporting high levels of NPAs following the Spanish financial crisis. At end-Q1 2021, NPAs totaled EUR 4.1 billion down 10% YoY. However, the NPA ratio is still high at 11.3% of total NPL and foreclosed assets. This level of NPAs places the Group at a weaker starting point than most domestic peers to cope with future asset quality deterioration. The Group reinforced its coverage level of NPLs in Q1 2021 to 70%, a very significant increase from 50% at end-Q1 2020, and these are now more in line with the levels seen at domestic peers.

DBRS Morningstar understands the unprecedented support measures announced by the Spanish government, as well as several other international authorities and central banks, including the implementation of the debt moratoriums and state-guaranteed loans, have been a key factor in the Group being able to limit the impact on asset quality. However, we consider asset quality will inevitably deteriorate due to the economic restrictions triggered by the COVID-19 pandemic once the moratoria measures are lifted. As of end-2020 the Group had granted EUR 1.8 billion of loans with state guarantees, which represents around 5.4% of the total loan book. In addition, the Bank had granted payment holidays amounting to around EUR 1 billion at end-2020 or around 3% of its loan book. At end-2020, EUR 582 million of payment holiday breaks were still active.

DBRS Morningstar views GCC’s funding and liquidity position as being underpinned by the solid and stable customer deposit base generated through its cooperative business model. At end-Q1 2021, the loan to deposit ratio was 90% (as calculated by DBRS Morningstar) down from 97% YoY. The Group also has a solid liquidity position supported by a large pool of liquid assets totaling EUR 11.3 billion, or 21% of end-Q1 2021 total assets. The Group also has the capacity to issue EUR 3.2 billion of covered bonds at end-March 2021. GCC reported a Liquidity Coverage Ratio (LCR) of 218% and a Net Stable Funding Ratio (NSFR) of 131% at end-Q1 2021. Funding from the European Central Bank (ECB) stood at around EUR 10.3 billion at end-Q1 2021, accounting for around 21% of total funding, a significantly higher proportion than at end-2019 as the Group took advantage of TLTRO III to support profitability.

At end-Q1 2021 the Group’s CET1 ratio (phased-in) was 13.8% and its total capital ratio (phased-in) was 15.5%. This compares to a minimum SREP Capital Requirement (OCR) for total capital of 13.0% for 2020. As a result, the capital cushion over the requirement was 247 bps at the lowest point, which is lower than the average of Spanish peers. The cooperative credit institutions within the Group (including Cajamar) are owned by its members who contribute to capital. Capital contributions from its members were substantial during the previous crisis and in 2020 reached EUR 86 million, representing 38 bps of the Group’s CET1 ratio (phased-in). DBRS Morningstar views this positively as the Group’s ability to increase capital through retained profits or capital markets is limited.

Lastly, DBRS Morningstar has assigned ratings to BCC’s Senior Non-Preferred Debt at BB with a Negative Trend. In line with the Debt Obligations Framework set out in DBRS Morningstar’s Global Methodology for Rating Banks and Banking Organisations (June 2020), Senior Non-Preferred Debt is rated one notch below the Group’s BB (high) Intrinsic Assessment (IA).

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Grupo Cooperativo Cajamar are as follows: Franchise Strength – Good/Moderate; Earnings – Moderate/Weak; Risk Profile – Moderate/Weak; Funding & Liquidity – Moderate; Capitalisation – Moderate/Weak.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, GCC 2020 Presentation, GCC 2020 Press Release, GCC 4Q 2020 Report, GCC 2020 Annual Accounts, European Banking Authority Risk Dashboard, Bank of Spain and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/378924

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Manzano, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG and Global FIG
Initial Rating Date: 26 November 2020
Last Rating Date: 26 November 2020

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