DBRS Morningstar Assigns First-Time BBB (low) / R-2 (low) Issuer Ratings to Institut Català de Finances, Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) has assigned first-time public ratings to Institut Català de Finances (ICF or the Entity)), a public regional development bank entirely owned by the Autonomous Community of Catalonia (Catalonia). The ratings assigned include a BBB (low) Long-Term Issuer Rating and an R-2 (low) Short-Term Issuer Rating. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS

DBRS Morningstar has assigned a support assessment of SA1 to ICF, which implies the expectation of predictable support from its shareholder, the Autonomous Community of Catalonia, who provide an explicit, irrevocable, unconditional and direct guarantee of ICF. ICF plays a critical role in Catalonia because it is strongly integrated in the regional government’s public mission of promoting regional development, channelling public credit and fostering the economic and social development of the Region

DBRS Morningstar rates the Autonomous Community of Catalonia’s Long-Term Issuer Ratings at BBB (low) with a Stable Trend and ICF’s ratings are positioned at the same level as the sub-sovereign rating of the Autonomous Community of Catalonia in line with the guarantee. The ratings incorporate the expectation of a very strong likelihood of support, as any difficulties at ICF would fall within the responsibility of the Regional government and also have a direct reputational impact on Catalonia.

RATING DRIVERS

The Long-Term and the Short-Term ratings move in line with the ratings of the Autonomous Community of Catalonia. An upgrade of the Autonomous Community of Catalonia would result in an upgrade for ICF.

Similarly, a downgrade of the Autonomous Community of Catalonia would result in a negative rating action for ICF.

RATING RATIONALE

ICF is a Spanish regional public development bank, based in Catalonia. The Entity’s aim is to provide an alternative to traditional bank funding and provide complementary funding to Catalan companies. At end-2021, the entity had total assets of EUR 2.7 billion. The Entity’s main activities are to finance investments and provide guarantees to facilitate access to credit for SMEs and entrepreneurs. At end-2021, the entity served a total of 4,420 private companies and 246 public sector entities.

DBRS Morningstar views ICF´s earnings power as constrained, reflecting a combination of low margins, due to its non-profit maximising business model, and the high levels of loan loss provisions stemming from the entity’s prudent provisioning policy. These are partly mitigated by the relatively low cost base. In 2021, ICF reported net income of EUR 36.4 million, up from EUR 5.4 million in 2020. Results were driven by an increase in interest margin and a drop in provisions. We expect revenues to grow going forward given the high sensitivity of ICF’s net interest income to interest rates hikes.

ICF’s asset quality continues to be affected by its large, albeit declining, stock of NPLs since ICF's strategy remains to work out loans on a case-by-case basis, rather than pursue the disposal of NPLs. The non-performing loans (NPL) ratio stood at 8.2% at end-2021 compared to 6.2% at end-2020, above Spanish peers and European standards. Nevertheless, the NPL ratio excluding guaranteed loans stood at 6.6% at end-2021 compared to 5.3% at end-2020. In addition, DBRS Morningstar notes that the coverage ratio of the Entity was sound at 114% at end-2021.

The Entity’s main funding sources at end-2021 consisted of public banks such as the European Investment Bank (EIB) and Instituto de Credito Oficial (ICO) at 70%, private banks (5%), issuances (21%) and the Entity’s Pagares Programme (4%). DBRS Morningstar notes that ICF has not experienced any notable difficulties in tapping the markets. ICF had high-quality liquid assets of EUR 333 million at end-2021 and reported a Liquidity Coverage Ratio (LCR) of 995%, well exceeding the 100% regulatory minimum. In addition, the NSFR ratio was also above regulatory requirements at 116% at end-2021.

DBRS Morningstar views ICF’s capitalisation as satisfactory, despite a relatively low nominal capital base, and the regulatory capital ratios are high given the low risk-weighting of its loan book. At end-2021, the Entity reported a phased-in CET 1 ratio of 41.7% and Total Capital Ratio of 42.5%, down from 42.8% and 43.8% respectively in 2020. This was mostly driven by an increase in risk-weighted assets (RWAs) resulting from the increase in operations in 2021. The capital ratios are well above regulatory requirements. The Entity’s phased-in leverage ratio was 35.5% at end-2021.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, or Governance factors that had a significant or relevant effect on the credit analysis

The social factor is considered as relevant to ICFs ratings, via passed-through social considerations on the parent entity, Catalonia. This relates to Human Rights and Human Capital concerns in the Spanish sovereign. For more information please refer to the Kingdom of Spain’s rating report here: https://www.dbrsmorningstar.com/research/402338/dbrs-morningstar-confirms-kingdom-of-spain-at-a-stable-trend.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022).

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692 (June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors. and the DBRS Morningstar Criteria: Guarantees and Other Forms of Support https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support (April 4, 2022)

The sources of information used for this rating include Morningstar Inc. and Company Documents, ICF 2017-2021 Annual Reports, and ICF 2017-2021 Pillar III Reports. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on this issuer.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/406026

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

Lead Analyst: Arnaud Journois, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: December 2, 2022
Last Rating Date: Not applicable as there is no last rating date

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