DBRS Morningstar Confirms Abanca’s LT Issuer Rating at BBB (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Abanca Corporación Bancaria S.A. (Abanca or the Bank), including the Long-Term Issuer Rating at BBB (high) and the Short-Term Issuer Rating at R-1 (low). The trend on all ratings is Stable. The Intrinsic Assessment (IA) is BBB (high), while its Support Assessment remains SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of Abanca’s ratings reflects the Bank’s leading regional franchise in its home market of Galicia, reinforced in recent years through several targeted acquisitions which have expanded the Bank’s footprint in both Spain and Portugal. We view these acquisitions as having diversified Abanca’s revenue mix while creating potential cost synergies which should improve profitability over the medium term.

The confirmation also considers Abanca’s consistent track record in successfully integrating previous acquisitions, which has enabled the Bank to quickly leverage its new businesses. In our view, this has translated into continued core revenue improvement, through both higher fees and commissions and net interest income (NII). Although cost efficiency remains weaker than its domestic peer group, synergies have materialised on the cost side and we expect the cost-to-income ratio to improve over the medium term.

In addition, the rating action incorporates the continued progress made by the Bank in asset quality, with asset quality metrics now comparing very favourably to domestic peers and in line with its European peers. Abanca’s asset quality profile has been unaffected by the recent economic shocks to date, including the COVID-19 pandemic and an inflationary environment resulting in a rapid increase in interest rates. However, the rating action also incorporates DBRS Morningstar’s expectation of moderate asset quality deterioration in 2023, as household and corporate debt repayment affordability metrics weaken after the rapid increase in interest rates with a large proportion of Abanca’s loan book being variable rate.

Ratings are also underpinned by the Bank’s sound funding and liquidity position. Capital levels are solid, and reinforced through regular access to wholesale markets, although we note that the acquisitions have put some pressure on capital levels. In addition, the ratings continue to incorporate the fact that Abanca is largely owned by one shareholder who is also the current non-executive chairman and therefore we consider the board of director independence as more limited than peers.

RATING DRIVERS

An upgrade of the Long-Term ratings would occur should the Bank materially improve its profitability metrics whilst maintaining its current risk profile and capital cushions.

The Long-Term ratings would be downgraded if the Bank were to experience a material decline in its capital position, asset quality or profitability. Any major integration issues from acquisitions would also lead to a downgrade.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good / Moderate

Abanca’s ratings continue to be underpinned by its well-established regional franchise in Galicia, where the Bank maintains dominant market shares for loans and deposits. In addition, DBRS Morningstar notes that Abanca has grown its presence in other areas of Spain, through a series of targeted acquisitions including Banco Caixa Geral, S.A.’s and Novo Banco, S.A.’s Spanish businesses, Bankoa and more recently Targobank’s Spanish activities, making it now the seventh largest Spanish banking group by total assets. In addition, the Bank now has a presence in neighbouring Portugal following the 2018 acquisition of Deutsche Bank’s retail business in the country. Abanca is largely owned by one shareholder, Mr. Escotet Rodríguez, who has a controlling stake of around 85% of the capital and who is also the current non-executive chairman. As a result, DBRS Morningstar views the independence of the Bank’s board of directors as potentially more limited than peers with a wider or public ownership, albeit the majority of the board is composed of independent directors.

Earnings Combined Building Block (BB) Assessment: Moderate

In 2022, Abanca reported net attributable income of EUR 215 million, down by 33.5% YOY from a very high base of EUR 323 million in 2021, which incorporated among others EUR 205.9 million of goodwill related to two acquisitions, NB España and Bankoa. Excluding all costs related to the acquisitions, recurring net attributable income grew 41% YOY, supported by higher core revenues, lower loan loss provisions which offset higher operating expenses. In particular, net interest income (NII) was up 14.2% YOY to EUR 770 million, driven by higher rates and net fees and commissions that grew 9.4% YOY in to EUR 282 million, supported by a positive momentum in the insurance and payments businesses. The positive recurring result was also supported by lower loan loss provisions, down by 35% to EUR 42 million, reflecting positive asset quality experience and expectations. In Q1 2023, Abanca reported net attributable income of EUR 105 million, up by 29.6% YOY driven by a continued increase in core revenues, particularly net interest income on the back of higher interest rates.

Risk Combined Building Block (BB) Assessment: Strong / Good

Abanca’s asset quality has improved substantially in recent years, primarily through the reduction of non-performing loans (NPLs). DBRS Morningstar views Abanca asset quality metrics as having reached levels that compare well to domestic peers and are now in-line with the European average. Abanca’s asset quality profile has been so far unaffected by the recent economic shocks, including the COVID-19 pandemic and an inflationary environment resulting in a rapid increase in interest rates. We expect moderate asset quality deterioration in 2023, as household and corporate debt repayment affordability metrics weaken after the rapid rise in interest rates with a large proportion of Abanca’s loan book being variable rate. The NPA ratio reduced to 3.2% at end-March 2023, stable from end-2022. Total NPLs stood at EUR 971 million at end-March 2023, in line with 2022 and 2021. As a result, Abanca’s NPL ratio (as calculated by DBRS Morningstar) was 2.2% at end-March 2023. DBRS Morningstar considers Abanca as having adequate coverage levels for NPAs at 75.6% at end-March 2023 (81.6% for NPLs and 63.8% for FAs at end-March 2023).

Funding and Liquidity Combined Building Block (BB) Assessment: Good

Abanca’s funding and liquidity position is supported by its large and resilient customer deposit base, which has increased as a result of acquisitions, and an ample pool of liquid assets. Abanca had a sound net loan-to-deposit ratio (excluding repos and covered bonds included in deposits, as calculated by DBRS Morningstar) of 85.0% at end-Q1 2023 compared to 87.5% at end-2022. Abanca has reduced its exposure to ECB funding retaining EUR 5.0 billion at end-March 2023 compared to EUR 8.0 billion at end-2022, as the bank proceeded with of EUR 3.0 billion of TLTRO III in Q1 2023 out of the EUR 7.2 billion maturing in June 2023. Abanca also has sound liquidity and funding ratios, with the Liquidity Coverage Ratio (LCR) at 204% and the Net Stable Funding Ratio (NSFR) at 123%, at end-March 2023.

Capitalisation Combined Building Block (BB) Assessment: Good / Moderate

Despite capital intensive recent acquisitions, DBRS Morningstar views Abanca’s capitalisation as sound, supported by its capacity to generate capital through retained earnings and a risk profile that has improved substantially over the years. In addition, Abanca has diversified its capital base through the issuances of AT1 and Tier 2 instruments in recent years. At end-March 2023, Abanca reported a Common Equity Tier 1 (CET 1) ratio of 12.3%, slightly down from end-2022. This continued to provide the Bank with a comfortable buffer of 417 bps over its Overall Capital Requirement (OCR) for CET1 ratio of 8.125% according to the Supervisory Review and Evaluation Process (SREP). In addition, Abanca maintained a 371 bps buffer over the 12.5% minimum Overall Capital Requirement (OCR) for total capital according to the SREP, which includes the AT1 and Tier 2 buckets. The Bank reported a sound Leverage ratio of 6.5% at end-March 2023. Abanca has to comply with an MREL requirement of 18.84% of Total Risk Exposure Amount (TREA) and 5.22% of Leverage Ratio Exposure (LRE) as of January 1, 2024. With an MREL ratio of 19.3% at end-March 2023, Abanca already complies with its MREL requirements applicable from January 2022 and is regularly issuing to comply with the January 2024 requirement. Between May and June 2023, Abanca has issued EUR 1 billion of MREL eligible issuances.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/416105.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Governance (G) Factors

DBRS Morningstar views the Corporate / Transaction Governance subfactor under the Governance ESG factor as relevant since it considers the Bank’s board independence to be more limited than peers with a wider ownership, albeit Abanca’s Board of Directors (BoD) currently consists of 12 members, of which 9 are independent. On top of this, Abanca maintains a Corporate Governance Excellence Plan, aligned with best market practices, and certified by evaluations carried out by independent third parties. As a result, these risks are incorporated in the Bank’s Franchise and Capital grid grades.

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

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).

DBRS Morningstar notes that this Press Release was amended on June 27, 2023 to incorporate the link to credit rating methodologies.

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 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, Abanca 2022 & Q1 2023 Press Releases, Abanca 2022 & Q1 2023 Presentations, Abanca 2022 & Q1 2023 Accounts, Abanca 2022 Consolidated Annual Accounts and Abanca 2022 Sustainability Report. 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.

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/416103.

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: William Schwartz, Senior Vice President - Credit Practices Group
Initial Rating Date: December 10, 2014
Last Rating Date: June 21, 2022

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