Madrid, March 22, 2018 -- Moody's Investors Service has today upgraded Kutxabank, S.A.
(Kutxabank)'s deposit ratings to Baa2/Prime-2 from Baa3/Prime-3.
The rating agency has also upgraded the bank's baseline credit assessment
(BCA) and adjusted BCA to baa2 from baa3. The outlook on the long-term
deposit ratings is stable.
As part of today's rating action Moody's has also affirmed
Kutxabank's Counterparty Risk Assessment (CR Assessment) at Baa1(cr)/Prime-2(cr).
The upgrade of Kutxabank's ratings reflects the bank's improved
credit profile, namely in terms of asset risk and capital.
The upgrade also reflects the bank's resilient revenue generation
capacity despite ongoing challenges stemming from the operating environment
and the lower contribution of dividend income after having divested a
significant part of its industrial portfolio.
A list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
---RATIONALE FOR UPGRADING THE BCA
The upgrade of Kutxabank's BCA to baa2 from baa3 reflects the bank's improved
credit fundamentals, notably in terms of asset risk and capital
while operating revenues have remained resilient despite ongoing profitability
headwinds.
During 2017, Kutxabank achieved a further improvement in its asset
risk metrics, with the non-performing asset (non-performing
loans + foreclosed real estate assets, NPA) ratio declining
to 10.9% at end-December 2017 from 12.2%
a year earlier and below Moody's estimated average of 14%
for the Spanish banking system (as of end-June 2017 latest data
available). Despite these improvements, Kutxabank continues
to display a high level of problematic assets on a broader European context.
More positively, Moody's notes that the bank's loss
absorption capacity has been reinforced, with NPAs as a percentage
of shareholders equity and provisions declining to 62.6%
at end-December 2017 from 68.7% a year earlier.
In upgrading Kutxabank's BCA to baa2, Moody's also incorporates
its expectation of a further improvement in the bank's asset risk
on the back of Spain's sound economic growth prospects (the rating agency
expects GDP to grow by 2.4% in 2018).
Today's rating action takes into account Kutxabank's improved capital
buffers, which compare very favorably to European peers, with
the regulatory common equity tier 1 (CET1) ratio increasing to 15.7%
at end-December 2017 from 15.2% a year earlier on
a phased-in basis and its fully-loaded capital ratio that
has increased to 15.3% from 14.8% during the
same period. This positive trend is visible as well in Moody's
tangible common equity (TCE) ratio, which now stands at 13.6%,
up from 12.2% at end-December 2016, driven
by the bank's asset de-risking strategy and increased retained
profits.
At end-December 2017, Kutxabank's net income to tangible
assets stood at 0.5%, which is modest but has remained
resilient despite pressures on top line revenues stemming from the very
low interest rates and the reduction in dividend income (by more than
51% in 2017 to represent 5% of operating revenues) after
the downsizing of the bank's industrial portfolio. Moody's
acknowledges the large component of trading gains incorporated into the
bank's pre-provision income at end-December 2017 stemming
from the mentioned portfolio sales, but also notes that these revenues
have been entirely earmarked to provide for Kutxabank's early retirement
plan and other asset provisions. Furthermore, the rating
agency expects a further rebalancing of the bank's revenue mix over
the outlook period, underpinned by a stronger contribution of fee
and commission income, which combined to the expected reduction
in the cost of risk will help to preserve bottom line profitability at
current levels.
The bank's BCA also reflects Kutxabank's sound liquidity profile
underpinned by a large retail deposit base (representing 80% of
total funding at end-December 2017) and very limited financing
requirements.
---RATIONALE FOR UPGRADING THE DEPOSIT RATINGS
The upgrade of Kutxabank's deposit ratings to Baa2/Prime-2 from
Baa3/Prime-3 reflects: (1) The upgrade of the bank's BCA
and adjusted BCA to baa2 from baa3; (2) the result from the rating
agency's Advanced Loss-Given Failure (LGF) analysis which results
in an unchanged no uplift for the deposits ratings; and (3) Moody's
assessment of low probability of government support for Kutxabank,
which results in no uplift for the deposit ratings.
---RATIONALE FOR AFFIRMING THE CR ASSESSMENT
As part of today's rating action, Moody's has also affirmed at Baa1(cr)/Prime-2(cr)
the CR Assessment of Kutxabank, one notch above the adjusted BCA
of baa2. The CR Assessment is driven by the banks' adjusted BCA,
low likelihood of systemic support and by the cushion against default
provided to the senior obligations represented by the CR Assessment by
subordinated instruments amounting to 8% of tangible banking assets.
Kutxabank's CR Assessment is capped at Baa1(cr) as it cannot exceed
the Spanish government bond rating of Baa2 by more than one notch.
---RATIONALE FOR THE STABLE OUTLOOK
The outlook on Kutxabank's long-term deposit ratings is stable,
reflecting Moody's expectation that the bank will be able to maintain
a gradual improvement on its credit profile, namely by further reducing
its stock of problematic assets.
WHAT COULD CHANGE THE RATING - UP
Kutxabank's BCA could be upgraded if the bank materially improves
its asset risk through a reduction in the stock of NPAs, while profitability
continues to improve sustainedly. This not-withstanding,
any upward pressure on Kutxabank's BCA is unlikely to materialise
as long as the Spanish government's bond rating remains at Baa2.
Kutxabank's deposit ratings could also be upgraded upon the issuance of
sizable volumes of senior or subordinated debt instruments.
Upward pressure on Kuxtabank's CR Assessment is primarily dependent on
an upgrade of the government of Spain, given that the current Baa1(cr)
long-term CR Assessment already exceeds the sovereign rating by
one notch and is constrained at that level under Moody's methodology.
WHAT COULD CHANGE THE RATING - DOWN
Downward pressure on the bank's BCA could develop as a result of:
(1) the reversal in current asset risk trends with an increase in the
stock of NPLs and/or other problematic exposures; and (2) a weakening
of Kutxabank's internal capital-generation and risk-absorption
capacity as a result of lower than current profitability levels.
Kutxabank's deposit ratings could also be downgraded if the amount of
junior deposits declines from current levels.
LIST OF AFFECTED RATINGS
Issuer: Kutxabank, S.A.
..Upgrades:
....Long-term Bank Deposit, upgraded
to Baa2 Stable from Baa3 Positive
....Short-term Bank Deposit,
upgraded to P-2 from P-3
....Adjusted Baseline Credit Assessment,
upgraded to baa2 from baa3
....Baseline Credit Assessment, upgraded
to baa2 from baa3
..Affirmations:
....Long-term Counterparty Risk Assessment,
affirmed Baa1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-2(cr)
..Outlook Action:
....Outlook changed to Stable from Positive
Issuer: Caja Vital Finance B.V.
..Upgrades:
....Backed Senior Unsecured Regular Bond/Debenture,
upgraded to Baa2 Stable from Baa3 Positive
..Outlook Action:
....Outlook changed to Stable from Positive
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
September 2017. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Maria Jose Mori
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
