Fitch Ratings has revised the Outlook on
A full list of rating actions is below.
The Outlook revision primarily reflects the resilience of BCP's asset quality and profitability since the pandemic crisis, supported by an efficient and fairly diverse business model. We expect BCP to be able to generate sufficient pre-impairment profit to absorb future additional loan impairment charges (LICs) from downside asset quality pressures in
The Outlook revision also considers that short-term risks to
Key Rating Drivers
IDRS AND VR
BCP's ratings primarily reflect the bank's improved asset quality, although it remains weaker than higher-rated domestic peers and international averages. They also reflect our view that capitalisation remains vulnerable to severe asset quality shocks, despite meaningful improvements since 2016. These relative rating weaknesses are mitigated by BCP's resilient pre-impairment profitability, thanks to a leading franchise in
BCP is the second-largest Portuguese bank by assets and had top three market shares of about 18% in domestic loans and deposits. The bank's multi-channel and more diverse business model than some of its local peers supports recurring fee income.
BCP's asset quality improved over the past four years and in 1H21, despite difficult economic conditions. The impaired loans ratio decreased to 5.2% at
Given the nature and size of the Portuguese economy, BCP is exposed to borrowers in sectors that are most affected by the pandemic, such as tourism, hotels or non-food retail (totalling
BCP's profitability had recovered when the bank entered the pandemic crisis thanks to sound cost efficiency and a gradual decline in impairment charges in
BCP's operating profit generation will remain challenged in 2021-2022, notably from subdued profitability at
BCP's capital buffers are moderate and at the low end of mid-sized southern European peers. The fully loaded common equity Tier 1 (CET1) and total capital ratios were 11.8% (excluding a 10bp benefit from the transitional implementation of IFRS9 provisions and pro-forma the sale of the Swiss bank subsidiary) and 15.1% at
We expect that BCP's CET1 ratio will remain between 11.5% and 12.0% in 2021 and 2022, as organic capital generation will remain subdued due to higher costs against legal risks in
Our assessment of capitalisation also considers BCP's exposure to risks from problem assets, including unreserved Stage 3 loans, holdings of foreclosed real estate assets and corporate restructuring funds. Fitch estimates BCP's unreserved problem assets were still high at about 50% of fully-loaded CET1 capital at
BCP's funding structure has been generally stable and its liquidity position has benefited from substantial loan deleveraging over the past four years, resulting in a satisfactory loans/deposits ratio below 100%. Customer deposits are the bank's main funding source and reliance on wholesale and central bank funding is limited. BCP's liquidity profile is adequate but sensitive to investor confidence, like most Portuguese peers. It has benefited from large targeted long-term refinancing operations drawings in 2020 and in 2021.
SENIOR PREFERRED AND SENIOR NON-PREFERRED DEBT
Fitch rates BCP's senior preferred debt in line with the bank's IDRs because we expect that the bank will meet its minimum requirement for own funds and eligible liabilities (MREL) with a combination of senior preferred and more junior instruments. In addition, we do not expect the buffer of hybrid, subordinated and senior non-preferred instruments to exceed 10% of RWAs of the resolution group headed by BCP.
For the same reasons, BCP's senior non-preferred notes are rated 'BB-' or one notch below the Long-Term IDR as Fitch sees a heightened risk of below-average recoveries for this debt class in a resolution.
DEPOSIT RATINGS
BCP's long-term deposit rating of 'BB+' is one notch above the bank's Long-Term IDR, reflecting Fitch's view that depositors would be protected by the bank's senior preferred instruments, junior debt and equity buffers in a resolution. This is because we expect BCP to comply with MREL and
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of subordinated debt and other hybrid capital issued by BCP are notched down from its VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.
We rate BCP's Tier 2 securities 'B+', two notches below the VR, which is the baseline notching under our Bank Rating Criteria. The notching reflects the expected loss severity and poor recovery prospects for those instruments.
Fitch rates BCP's additional Tier 1 (AT1) instruments at 'B-', four notches below the VR. This notching reflects the instruments' higher expected loss severity relative to the bank's VR due to the notes' deep subordination (two notches) and higher non-performance risk relative to the VR given fully discretionary coupon payments and mandatory coupon restriction features (another two notches).
The notching of AT1 notes reflects our expectations that BCP will maintain moderate capital buffers above regulatory requirements. BCP had buffers of about 180bp above its total capital requirement and about 300bp above the CET1 requirement at
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the bank cannot rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade would be contingent on the stabilisation of the Portuguese operating environment and subject to BCP further improving its financial profile, in particular asset quality. This could be evidenced by a good repayment record for borrowers that recently exited moratoriums and the impaired loans ratio remaining below 6%.
Stronger capital ratios, which are comparatively low at BCP, would also be rating positive as they would further increase BCP's headroom relative to capital requirements. Improved visibility on final legal costs from
The senior non-preferred and senior preferred debt ratings could be upgraded if BCP's IDRs were upgraded. They could also be upgraded if Fitch expects that BCP will either meet its MREL without recourse to senior preferred debt or if the buffer of AT1, Tier 2 and senior non-preferred debt will sustainably exceed 10% of the Portuguese resolution group's RWAs.
BCP's deposit ratings could be upgraded if BCP's IDRs were upgraded. BCP's AT1 and Tier 2 ratings could be upgraded if the bank's VR was upgraded.
An upgrade of the bank's SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support the bank. While not impossible, this is highly unlikely, in Fitch's view.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
BCP's ratings could be downgraded if there was an unexpected severe setback to the economic recovery implying negative financial repercussions on the bank's credit profile. Fitch would likely downgrade BCP's Long-Term IDR and VR if there was a substantial and prolonged deterioration in asset quality and profitability, which would lead to an increase of BCP's stage 3 impaired loans ratio to levels above 8% and an operating profit/RWA that would fall to levels below 0.5% with no credible plan to restore these ratios to pre-coronavirus crisis levels.
An unexpected and material drop in BCP's CET1 ratio to around 10%-10.5% without credible plans to restore it above 12% could lead to a downgrade. This could come from larger than expected legal costs from
BCP's senior preferred and senior non-preferred debt ratings could be downgraded if the bank's Long-Term IDR was downgraded. BCP's Tier 2 ratings could be downgraded if the bank's VR was downgraded. The rating of BCP's AT1 instruments would be downgraded only if the VR was downgraded by more than one notch given the tighter notching applied to those instruments for 'bb-' rated banks under our criteria. We could also downgrade the AT1 instrument's rating if we no longer expect BCP to maintain moderate buffers above its capital requirements (typically at least 100bp) or if available distributable items decline to only modest levels leading to higher non-performance risk.
BCP's deposit ratings are sensitive to changes in BCP's IDRs and could be downgraded if the latter were downgraded. We could also downgrade BCP's deposit ratings if we expect that the bank fails to comply with its MREL requirement, without the use of eligible deposits.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
Banco Comercial Portugues, S.A. LT IDR BB Affirmed BB
ST IDR B Affirmed B
Viability bb Affirmed bb
Support 5 Affirmed 5
Support Floor NF Affirmed NF
subordinated
LT B+ Affirmed B+
junior subordinated
LT B- Affirmed B-
Senior preferred
LT BB Affirmed BB
long-term deposits
LT BB+ Affirmed BB+
Senior non-preferred
LT BB- Affirmed BB-
short-term deposits
ST B Affirmed B
Senior preferred
ST B Affirmed B
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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