December 21, 2017 / 4:16 PM / 10 months ago

Fitch Revises Millennium bcp's Outlook to Positive; Affirms at 'BB-'

(The following statement was released by the rating agency) BARCELONA, December 21 (Fitch) Fitch Ratings has revised Banco Comercial Portugues, S.A.'s (Millennium bcp) Outlook to Positive from Stable while affirming the bank's Long-Term Issuer Default Rating (IDR) at 'BB-'. A full list of rating actions is at the end of this rating action commentary. The rating actions are part of a periodic portfolio review of Portuguese banks rated by Fitch and follow the upgrade of Portugal's sovereign rating (see "Fitch Upgrades Portugal to BBB" dated 15 December 2017 at www.fitchratings.com). KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The Positive Outlook reflects Fitch's expectations that Millennium bcp will continue to reduce its problem assets (non-performing loans (NPLs) and foreclosed assets) in the next 18-24 months, which should gradually lower impairment charges and result in a meaningful improvement of internal capital generation. The implementation of the bank's problem asset reduction plan is expected to benefit from an improved operating environment in Portugal. The ratings of Millenium bcp are driven by its weak, albeit improving, asset quality that puts pressure on its operating profitability and internal capital generation. The ratings also factor in the bank's vulnerable capitalisation, as well as stable funding profile. Pre-impairment profitability has progressively improved in the past four years but the bank's earnings generation is still dented by large provisions for problem assets. We expect impairment charges to gradually decrease and this to translate into higher operating profitability. The bank's operating efficiency is better than domestic peers' and should benefit from expected lower funding costs. Millennium bcp's asset quality indicators remain weak, reflecting the bank's sizeable stock of problem assets, although the bank has made good progress in reducing it. At end-September 2017 the bank's NPL ratio (as per European Banking Authority definition) declined to 15.9% (from 19% a year earlier) but remains high by international standards. Reserve coverage (42%) also improved but remained low compared with international peers, resulting in a high reliance on collaterals and guarantees. In addition, the bank is exposed to risks arising from its holdings of foreclosed assets and investments in corporate restructuring funds. The bank's capital position has been strengthened in 2017 by a EUR1.33 billion equity increase and risk-weighted asset (RWA) reduction. At end-September 2017, the fully loaded common equity Tier 1 (CET1) ratio stood at 11.7%. However, capitalisation remains vulnerable to additional asset quality shocks as its unreserved NPLs and foreclosed assets still represented a high 1.4x of its fully loaded CET1 at that date. Millennium bcp's funding structure has generally been stable and its liquidity position has benefited from the substantial loan deleveraging carried out in the past four years. Customer deposits remained the bank's main funding source at about 80% of total funding at end-September 2017. Reliance on wholesale funding is more limited and mostly in the form of senior and covered bonds and ECB funding. 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 become non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that is likely to require senior creditors to participate in losses, if necessary, instead of - or ahead of - a bank receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings on subordinated debt and other hybrid capital issued by Millennium 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. The rating on Millenium bcp's lower Tier 2 is notched down once from the bank's VR for loss severity. Millenium bcp's preference shares are rated 'CCC' because Fitch believes that economic losses are likely to be moderate before coupon payment resumes. We estimate this will occur at the next coupon date after the approval of 2017 accounts. The preference shares' 'CCC' rating has been placed on Rating Watch Negative (RWN) to reflect the publication of the Exposure Draft: Bank Rating Criteria (see "Fitch Publishes Bank Rating Criteria Exposure Draft" dated 12 December 2017). As outlined in the Exposure Draft, Fitch plans to introduce + and - modifiers at the 'CCC'/'ccc' level for Long-Term Issuer Default Ratings (IDRs), long-term international debt and deposit ratings, Derivative Counterparty Ratings (DCR) and VRs. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Higher earnings could lead to the upgrade of Millenium bcp's ratings in the next 18-24 months. Sustained reductions in problem assets resulting in lower impairment needs would strengthen internal capital generation. The improved economic environment in Portugal should decrease NPL inflows, increase recoveries and cures and facilitate the sale distressed debt portfolios. This would lower the vulnerability of the bank's capital to asset quality shocks. Downward rating pressure would arise from a failure to improve asset quality metrics, weakening profitability or unexpected deterioration in the operating environment in Portugal. SUPPORT RATING AND SUPPORT RATING FLOOR 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. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings on subordinated debt and other hybrid capital issued by Millennium bcp are primarily sensitive to a change in the bank's VR. The rating of the subordinated notes is also sensitive to a widening of notching if Fitch's view of the probability of non-performance on the bank's subordinated debt relative to the probability of the group failing, as measured by its VR, increases or if Fitch's view of recovery prospects changes adversely. The RWN on the rating of the preference shares reflects that upon publication of the final criteria (provided it is in line with the Exposure Draft) the rating is likely to be downgraded to 'CCC-'. The rating of the preference shares is also sensitive to Fitch changing its assessment of the probability of the notes returning to performing status. The rating actions are as follows: Millenium bcp Long-Term IDR affirmed at 'BB-'; Outlook Revised to Positive from Stable Short-Term IDR affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt long-term rating affirmed at 'BB-' Senior unsecured debt short-term rating affirmed at 'B' Subordinated notes affirmed at 'B+' Preference shares: 'CCC' placed on RWN Contact: Primary Analyst Josu Fabo, CFA Director +34 93 494 3464 Fitch Ratings Espana, S.A.U. 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