Full text: Moody’s takes actions on seven Portuguese banks; Outlook negative

The following is the text of a ratings action on Portuguese banks initiated today

Actions conclude review initiated on 15 February 2012

Madrid, March 28, 2012 — Moody’s Investors Service has today taken rating actions on seven Portuguese banks and banking groups. The senior debt and deposit ratings for four banks were downgraded by one notch, aligning their ratings at the same level or one notch below the ratings of the Portuguese government, which was downgraded to Ba3 from Ba2 on 13 February 2012. The debt and deposit ratings of Banco Santander Totta (a subsidiary of Banco Santander S.A.) were lowered by two notches to Ba1. The debt and deposit ratings of Banco Comercial Portugues (BCP) and of Caixa Economica Montepio Geral (Montepio) were confirmed at Ba3. All ratings have a negative outlook.

The downgrades of most of the banks’ debt and deposit ratings reflect Moody’s downgrades of their standalone bank financial strength ratings (BFSRs), which are driven by the following key factors:

— Expected further deterioration of banks’ domestic asset quality and profitability given the country’s poor economic outlook which is driven in part by the austerity measures needed to address the sovereign’s weakening credit profile

— Additional asset risks stemming from banks’ substantial holdings of government-related debt

— Prolonged and ongoing lack of access to private wholesale funding sources;

While none of these pressures are new, in Moody’s view they continue to mount against the backdrop of the ongoing euro debt crisis. Positively, Moody’s recognises the supportive stance toward the Portuguese banking system by its government and the euro area authorities including the ECB. However, as discussed further below, Moody’s has concluded that this supportive stance does not fully offset the aforementioned negative drivers.

All of the banks’ standalone credit assessments have negative outlooks, reflecting the very challenging operating environment, which will likely continue to exert negative pressure on the banks’ operating performance. The negative outlooks on the banks’ debt and deposit ratings reflect the negative outlook on their standalone credit assessments and on the Portuguese government’s Ba3 bond rating.

Today’s rating actions conclude the review for downgrade of Portuguese banks, initiated on 15 February 2012 (see "Moody’s Reviews Ratings for European Banks"). That review was part of Moody’s wider review of European financial institutions driven in part by (i) the difficult European operating environment caused by the prolonged euro area crisis; and (ii) and the deteriorating creditworthiness of certain euro area sovereigns (including Portugal).

Moody’s has also concluded its review of systemic support currently incorporated in the ratings of subordinated debt of Portuguese banks, which was initiated on 29 November 2011, and removed all systemic support from these ratings.

As a result, the subordinated debt (and, where applicable, junior subordinated debt) ratings of two banks (Banco Comercial Portugues and Banco Espirito Santo) have been affected, since the ratings on those securities are now being notched off these banks’ adjusted standalone credit assessments, which do not incorporate government support assumptions. This action reflects Moody’s view that creditors holding subordinated debt of Portuguese banks are more likely to suffer losses than holders of their senior unsecured debt in the event that the government provides financial support to the banking system.


* Caixa Geral de Depositos (CGD): The standalone BFSR was downgraded to E+ (mapping to B1 on the long term scale) from D (Ba2) and the debt and deposit ratings were downgraded to Ba3/Not Prime from Ba2/Not Prime.

* Banco Comercial Portugues (BCP): The standalone BFSR was downgraded to E+ (B2) from E+ (B1) and the debt and deposit ratings was confirmed at Ba3/Not Prime.

*Banco Espirito Santo (BES): The standalone BFSR was downgraded to E+ (B1) from D- (Ba3) and the debt and deposit ratings were downgraded to Ba3/Not Prime from Ba2/Not Prime. Espirito Santo Financial Group (ESFG, the parent of BES): The debt ratings were downgraded to B2/Not prime from B1/Not Prime.

* Banco BPI (BPI): The standalone BFSR was downgraded to E+ (B1) from D (Ba2) and the debt and deposit ratings were downgraded to Ba3/Not prime from Ba2/Not Prime.

*Banco Santander Totta (BST): The standalone BFSR was downgraded to D- (Ba3) from D+ (Ba1) and the debt and deposit ratings were downgraded to Ba1/Not Prime from Baa2/Prime-2.

* Caixa Economica Montepio Geral (Montepio): The standalone BFSR was confirmed at D- (Ba3) and the debt and deposit ratings were confirmed at Ba3/Not Prime.

* Banco Internacional do Funchal (Banif): The standalone BFSR was downgraded to E+ (B2) from D- (Ba3) and the debt and deposit ratings were downgraded to B1/Not Prime from Ba3/Not Prime.

A full list of affected ratings can be found at this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_140945

For additional information on bank ratings, please refer to the webpage containing Moody’s related announcements:http://www.moodys.com/bankratings2012



In Moody’s view, the intrinsic credit strength of Portuguese banks is weakening, primarily owing to the three drivers mentioned above and discussed below:


Portugal’s increasingly challenging economic prospects will exacerbate the intense pressure on Portuguese banks’ already weak profitability and asset quality. Moody’s expects loan loss provisions to absorb an increasing portion of banks’ pre-tax income. At the same time, margins will be further pressured in light of the expected increase in non-earning assets, higher funding costs (particularly of retail deposits) and continued balance sheet deleveraging.

The Portuguese economy, which Moody’s expects to shrink by 3.6% during 2012, is weighed down by the weakening sovereign credit profile (reflected in the recent government bond rating downgrade to Ba3 from Ba2 on 13 February 2012), by the government’s austerity programme needed to consolidate the sovereign’s debt position and by an increasingly restricted supply of credit, as banks seek to reduce risk assets given the demands on them to deleverage from investors and regulators. The recapitalisations orchestrated (and most likely funded) by the Portuguese government as a means of supporting the solvency of the Portuguese banking system and perhaps ultimately bolstering confidence in it are likely, in the short term, to further inhibit credit creation.


Portuguese banks, like most banks, have substantial exposures to their domestic sovereign. Holdings of government bonds averaged around 80% of core capital as of end-December 2011 for the seven banks covered by today’s announcement. This direct exposure, together with exposure via counterparties and customers who are themselves sensitive to the sovereign, means Portuguese banks are highly sensitive to the sovereign’s weakening credit profile (see "Moody’s adjusts ratings of 9 European sovereigns to capture downside risks" and "How sovereign credit quality may affect other ratings", 13 February 2012).


Portuguese banks face a prolonged loss of access to private sources of wholesale funding. They are, to all intents and purposes, unable to operate on a standalone basis without external funding. Moody’s has taken into account the extensive routine and extraordinary financing made available by the Portuguese government and the euro area authorities in preserving the banks’ BFSRs and debt and deposit ratings in the ‘B’ and ‘Ba’ category. The rating agency also acknowledges the generally supportive stance of the euro area authorities including the supportive effect of recent ECB operations, which have sharply reduced the risk of any bank failing because of illiquidity.

However, this supportive stance does not mitigate Moody’s concerns. Such extraordinary support will ultimately buy time, however there is still significant uncertainty about how that time will be used to resolve the underlying problems driving the euro area debt crisis or to enable the Portuguese banks to re-enter the markets. The recent downgrade of the Portuguese sovereign reflects the heightened uncertainties over the government’s ability to achieve its debt targets given, for example, the weakening of the Portuguese economy.

In such an environment it is very difficult to see the Portuguese banks re-entering the private markets in the foreseeable future. The longer the banks remain reliant on public sector support, the greater the probability that conditions come to be attached to continued funding and liquidity support, with negative consequences for creditors including bondholders. Moody’s has therefore concluded that it should continue to place only limited additional weight on the availability of routine and extraordinary funding and liquidity support arrangements in assessing the banks’ standalone strength, and in determining the appropriate uplift factored into debt and deposit ratings.


Below, the rationale for each bank’s standalone credit assessment is discussed briefly. Moody’s assumptions about parental and government support are discussed below in the section "Rationale for downgrade of debt ratings and support assumptions".



Moody’s believes that the bank continues to display the strongest financial indicators within the Portuguese banking sector in terms of capital, profitability and asset quality. However, given the domestic nature of its operations, the BFSR downgrade to D-/Ba3 from D+/Ba1 indicates that BST is subject to the same challenges as the rest of the Portuguese banks, derived from the very weak operating environment and increased sovereign risk, to which the bank has significant direct exposure. Furthermore, BST has traditionally displayed a sizable dependence on wholesale funding, which has led to an increased reliance on ECB funding due to the closure of capital markets (9% of total assets at end-December 2011). Moody’s acknowledges that BST is well positioned to meet the recapitalisation and deleveraging targets imposed by the regulator in conjunction with the European Union, the European Central Bank and the IMF (the "Troika"). However, Moody’s has eliminated the gap between BST’s standalone credit assessment and the sovereign’s government bond rating, both now at Ba3, to reflect the pressures stemming from the close linkage between the bank and the sovereign, at a time where further pressure on the real economy or on market confidence on the Portuguese government could rapidly spread to the country’s banking sector (see also: "How sovereign credit quality may affect other ratings", 13 February 2012).


For CGD, the downgrade to an E+ BFSR (mapping to B1 on the long-term scale) from D (Ba2) reflects Moody’s expectations of further pressure on CGD’s credit fundamentals, stemming from the very weak operating environment and disrupted access to wholesale funding, as well as its strong interlinks with the sovereign credit risk from both an ownership perspective and through its direct government debt holdings and exposure to domestic operations. The downgrade also captures CGD’s difficulty to generate capital internally to comply with the more stringent regulatory capital requirements. Moody’s expects that this capital shortfall will be offset by the support provided by the Portuguese government (CGD’s unique shareholder) and will closely monitor the accomplishment of the bank’s deleveraging plan, which, if fulfilled should have a favourable impact on the bank’s capital position. Furthermore, the bank’s liquidity position should improve once the privatisation of BPN (E (Caa1)/B3; developing outlook) concludes (scheduled for H1 2012), since CGD currently provides significant liquidity support to BPN.


For BPI, the two-notch downgrade of the BFSR to E+ (mapping to B1 on the long-term scale) from D/Ba2 reflects the bank’s vulnerability to the adverse domestic environment and relatively high exposure to sovereign risk. Moody’s also acknowledges BPI’s increased capital needs deriving from the EBA’s requirement for mid-2012 to cover its sovereign exposures, in addition to Bank of Portugal’s target of a 10% core capital ratio at the end of this year, combined with a lack of access to capital markets and a weakened and volatile revenue generation capacity, which has increased the likelihood that BPI will resort to capital assistance from the government.

The recapitalisation will exert additional strain on profitability given the cost of such instruments and the need to comply with the targets of the plan presented to Bank of Portugal and the Troika in order to repay such capital instruments in due time. More positively, BPI’s stronger-than-average asset-quality indicators — combined with modest refinancing requirements over the next two years — place BPI in a stronger position relative to its domestic peers to emerge from the current challenges.


For Banif, the BFSR downgrade to E+ (mapping to B2 on the long-term scale) from D-/Ba3 is a reflection of the bank’s (i) very weak credit fundamentals, namely asset quality and profitability (jointly with BCP, Banif displays the highest nonperforming loan (NPL) ratio of the Portuguese system); (ii) very limited capacity to internally generate capital; and (iii) high reliance on wholesale funding, that has translated into a large dependence on ECB funding (14% of total assets at year-end 2011). The ratings of Banif have been traditionally constrained by its complex organisational structure and corporate-governance issues. Moody’s acknowledges that the group has very recently replaced its top management. In this regard, the rating agency will monitor any new developments that may affect the bank’s main targets within the funding and recapitalisation plan submitted to Bank of Portugal and the Troika, and will assess any potential effects it could have on Banif’s credit profile. Moody’s notes that the deleveraging plan might affect Banif’s profitability, in addition to the negative transition risk derived from any further deterioration in the country’s operating environment.



For BCP, the E+ BFSR (now mapping to B2 on the long-term scale from B1) reflects the bank’s very weak financial fundamentals evidenced by (i) high NPL ratio of 6.4% at the end of 2011 (145 bps above the system average, according to Bank of Portugal criteria); (ii) deteriorating profitability ratios (after deducting extraordinary charges in 2011); (iii) pressures stemming from its Greek subsidiary, although BCP has made significant impairments linked to these operations during 2011; and (iv) a challenged funding profile, due to its high reliance on wholesale funds and ongoing restrictions in accessing other type of funding outside the ECB. In addition, Moody’s notes BCP’s significant capital needs to comply with the mid-2012 more stringent solvency standards ( similar to other domestic peers, Moody’s expects that this will be addressed through government support). The B2 standalone credit assessment also captures BCP’s vulnerability to a further deterioration of the bank’s risk-absorption capacity, if the outlook for the Portuguese economy becomes more negative.


For BES, the BFSR downgrade to E+ (mapping to B1 on the long-term scale) from D-/Ba3 captures the effects that the very weak operating environment and increased sovereign risks may have on BES’s credit profile, due to its high reliance on market funds and exposure to capital markets activities. The accomplishment of BES’s funding and recapitalisation plan will be a key rating factor going forward, as any slippage in attaining its targets may result in a need of government support for the bank.

Moody’s notes that BES displays a capital shortfall principally linked to the increased capital standards required by the EBA. However, BES is confident that this shortfall is likely to be covered by private funds without resorting to government support. This will provide the bank some flexibility to accommodate the more challenging operating environment as it will not be constrained by the need of redeeming the public capital instruments. In addition, Moody’s also acknowledges that asset-quality indicators compare favourably with those of its weakest peers.


Moody’s has confirmed the standalone credit assessment of Montepio at D- (mapping to Ba3 on the long-term scale). This reflects Montepio’s exposure to the same challenges as the other Portuguese banks, namely due to the domestic nature of its operations, expected deterioration in asset quality, further pressure in recurrent revenues and continued lack of access to market funding, but that these risks were already incorporated into its relatively low standalone credit assessment.


For five banks (CGD, BPI, BST, BES and Banif), the downgrades of long-term debt ratings directly reflect the downgrade of the banks’ standalone credit assessments and the downgrade of the Portuguese sovereign to Ba3 from Ba2, with a negative outlook (see "Moody’s adjusts ratings of 9 European sovereigns to capture downside risks", 13 February 2012). The debt ratings for ESFG, the holding company of BES, have been downgraded to B2 from B1 to reflect the one notch downgrade of BES’s standalone credit assessment. The ratings of ESFG reflect the structural subordination to its operating company BES.

The debt ratings of BCP were confirmed at Ba3, resulting in two notches of uplift from its standalone credit assesment of B2, and based on Moody’s assessment of a very high probability of support from the Portuguese sovereign.

The debt ratings of Montepio were confirmed at Ba3 after the confirmation of its standalone credit assessment at Ba3. The bank’s debt and deposit ratings have not been affected by the downgrade of the Portuguese sovereign as they did not benefit from any rating uplift from systemic support.

BST’s debt and deposit ratings of Ba1 incorporate a two-notch uplift from its standalone credit assessment at D-/Ba3. This uplift is based on Moody’s assessment of a high likelihood of parental support from Banco Santander S.A. (rated Aa3/B-; on review for downgrade). BST’s debt ratings are two notches above the Portuguese government bond rating of Ba3; this uplift will likely be maintained even after the conclusion of the current rating review of Banco Santander.


Moody’s has today concluded its review on the systemic support that had been incorporated in Portuguese banks’ subordinated debt ratings. All systemic support will be removed from these instruments’ ratings. This followed the rating action of 29 November 2011, when Moody’s placed on review for downgrade the ratings of the senior subordinated and junior subordinated debt of Portuguese banks (only BCP and BES were affected by the rating review), together with other subordinated debt in other European countries which benefited from some rating uplift based on Moody’s assumption of government support. (See Moody’s Special Comment "Reassessment of Government Support Assumptions in European Bank Subordinated Debt," published on 28 November 2011,for further information.)

The removal of the support assumption for Portuguese subordinated debt reflects Moody’s conclusion that losses are more likely to be imposed on these instruments when the government is otherwise providing financial support to the banks outside of liquidation has risen to a level that is incompatible with any remaining uplift. Moody’s acknowledges that the current legal and regulatory framework remains ostensibly supportive. However, Moody’s believes that the conflict between rising pressure on banks’ capitalisation levels and increasingly severe austerity measures increases the probability that the government will seek to protect its own balance sheet at the expense of subordinated creditors, given the lesser contagious impact of such losses on the financial system.

The subordinated debt ratings have been downgraded for all banks whose standalone credit assessments have been downgraded. Furthermore, in the case of BCP and BES, where subordinated debt ratings had previously benefited from systemic support, the downgrades of their subordinated debt ratings also reflects the removal of systemic support.


The downgrade of five banks’ junior subordinated debt and of four banks’ preference shares ratings follows the downgrade of these banks’ standalone credit assessments and the downgrade of the subordinated debt ratings. All of these instruments’ ratings have a negative outlook, in line with the outlook on the banks’ standalone credit assessments.


An upgrade of banks’ standalone credit assessments is unlikely in the short term given the current negative outlook.

The banks’ BFSRs could be adversely affected by (i) a greater-than-expected deterioration in their loss-absorption capacity (e.g., a reduction of existing capital buffers); (ii) higher losses than those estimated under our base-case scenario; (iii) a further material deterioration in their liquidity position; or (iv) material deterioration on banks’ business franchise as a consequence of a further weakening of the operating environment.

Negative pressure on the banks’ long-term debt and deposit ratings could result from a further downgrade of the Portuguese government’s rating (Ba3, negative), as well as from a downgrade of the banks’ individual standalone BFSRs.

However, if the current economic environment improves, an upgrade of the banks’ BFSR could be driven by a combination of the following factors (i) achieving the targeted deleveraging plan resulting in stronger solvency ratios; (ii) an improved liquidity position, with lower reliance on ECB funding and normalised access to long-term wholesale financing; (iii) a sustainable recovery of asset-quality indicators; (iv) an improved capacity to generate recurrent revenues on the domestic operations; and/or (iv) a reduction in their exposure to Portuguese government securities.

An upgrade of the banks debt and deposit ratings could be triggered by an improvement in their standalone financial strength.


Following the downgrade on 13 February of the Portuguese government’s bond rating to Ba3 from Ba2, Moody’s has today downgraded to Ba3 from Ba2 the backed senior debt of CGD and BES. The backed-Ba3 ratings assigned are based on the unconditional guarantee, which directly links them to the ratings of the Portuguese government. (See "Moody’s to assign backed-Aa2 ratings to new debt securities covered by the Portuguese government’s guarantee," published on 2 December 2008).

  1. David Lazarus says

    Portugal would do well to drop any support for the banks, so when they collapse they will not be left with all the bad debts landing on the tax payers.

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