Moody´s - Caja Rural de Navarra

Credit Opinion: Caja Rural de Navarra
Global Credit Research - 18 Jun 2015
Pamplona, Spain
Ratings
Category
Moody's Rating
Outlook
Bank Deposits -Dom Curr
Baseline Credit Assessment
Adjusted Baseline Credit Assessment
Positive
Baa3/P-3
baa3
baa3
Contacts
Analyst
Maria Vinuela/Madrid
Alberto Postigo/Madrid
Carola Schuler/Frankfurt am Main
Phone
34.91.768.8200
49.69.707.30.700
Key Indicators
Caja Rural de Navarra (Consolidated Financials)[1]
Avg.
9,652.5 9,662.0 9,594.3 7,991.1 7,381.7 [4]6.9
11,680.1 13,313.6 12,649.0 10,373.6 9,902.9 [4]4.2
795.3 750.3 703.6 737.7 697.0 [4]3.4
962.3 1,033.9 927.6 957.6 935.1 [4]0.7
4.4
5.2
4.3
3.9
3.5 [5]4.3
13.6
12.0
11.3
12.5
12.0 [6]13.6
26.5
32.8
28.5
27.3
25.9 [5]28.2
[2]12-14 [3]12-13 [3]12-12 [3]12-11 [3]12-10
Total Assets (EUR million)
Total Assets (USD million)
Tangible Common Equity (EUR million)
Tangible Common Equity (USD million)
Problem Loans / Gross Loans (%)
Tangible Common Equity / Risk Weighted Assets (%)
Problem Loans / (Tangible Common Equity + Loan Loss
Reserve) (%)
Net Interest Margin (%)
PPI / Average RWA (%)
Net Income / Tangible Assets (%)
Cost / Income Ratio (%)
Market Funds / Tangible Banking Assets (%)
Liquid Banking Assets / Tangible Banking Assets (%)
Gross Loans / Total Deposits (%)
Source: Moody's
1.5
2.2
0.6
69.2
22.5
30.4
83.4
1.4
1.5
0.3
72.8
27.7
26.4
81.5
1.5
1.8
-0.4
50.1
30.4
18.8
81.4
1.1
1.2
0.4
60.6
25.0
15.1
97.1
1.2 [5]1.3
1.1 [6]2.2
0.5 [5]0.3
63.9 [5]63.3
21.0 [5]25.3
10.4 [5]20.2
104.2 [5]89.5
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional
phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS
reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS
reporting periods have been used for average calculation
Opinion
SUMMARY RATING RATIONALE
On 17 June 2015, we confirmed Caja Rural de Navarra's (CRN) long-term deposit rating at Baa3 and its shortterm deposit rating at Prime-3. The bank's standalone baseline credit assessment (BCA) was affirmed at baa3.
This rating action takes into account the introduction of the new global bank methodology and our advanced Loss
Given Failure (LGF) analysis.
Furthermore, Moody's has assigned a Counterparty Risk Assessment (CR Assessment) of Baa1 (cr)/Prime-2 (cr)
to CRN.
CRN's BCA of baa3 reflects the bank's sound financial fundamentals, namely (1) its stronger asset quality
performance compared with that of the banking system; (2) its sound capitalisation levels; (3) its stable retail
deposit base and low reliance on wholesale funding; and (4) the fact that it mainly operates in Navarra, one of the
wealthiest regions in Spain. The bank's BCA also reflects CRN's modest - albeit improving - profitability levels.
CRN'S RATING IS DETERMINED BY ITS MACRO PROFILE OF `MODERATE+'
CRN is a domestic bank focused on the Spanish market; the bank has a Macro Profile score of `Moderate+'.
Spanish banks operate in a large, diversified and affluent economy, which is gradually recovering from the
prolonged recession of 2012-13. The speed of the recovery is constrained primarily by the high levels of debt
remaining in all sectors of the economy. Spain's institutional strength is very high, reflecting the structural reforms
of the past two years; and the country displays moderate susceptibility to event risk. The bank's Macro Profile
score also incorporates the recent improvement in funding conditions for financial institutions.
Rating Drivers
- Sound brand recognition and market positioning in Navarra
- CRN's asset quality indicators perform better than the system average, and are starting to improve
- Sound solvency levels
- Historically modest profitability indicators are slowly improving
- Retail funding has proven resilient throughout the crisis
Rating Outlook
CRN's deposit ratings carry a positive outlook to reflect the positive pressure that could develop on this ratings if
the improving trend observed on this bank's credit fundamentals consolidates over the next 12-18 months.
What Could Change the Rating - Up
Upward pressure on CRN's standalone BCA could be driven by clear evidence that asset quality is improving,
along with a sustainable recovery in the bank's recurring earnings. Any significant macroeconomic growth beyond
our central scenario of 2.7% GDP growth in 2015 could underpin signs of a turnaround.
Any change to the BCA would likely also affect deposit ratings, as they are linked to the standalone BCA.
CRN's senior unsecured debt and deposit ratings could also change due to changes in the loss-given failure faced
by these securities.
What Could Change the Rating - Down
Downward pressure could be exerted on CRN's standalone BCA as a result of (1) an unexpected considerable
worsening in the asset quality indicators, which would align the bank's performance closer to that of the
comparatively weaker banking system; (2) weakening of the bank's risk absorption capacity through earnings
generation capacity or capital levels; and/or (3) any worsening (beyond Moody's current expectations) in operating
conditions in the Spanish operating environment, particularly in the region of Navarra.
CRN's senior unsecured debt and deposit ratings could also change due to changes in the loss-given failure faced
by these securities.
DETAILED RATING CONSIDERATIONS
SOUND BRAND RECOGNITION AND MARKET POSITIONING IN NAVARRA
With total assets of EUR 9.7 billion and 244 branches at end-December 2014, CRN is the third-largest rural co-
operative bank in Spain and is associated with 28 other rural co-operatives under the Spanish Rural Co-operatives
Association (Asociacion Espanola de Cajas Rurales). Despite its size, CRN has strong brand recognition and
market positioning in its home region.
CRN is primarily based in Navarra. It also operates in the neighbouring regions of La Rioja and the Basque
Country as the only rural credit co-operative. With market shares of 21.0% in lending and 25.1% in deposits at
end-December 2014, CRN is ranked second in Navarra, behind Caixabank.
Navarra is one of the wealthiest regions in Spain with an unemployment rate of 14.9%, compared with the
nationwide unemployment of 23.7% (as of December 2014). Its GDP per capita is around 27% higher than the
Spanish average .
Spanish rural co-operatives have benefited from the integration of some of their direct local competitors - former
savings banks - into major financial groups that have attained a nationwide presence, following the restructuring
process of the Spanish financial system. In particular, CRN's direct competitor Caja de Ahorros de Navarra was
integrated into Caixabank (through Banca Civica). These integrations have led to the weakening or loss of regional
identity for the merged entities, which prompted some customer flight from the integrated entities to rural cooperatives. As such, CRN's market shares in Navarra have increased by 53 bps in lending and 46 bps in deposits
in 2014.
CRN'S ASSET QUALITY INDICATORS COMPARE BETTER THAN THE SYSTEM AVERAGE, AND ARE
STARTING TO IMPROVE
CRN's asset-quality indicators have historically performed better than the Spanish banking system average,
owing to the bank's more prudent risk management, its relatively low exposure to the real estate sector and its
activities being limited to its regional territories.
CRN's non-performing loan (NPL) ratio is significantly lower than the system average. Moreover, the gap between
CRN's NPL ratio and that of the system has been widening in recent years as the entity's NPL metrics exhibited a
much slower pace of deterioration. At the end of December 2014, CRN reported an NPL ratio of 4.4%, down from
5.2% at end-December 2013 (while the same ratio for the banking system stood at 12.5%). The coverage ratio defined as NPLs as a percentage of loan loss reserves (LLR) - increased in 2014 to a high 95%, compared to the
system average of 58%. We expect this improving trend to continue during the next 12 months as the domestic
economy gradually recovers, which will help to alleviate pressures on the bank's risk absorption capacity and
further reduce the bank's provisioning costs.
In addition to NPLs, CRN has other problematic exposures related to real-estate assets acquired by the bank over
the past few years. If these are included, the NPL ratio rises to 7.3%, which still compares favourably with that of
its domestic peers. Furthermore, we note that the percentage of refinanced loans at the bank is also low (3.0% of
gross loans). The aggregation of performing refinanced loans would increase the overall non-earning assets ratio
to 9.3%.
We have assigned a score of baa3 to CRN's Asset Risk. This score incorporates the improving trend in CRN's
NPL ratio, as well as the bank's low exposure to other non-earning assets.
SOUND SOLVENCY LEVELS
CRN's capital is composed of "aportaciones" on which it pays interest. Therefore, in common with other rural cooperatives, the bank has flexibility to raise capital from co-operative members. In addition, in line with Spanish
legislation, CRN allocates part of its net profit to a welfare fund, although it retains most of the profit to support
capital generation and to fund future growth. This profit retention translates into CRN's higher-than-average capital
ratios. At end-December 2014, the bank's tangible common equity (TCE) -to-risk-weighted assets (RWA) ratio
stood at 13.6%, which is equivalent to a Capital score of baa1. This high score indicates that CRN's capitalisation
is a relative strength for the bank's BCA.
In terms of regulatory capital ratios, CRN reported a phased-in Common Equity Tier 1 (CET1) ratio of 15.6% at
end-December 2014 and a fully loaded CET1 ratio of 15.2%.
HISTORICALLY MODEST PROFITABILITY INDICATORS ARE SLOWLY IMPROVING
CRN has historically displayed modest profitability indicators, and the bank's recurring earnings have been
pressured by its non-earning assets, historical low interest rates in Europe and subdued business growth.
However, during 2014, the bank's top-line revenues improved, with the bank's net interest income growing by 9%
and its pre-provision income growing by 22%. In addition, we note the bank has increased its operating income
with a lower contribution from the securities carry trade (primarily borrowing low-cost ECB funds that are then
invested in higher-yielding Spanish government securities), which has been supporting the bank's earnings since
2012.
At end-December 2014, CRN reported a net profit of EUR53 million, which represents 0.6% of the bank's tangible
banking assets. We expect the bank to start benefiting from Spain's improved economic conditions, which should
enable it to gradually improve business volumes from current subdued levels and to report lower provisioning
requirements as asset quality metrics improve. The Profitability score of ba2 is higher than that suggested by
historic earnings, and thus incorporates some recovery in the bank's profitability ratios.
RETAIL FUNDING HAS PROVEN RESILIENT THROUGHOUT THE CRISIS
CRN is predominantly retail-funded. At end-December 2014, deposits accounted for around 75% of its total
funding. Spanish banks overall have maintained their sound retail deposit franchises, albeit with some flight-toquality to stronger institutions, and retail funds have been resilient over the more stressed periods of the crisis.
CRN's regional identity adds a component of stability to its retail funding base, especially considering that its direct
competitor - a former savings bank - has been integrated into Caixabank, a large financial group that has a
nationwide presence. CRN's aggregate deposits increased by around 5% in 2014.
Market funding represented a low 22.5% of CRN's tangible banking assets at end-December 2014. Most of CRN's
wholesale funding represents covered bonds. In addition, the entity took advantage of ECB funding to given its
favourable terms and conditions. ECB funding represented 14% of the bank's total funding at end-December 2014.
This limited reliance on market funding reliance is reflected in CRN's Funding Structure score of baa3.
CRN's liquid banking assets accounted for 30.4% of its tangible banking assets at end-December 2014, which is
equivalent to a Liquid Resources score of baa1. According to our liquidity stress test, the bank displays a net
positive funding gap (as of end December 2014) in the event that capital markets remained closed for a period of
one year. Our stress test includes interbank borrowings, committed undrawn credit lines and the re-issuance of
maturing covered bonds, but the stress test excludes the liquidity arising from a reduction in CRN's commercial
gap. The bank would also be resilient to our stress scenario of a deposit outflow of 5% for retail deposits, and 25%
for corporate deposits. The stress test also assumes that debt placed among retail investors is not rolled over.
Notching Considerations
LOSS GIVEN FAILURE
CRN is subject to the EU Bank Resolution and Recovery Directive (BRRD), which we consider to be an
Operational Resolution Regime. Accordingly, we apply mostly its standard assumptions. These assumptions
include a residual tangible common equity of 3%, losses post-failure of 8% of tangible banking assets, a 25% runoff in "junior" wholesale deposits, a 5% run-off in preferred deposits and assign a 25% probability to deposits being
preferred to senior unsecured debt. Because we assume that the CRN's deposit base is essentially retail in
nature, we consider a proportion of 10% of junior deposits below the estimated EU-wide average of 26%.
For CRN's deposits, our Loss-Given Failure (LGF) analysis considers the likely impact on loss-given-failure of the
combination of its own volume and subordination. Our LGF analysis indicates a moderate loss-given-failure for
deposits, which leads us to position CRN's Preliminary Rating Assessments (PRA) at the same level as the
Adjusted BCA. Please refer to the Loss Given Failure and Government Support table at the bottom of the
scorecard.
COUNTERPARTY RISK ASSESSMENT
CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are
distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood
of default and the expected financial loss suffered in the event of default and (2) apply to counterparty obligations
and contractual commitments rather than debt or deposit instruments. The CR assessment is an opinion of the
counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives
(e.g., swaps), letters of credit, guarantees and liquidity facilities.
CRN's CR Assessment is positioned at Baa1 (cr).
The CR Assessment, prior to government support, is positioned two notches above the Adjusted BCA of baa3,
based on the cushion against default provided to the senior obligations represented by the CR Assessment by
subordinated instruments amounting to 10% of Tangible Banking Assets. The main difference with our Advanced
LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default
on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take no
account of the volume of the instrument class.
About Moody's Bank Scorecard
Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment.
When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the
output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated
to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in
rating committees and may be adjusted up or down to reflect conditions specific to each rated entity.
Rating Factors
Caja Rural de Navarra
Macro Factors
Weighted Macro Profile
Financial Profile
Factor
Moderate +
Historic Ratio
Macro
Adjusted
Score
Credit Trend
Assigned Score Key driver
#1
Key driver
#2
4.6%
baa3
←→
baa3
Expected
trend
13.6%
baa1
←→
baa1
Expected Access to
trend
capital
0.2%
b2
↑↑
ba2
Expected
trend
Solvency
Asset Risk
Problem Loans / Gross
Loans
Capital
TCE / RWA
Profitability
Net Income / Tangible
Assets
Combined Solvency Score
Liquidity
Funding Structure
Market Funds / Tangible
Banking Assets
baa3
baa3
22.5%
baa3
←→
baa3
Market
funding
quality
30.4%
baa1
←→
baa1
Stock of
liquid
assets
Liquid Resources
Liquid Banking Assets /
Tangible Banking Assets
Combined Liquidity Score
Financial Profile
baa2
baa2
baa3
Qualitative Adjustments
Adjustment
Business Diversification
Opacity and Complexity
Corporate Behavior
0
0
0
Total Qualitative
Adjustments
0
Deposit
quality
Sovereign or Affiliate
constraint
Baa2
Scorecard Calculated
BCA range
baa2 - ba1
Assigned BCA
baa3
0
Affiliate Support notching
Adjusted BCA
Instrument Class
Deposits
baa3
Loss Given
Failure
notching
Additional
notching
Preliminary
Rating
Assessment
Government
Support
notching
Local
Currency
rating
0
0
baa3
0
Baa3
Foreign
Currency
rating
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