Moody´s - Caja Rural de Navarra

FINANCIAL INSTITUTIONS
CREDIT OPINION
21 June 2016
Caja Rural de Navarra
Update Following Recent Upgrade to Baa2 Stable
Update
Summary Rating Rationale
On 16 June 2016 we upgraded Caja Rural de Navarra’s (CRN) deposit ratings to Baa2/
Prime-2 from Baa3/Prime-3. We also upgraded the bank’s baseline credit assessment (BCA)
and adjusted BCA to baa2 from baa3. The bank’s CR Assessment was affirmed at Baa1(cr)/
Prime-2(cr). The outlook on the long-term deposit ratings was changed to stable from
positive.
RATINGS
Caja Rural de Navarra
Domicile
Spain
Long Term Rating
Baa2
Type
LT Bank Deposits - Dom
Curr
Outlook
Stable
Please see the ratings section at the end of this report
for more information.The ratings and outlook shown
reflect information as of the publication date.
Analyst Contacts
Alberto Postigo
34-91-768-8230
VP-Sr Credit Officer
[email protected]
Maria Jose Mori
34-91-768-8227
VP-Sr Credit Officer
[email protected]
Carola Schuler
49-69-70730-766
Managing Director Banking
[email protected]
Pedro Rodriguez
34-91-768-8244
Associate Analyst
[email protected]
CLIENT SERVICES
Americas
1-212-553-1653
Asia Pacific
852-3551-3077
Japan
81-3-5408-4100
EMEA
44-20-7772-5454
The rating action was prompted by the institution’s solid credit performance, particularly in
terms of asset risk, capital and liquidity, which is among the strongest of Spanish rated banks
and with credit metrics consistent with those shown by similarly rated European banks.
CRN’s Baa2/Prime-2 deposit ratings reflect (1) the bank's baa2 baseline credit assessment
(BCA); and (2) our Advanced Loss Given Failure (LGF) analysis, which translates into no
notches of rating uplift. CRN's Counterparty Risk Assessment (CR Assessment) is Baa1(cr)/
Prime-2 (cr).
CRN's BCA of baa2 reflects the bank's sound financial fundamentals, namely (1) its stronger
asset quality performance compared with that of the wider Spanish banking system; (2)
its sound capitalisation levels; and (3) its stable retail deposit base and low reliance on
wholesale funding. The bank's BCA also reflects CRN's modest, albeit improving, profitability
levels, and the limited geographical diversification of its franchise, concentrated in Navarra
and neighbouring regions.
Under our Advanced LGF analysis, CRN's long-term deposit ratings take into account their
moderate loss-given-failure, because of the lack of subordinated and senior unsecured debt
outstanding, leading to no notches of rating uplift from the bank's baa2 adjusted BCA.
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Exhibit 1
Rating Scorecard - Key Financial Ratios
Source: Moody's Financial Metrics
Credit Strengths
»
Sound brand recognition and market positioning in Navarra
»
Improving asset quality indicators that are significantly stronger than the system average
»
Sound solvency levels
»
Low reliance on market funding, the majority of which is secured
Credit Challenges
»
Geographical concentration renders the bank vulnerable to negative developments affecting its home region
»
Albeit improving, CRN has traditionally shown modest profitability indicators
Rating Outlook
The outlook on CRN’s deposit ratings is stable, reflecting our expectations that Spain’s improved operating conditions will help to
preserve current positive trends in the bank’s credit metrics.
Factors that Could Lead to an Upgrade
An upgrade of CRN's deposit ratings could arise as a result of changes in the liability structure that indicated a lower loss-given-failure
to be faced by deposits.
A sustained improvement in CRN’s recurrent profitability would provide upward pressure on the BCA. In addition, any upward pressure
on CRN's BCA is unlikely to materialise as long as the Spanish government's bond rating remains at Baa2, because, absent any
factor that reduces the dependency between the creditworthiness of a bank and the sovereign, the BCA will not typically exceed the
sovereign rating under Moody’s methodology.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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Caja Rural de Navarra: Update Following Recent Upgrade to Baa2 Stable
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Factors that Could Lead to a Downgrade
Downward pressure could be exerted on CRN's BCA as a result of: (1) an unexpected considerable worsening in the bank's asset quality
indicators, which would align the bank's performance closer to that of the comparatively weaker banking system; (2) a weakening
of the bank's risk-absorption capacity through earnings-generation capacity or capital levels; and/or (3) any worsening, beyond our
current expectations, in operating conditions in the Spanish operating environment, particularly in the region of Navarra.
CRN's deposit ratings could also change as a result of alterations to the bank’s liability structure, which would indicate a higher lossgiven-failure to be faced by deposits.
Key Indicators
Exhibit 2
Caja Rural de Navarra (Consolidated Financials) [1]
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 / Due to customers (%)
12-152
12-142
12-133
12-123
12-113
Avg.
9860.1
10711.0
872.5
947.8
3.4
13.6
20.0
1.5
2.1
0.7
52.3
17.4
29.0
103.1
9652.5
11680.1
795.3
962.3
4.4
13.6
26.5
1.5
2.2
0.5
49.2
22.5
30.4
105.5
9662.0
13313.6
750.3
1033.9
5.2
12.0
32.8
1.4
1.5
0.3
55.1
27.7
26.4
111.6
9594.3
12649.0
703.6
927.6
4.3
11.3
28.5
1.5
1.8
-0.4
50.1
30.4
18.8
115.0
7991.1
10373.6
737.7
957.6
3.9
12.5
27.3
1.1
1.2
0.4
60.6
25.0
15.1
128.0
5.44
0.84
4.34
-0.34
4.25
13.66
27.05
1.45
2.16
0.35
53.55
24.65
24.05
112.65
[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
Source: Moody's Financial Metrics
Detailed Rating Considerations
SOUND BRAND RECOGNITION AND MARKET POSITIONING IN NAVARRA
With total assets of EUR11 billion at end-March 2016, CRN is the third-largest rural co-operative bank in Spain. The bank is associated
with 28 other rural co-operatives under the Spanish Rural Co-operatives Association (Asociacion Espanola de Cajas Rurales). Despite its
small 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 22.3% in lending and 26.0% in deposits at end-December 2015, CRN is ranked second in
Navarra, behind Caixabank (deposits Baa2 negative, BCA ba1).
Navarra is one of the wealthiest regions in Spain, with an unemployment rate of 14.3%, compared with the nationwide unemployment
rate of 21.0% as of end-March 2016. Its GDP per capita is around 23% higher than the Spanish average as of end-December 2015.
Spanish rural co-operatives have benefitted 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 co-operatives.
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Caja Rural de Navarra: Update Following Recent Upgrade to Baa2 Stable
MOODY'S INVESTORS SERVICE
FINANCIAL INSTITUTIONS
IMPROVING ASSET QUALITY INDICATORS THAT ARE SIGNIFICANTLY STRONGER THAN THE SYSTEM AVERAGE
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.
At the end of March 2016, CRN reported a non-performing loan (NPL) ratio of 3.1%, down from 4.3% a year earlier, while the same
ratio for the banking system stood at 10%. The bank's coverage ratio - defined as NPLs as a percentage of loan loss reserves - increased
to a high 116% at end-March 2016 from 94% a year earlier, compared to the system average of 57%. However, CRN set aside some
loan loss reserves in April 2016 for any potential contingency derived from the potential cancelation of interest rate mortgage floors,
which is likely to reduce the loan loss coverage ratio below, but close to, 100%.
In addition to NPLs, CRN has other problematic exposures related to real-estate assets it acquired over the past few years. If these are
included, the NPL ratio rises to 5.6% (as of end-December 2015), which still compares very favourably with that of its domestic peers.
Refinanced loans classified as performing represented just 1.2% of total loans as of the same date.
We expect that this improving trend will continue during the next 12 months as the domestic economy maintains a healthy growth
rate, which will help the bank to reduce its provisioning costs further.
CRN's assigned Asset Risk score of baa2 incorporates its very low level of problematic assets relative to the system, as well as the
limited geographical diversification of the bank’s franchise.
SOUND SOLVENCY LEVELS
CRN's capital is composed of “aportaciones” on which it pays interest. Therefore, in common with other rural co-operatives, the
bank has flexibility to raise capital from co-operative members. 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 2015, the bank's tangible common equity to risk-weighted
assets 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 15.9% at end-December 2015
and a fully loaded CET1 ratio of 16.5%. The bank aims to grow its CET1 ratio by 1 percentage point in the following three years, mainly
through profit retention.
HISTORICALLY MODEST PROFITABILITY INDICATORS
CRN reported a net profit of EUR66 million in 2015, which represents 0.7% of the bank's tangible banking assets (compared to EUR53
million a year before). This improvement is mainly a result of lower loan loss provisions, which reduced by a significant 35% compared
to 2014, while top-line revenues remained overall broadly stable. As opposed to system trends, the bank was able to grow its net
interest income in 2015, assisted by a (slightly) growing loan book 3.5% growth throughout 2015) and declining funding costs.
In Q1 2016, CRN revenues followed the same trends observed in 2015. As of this period, the bank reported a net profit of EUR19
million.
We expect that the bank will continue benefitting from Spain's improved economic conditions, which are likely to enable it to gradually
improve business volumes from the current subdued levels, and to report lower provisioning requirements as asset-quality metrics
improve. The bank’s reported net profit in 2015 is consistent with a ba2 Profitability score, which also reflects our expectations
regarding the bank’s profitability over the next 12 to 18 months.
RETAIL FUNDING HAS PROVEN RESILIENT THROUGHOUT THE CRISIS
CRN is predominantly retail-funded. At end-March 2016, deposits accounted for around 72% of its total funding after growing by
around 9% since the end of 2014, representing around 100% of the bank’s gross loans. 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.
Market funding represented a low 17% of CRN's tangible banking assets at end-December 2015. Most of CRN's wholesale funding
represents covered bonds (11% of total funding), European Central Bank repos (7% of total funding) and other repos (9% total
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Caja Rural de Navarra: Update Following Recent Upgrade to Baa2 Stable
MOODY'S INVESTORS SERVICE
FINANCIAL INSTITUTIONS
funding), all secured funding sources. Repo financing is primarily used to fund the sovereign portfolio, given the favourable conditions
of this funding source. The bank’s limited reliance on market funding is reflected in CRN's Funding Structure score of baa2. The bank
does not face any debt maturity either in 2016 or 2017.
CRN's liquid banking assets accounted for 29% of its tangible banking assets at end-December 2015. We assign a Liquid Resources
score of baa3 to CRN, one notch below the macro-adjusted score of baa2, to reflect the encumbrance of some of the bank's liquid
assets.
According to our liquidity stress test, the bank displays a net positive funding gap (as of end March 2016) 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 potential 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, which we consider to be an Operational Resolution Regime.
Accordingly, we apply most of its standard assumptions. These assumptions include a residual tangible common equity of 3%, losses
post-failure of 8% of tangible banking assets, a 25% run-off 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 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 Assessment 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
CRN’s CR Assessment is positioned at Baa1(cr), and is constrained by Spain’s sovereign rating of Baa2. Under Moody's methodology,
the CR Assessment will not typically exceed the sovereign's own rating by more than one notch.
Prior to the government cap, the CR assessment is positioned two notches above the adjusted BCA of baa2, based on the cushion
against default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 8.5%
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, thereby focusing purely on
subordination and taking no account of the volume of the instrument class.
GOVERNMENT SUPPORT
We assign a low probability of government support for CRN deposits, which does not translate into any uplift. Likewise, the CR
Assessment does not benefit from any rating uplift from government support.
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.
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Caja Rural de Navarra: Update Following Recent Upgrade to Baa2 Stable
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Rating Methodology and Scorecard Factors
Exhibit 3
Caja Rural de Navarra
Macro Factors
Weighted Macro Profile
Moderate +
100%
Historic Ratio
Macro
Adjusted Score
Credit Trend
Assigned Score
Key driver #1
Key driver #2
Solvency
Asset Risk
Problem Loans / Gross Loans
4.3%
baa3
↑
baa2
Expected trend
Geographical
concentration
Capital
TCE / RWA
13.6%
baa1
←→
baa1
Risk-weighted
capitalisation
Profitability
Net Income / Tangible Assets
0.5%
ba2
←→
ba2
Return on assets
Financial Profile
Factor
Combined Solvency Score
Liquidity
Funding Structure
Market Funds / Tangible Banking
Assets
Liquid Resources
Liquid Banking Assets / Tangible
Banking Assets
Combined Liquidity Score
Financial Profile
Business Diversification
Opacity and Complexity
Corporate Behavior
Total Qualitative Adjustments
Sovereign or Affiliate constraint:
Scorecard Calculated BCA range
Assigned BCA
Affiliate Support notching
Adjusted BCA
Instrument Class
Counterparty Risk Assessment
Deposits
baa3
baa2
17.4%
baa2
←→
baa2
Extent of market
funding reliance
29.0%
baa2
←→
baa3
Asset encumbrance
baa2
Loss Given
Failure
notching
1
0
Additional notching
0
0
baa2
baa2
0
0
0
0
Baa2
baa1-baa3
baa2
0
baa2
Preliminary
Rating
Assessment
baa1 (cr)
baa2
Government
Support notching
Local Currency
rating
0
0
Baa1 (cr)
Baa2
Foreign
Currency
rating
---
Source: Moody's Financial Metrics
Ratings
Exhibit 4
Category
CAJA RURAL DE NAVARRA
Outlook
Bank Deposits -Dom Curr
Baseline Credit Assessment
Adjusted Baseline Credit Assessment
Counterparty Risk Assessment
Moody's Rating
Stable
Baa2/P-2
baa2
baa2
Baa1(cr)/P-2(cr)
Source: Moody's Investors Service
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Caja Rural de Navarra: Update Following Recent Upgrade to Baa2 Stable
MOODY'S INVESTORS SERVICE
FINANCIAL INSTITUTIONS
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Caja Rural de Navarra: Update Following Recent Upgrade to Baa2 Stable