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DBRS COMMENTS ON NOVO BANCO'S 2015 RESULTS
DBRS
04-Mar-2016 14:07
Date of Release: March 4, 2016
DBRS comments on Novo Banco's 2015 results
Industry: Fin.Svc.--Banks & Trusts
Commentary Highlights
Novo Banco (NB) reported a net attributable loss of EUR 980.6 million for the full year 2015. This compares to a net loss of EUR 497.6 million in 2H14 (from August 4, 2014 to December 31, 2014) and a EUR 251.9 million net loss in 1H15.
Asset quality remains a key challenge for NB with credit at risk loans up 29.6% year-on-year (YoY) and results largely affected by significantly higher loan impairment charges.
Funding and liquidity position remains fragile with low levels of investor confidence.
Bank of Portugal's (BoP) actions at end-2015 boosted NB's regulatory capital level, however capitalisation still remains weak.
DBRS rates Novo Banco at CCC (high), Negative trend for Senior Long-Term Debt and Deposits.
DBRS Ratings Limited (DBRS) views Novo Banco's (NB or the Bank) 2015 results as continuing to reflect the significant challenges the Bank is facing to restore its franchise as well the efforts that management is making to clean up legacy issues from the former Banco Espírito Santo S.A. (BES). The 2015 loss was largely driven by sizeable impairments associated with loans, securities and real estate assets, and mainly related to legacy BES exposures. Moreover, results were also negatively affected by the write-off of tax losses carried forward booked at year-end 2013 (EUR 160 million). Results also reflected some of the challenges faced by its domestic peers amid the difficult low interest rate environment and slow economic recovery in Portugal.
The Bank reported a much improved income before provisions and taxes (IBPT, as calculated by DBRS) of EUR 91.6 million in 2H15 as compared to EUR 2 million in 1H15. 1H15 was negatively affected by the annual contribution to the Deposit Guarantee Fund (DGF) and to the Resolution fund (EUR 32 million). Improved IBPT in 2H15 was largely supported by strong operating costs reduction. Cost restructuring continued to be at the center of the Bank's strategy. Total operating costs totaled EUR 358 million in 2H15, down 10% on 1H15. Moreover, gross operating revenues were supported by core banking revenues, namely net interest income (NII) and fees, which contributed 87% of total gross operating income but also by capital gains of EUR 59 million, primarily from the sale of sovereign debt.
NB's NII held up relatively well in 2015 and rose to EUR 236 million in 2H15, as compared to EUR 214.7 million in 1H15. NII was supported by lower wholesale funding costs and interest income contributions from the Bank's large sovereign debt portfolio. However, NII continued to reflect strong loan contraction, the Bank's high level of problematic loans and the Bank's fairly expensive funding cost base. The latter is the combination of BES' legacy large wholesale funding reliance as well as the Bank's higher retail funding costs as compared to domestic peers. Although retail funding costs were substantially higher after the resolution of BES, the Bank has managed them gradually down during 2015. Commission income also improved during 2015 despite the fact that 2H15 fees were negatively affected by the commissions paid on the debt securities guaranteed by the Republic of Portugal (EUR 34 million) as well as higher fees on advising and servicing services as compared to 1H15. Total impairments amounted EUR 1.1 billion in 2015, largely associated with lending exposures (EUR 739.3 million) but also to some impairments on debt securities and the Bank's stakes in the telecom companies Pharol and Oi. Around 56% of total impairments were made to improve coverage levels associated with the 50 largest credit exposures and real estate portfolio and circa 70% of total provisions were made in 2H15. Asset quality remained a challenge for the Bank given BES' legacy issues and the slow recovery of the domestic economy. Credit at risk loans increased EUR 2 billion at end-2015. As a result, the credit at risk ratio weakened to 22.8% at end-2015 from 16.5% at end-2014. Nevertheless, DBRS also notes that deterioration in the ratio was also influenced by deleveraging, as gross loans declined 6.6% YoY.
During 2015, the Bank made significant progress in restoring its funding and liquidity position, albeit it still remains fragile. The Bank's net loan to deposit ratio (as calculated by DBRS) improved to 115% at end-2015 from 131% end-2014, benefitting from a 2.8% growth in customer deposits. However, including off balance sheet funds and retail debt, NB's total customer funds were down 6.5% YoY. In DBRS' view, this evidences the Bank's challenges to fully restore and stabilize its customer deposit base and franchise.
Capital levels have also improved during the year but remain weak, particularly in the context of potentially prolonged losses and the high level of unreserved problematic assets. Regulatory capital levels largely benefitted from the Bank of Portugal's decision in late 2015 to remove some of the senior debt notes initially placed in NB upon resolution of BES. This had a positive impact on Common Equity Tier 1 (CET1) of EUR 1.9 billion, which helped to compensate for losses in the period. Capital levels also benefitted from a substantial reduction of risk weighted assets in 2015, which were down EUR 9.3 billion in the year, primarily as a result of the deconsolidation of BES and the loan deleveraging. As a result the CET1 capital ratio (fully loaded) improved to 11.5% at end-2015, up from 7.5% at end-2014.
DBRS rates Novo Banco at CCC (high), Negative Trend for Senior Long-Term Debt and Deposits.
DBRS
04-Mar-2016 14:07
Date of Release: March 4, 2016
DBRS comments on Novo Banco's 2015 results
Industry: Fin.Svc.--Banks & Trusts
Commentary Highlights
Novo Banco (NB) reported a net attributable loss of EUR 980.6 million for the full year 2015. This compares to a net loss of EUR 497.6 million in 2H14 (from August 4, 2014 to December 31, 2014) and a EUR 251.9 million net loss in 1H15.
Asset quality remains a key challenge for NB with credit at risk loans up 29.6% year-on-year (YoY) and results largely affected by significantly higher loan impairment charges.
Funding and liquidity position remains fragile with low levels of investor confidence.
Bank of Portugal's (BoP) actions at end-2015 boosted NB's regulatory capital level, however capitalisation still remains weak.
DBRS rates Novo Banco at CCC (high), Negative trend for Senior Long-Term Debt and Deposits.
DBRS Ratings Limited (DBRS) views Novo Banco's (NB or the Bank) 2015 results as continuing to reflect the significant challenges the Bank is facing to restore its franchise as well the efforts that management is making to clean up legacy issues from the former Banco Espírito Santo S.A. (BES). The 2015 loss was largely driven by sizeable impairments associated with loans, securities and real estate assets, and mainly related to legacy BES exposures. Moreover, results were also negatively affected by the write-off of tax losses carried forward booked at year-end 2013 (EUR 160 million). Results also reflected some of the challenges faced by its domestic peers amid the difficult low interest rate environment and slow economic recovery in Portugal.
The Bank reported a much improved income before provisions and taxes (IBPT, as calculated by DBRS) of EUR 91.6 million in 2H15 as compared to EUR 2 million in 1H15. 1H15 was negatively affected by the annual contribution to the Deposit Guarantee Fund (DGF) and to the Resolution fund (EUR 32 million). Improved IBPT in 2H15 was largely supported by strong operating costs reduction. Cost restructuring continued to be at the center of the Bank's strategy. Total operating costs totaled EUR 358 million in 2H15, down 10% on 1H15. Moreover, gross operating revenues were supported by core banking revenues, namely net interest income (NII) and fees, which contributed 87% of total gross operating income but also by capital gains of EUR 59 million, primarily from the sale of sovereign debt.
NB's NII held up relatively well in 2015 and rose to EUR 236 million in 2H15, as compared to EUR 214.7 million in 1H15. NII was supported by lower wholesale funding costs and interest income contributions from the Bank's large sovereign debt portfolio. However, NII continued to reflect strong loan contraction, the Bank's high level of problematic loans and the Bank's fairly expensive funding cost base. The latter is the combination of BES' legacy large wholesale funding reliance as well as the Bank's higher retail funding costs as compared to domestic peers. Although retail funding costs were substantially higher after the resolution of BES, the Bank has managed them gradually down during 2015. Commission income also improved during 2015 despite the fact that 2H15 fees were negatively affected by the commissions paid on the debt securities guaranteed by the Republic of Portugal (EUR 34 million) as well as higher fees on advising and servicing services as compared to 1H15. Total impairments amounted EUR 1.1 billion in 2015, largely associated with lending exposures (EUR 739.3 million) but also to some impairments on debt securities and the Bank's stakes in the telecom companies Pharol and Oi. Around 56% of total impairments were made to improve coverage levels associated with the 50 largest credit exposures and real estate portfolio and circa 70% of total provisions were made in 2H15. Asset quality remained a challenge for the Bank given BES' legacy issues and the slow recovery of the domestic economy. Credit at risk loans increased EUR 2 billion at end-2015. As a result, the credit at risk ratio weakened to 22.8% at end-2015 from 16.5% at end-2014. Nevertheless, DBRS also notes that deterioration in the ratio was also influenced by deleveraging, as gross loans declined 6.6% YoY.
During 2015, the Bank made significant progress in restoring its funding and liquidity position, albeit it still remains fragile. The Bank's net loan to deposit ratio (as calculated by DBRS) improved to 115% at end-2015 from 131% end-2014, benefitting from a 2.8% growth in customer deposits. However, including off balance sheet funds and retail debt, NB's total customer funds were down 6.5% YoY. In DBRS' view, this evidences the Bank's challenges to fully restore and stabilize its customer deposit base and franchise.
Capital levels have also improved during the year but remain weak, particularly in the context of potentially prolonged losses and the high level of unreserved problematic assets. Regulatory capital levels largely benefitted from the Bank of Portugal's decision in late 2015 to remove some of the senior debt notes initially placed in NB upon resolution of BES. This had a positive impact on Common Equity Tier 1 (CET1) of EUR 1.9 billion, which helped to compensate for losses in the period. Capital levels also benefitted from a substantial reduction of risk weighted assets in 2015, which were down EUR 9.3 billion in the year, primarily as a result of the deconsolidation of BES and the loan deleveraging. As a result the CET1 capital ratio (fully loaded) improved to 11.5% at end-2015, up from 7.5% at end-2014.
DBRS rates Novo Banco at CCC (high), Negative Trend for Senior Long-Term Debt and Deposits.
