Moody's
Moody's upgrades Novo Banco's BCA to caa2; deposit and senior debt ratings remain on review direction uncertain
Global Credit Research - 28 May 2015
Madrid, May 28, 2015 -- Moody's Investors Service has today upgraded Novo Bancos S.A.'s baseline credit assessment (BCA) to caa2 from ca to reflect the bank's improved credit fundamentals compared with those of its predecessor Banco Espirito Santo S.A. (BES; unrated). Furthermore, Moody's has placed the B2 and B3 bank's long-term deposit and senior debt ratings on review with direction uncertain. The short-term deposit and senior debt ratings are unaffected by this rating action and remain at Not Prime.
Moody's says that today's rating actions follow its assessment of Novo Banco's credit profile and concludes the review on the BCA initiated on 12 August 2014 and extended on 24 November 2014. This rating action also changes the direction of the review on the deposit and senior debt ratings initiated on 12 August 2014 and extended on 24 November 2014.
The bank's backed Ba1 ratings which benefit from a guarantee of Portugal (Ba1, stable) are unaffected by today's rating action.
Please refer to the end of this press release for a list of all affected ratings.
RATINGS RATIONALE
--- RATIONALE FOR THE BCA
The raising of Novo Banco's standalone BCA to caa2 is triggered by Moody's assessment of the bank's credit profile after it assigned a BCA of ca on review for upgrade on 12 August 2014, following the resolution measures applied by Portugal's central bank to BES on 3 August 2014, that led to the creation of a bridge bank called Novo Banco.
In raising Novo Banco's BCA, Moody's says that the bank's credit fundamentals have improved relative to those of its predecessor BES, for which the Portuguese authorities had to intervene and resolve to avoid BES defaulting on its financial obligations. Novo Banco's improved credit profile namely stems from the fact that most of the problematic assets (i.e. assets and liabilities related to the Espirito Santo Group and the troubled Angolan subsidiary) remained at BES and that Novo Banco received a capital injection from the Portuguese Resolution Fund of EUR4.9 billion.
Despite today's positive rating action, Moody's says that Novo Banco's credit profile remains very weak. In particular, the standalone BCA of caa2, reflects the bank's weak risk-absorption capacity, despite above-average provisioning coverage (non-performing loans as a proportion of loan loss reserves stood at 77.8% at year-end 2014). The weak risk absorption is principally because of its modest capital buffers (phased-in Common Equity Tier 1 ratio of 9.6% at year-end 2014) that are challenged by the bank's deteriorating asset quality metrics (NPL ratio reached 16.5% at year-end 2014 compared to the system's average of 12.0%) and large losses booked in 2014 (EUR467.9 million). Novo Banco's standalone BCA also reflects its (1) weak liquidity position, despite visible improvements in restoring customer confidence and the generation of liquidity through asset sales and balance-sheet deleveraging, and (2) its status as a bridge bank, with the associated high degree of uncertainty around future strategy together with the remaining risk that not all the underlying causes of BES's failure have yet been resolved.
Novo Banco was created as a temporary bridge bank and under the terms of BES's resolution any assets transferred to Novo Banco have to be disposed within 24 months of the bank's creation. Unsold assets at that date will be wound down in the month following the end of the existence period of the bank and the banking license of Novo Banco will be revoked when the assets of the bank are sold or after the 24 month period expires.
In late 2014, Bank of Portugal as the Portuguese resolution authority, started to promote the sale by the Resolution Fund of Novo Banco and requested banks to submit expressions of interest. On 17 April 2015, Bank of Portugal stated that five entities had been selected to present binding offers for Novo Banco, before end-June 2015. This entails some near-term better visibility about Novo Banco's prospects for regaining its viability or in the absence of binding offers more clarity about the potential for the bank entering a finite wind-down status under public ownership.
--- RATIONALE FOR THE DEPOSIT AND SENIOR DEBT RATINGS
The B3/Not Prime senior debt and B2/Not Prime deposit ratings that Moody's assigned to Novo Banco on 12 August 2014 reflect the fact that the holders of these instruments had been protected by the Portuguese authorities from the resolution of BES, as they were transferred to Novo Banco.
Novo Banco's deposit and senior debt ratings are on review with direction uncertain. The review is prompted by (1) uncertainties around the outcome of the sale process in which the bank is currently immersed that could impact Moody's final assessment of the deposits and senior debt ratings; and (2) the implementation of the rating agency's new global banking methodology, in particular its Loss Given Failure (LGF) analysis. To assess the impact of our LGF analysis on the bank's deposits and senior debt ratings Moody's requires Novo Banco's audited 2014 financial statements, which the bank has not yet disclosed.
WHAT COULD CHANGE THE RATINGS UP/DOWN
The deposit and senior debt ratings could be upgraded based on the outcome of Moody's review of the likely loss-given-failure that these securities face. The ratings could also be upgraded if a stronger peer acquires Novo Banco, implying some probability that senior creditors could benefit from affiliate support.
An improvement of the BCA could be driven by a clear improvement in the bank's capital buffers, a reduction in the stock of problematic assets and a sustainable recovery in Novo Banco's profitability. Any significant macroeconomic growth for Portugal (Ba1 stable) beyond Moody's central scenario of 1.7% GDP growth in 2015 could underpin signs of a turnaround and also exert positive pressure on the ratings.
The deposit and senior debt ratings could be downgraded if the Portuguese Resolution fund fails to conclude the bank's sale process before August 2016 and the bank's assets are liquidated. Downward pressure could also arise following the review of the likely loss-given-failure that Novo Banco's deposit and senior debt ratings face.
The BCA of Novo Banco could be downgraded following a further material deterioration in asset quality, or losses that further weaken the bank's risk-absorption capacity. The BCA could also be downgraded in the event of a liquidation.
As the bank's debt and deposit ratings are linked to the standalone BCA, any change to the BCA would likely also affect these ratings.
Upgrades:
..Issuer: Novo Banco, S.A.
.... Adjusted Baseline Credit Assessment, Upgraded to caa2 from ca
.... Baseline Credit Assessment, Upgraded to caa2 from ca
On Review Direction Uncertain:
..Issuer: BES Finance Ltd.
....Backed Senior Unsecured Regular Bond/Debenture, Placed on Review Direction Uncertain, currently B3
..Issuer: Novo Banco S.A., London Branch
....Senior Unsecured Regular Bond/Debenture, Placed on Review Direction Uncertain, currently B3
....Senior Unsecured Deposit Rating, Placed on Review Direction Uncertain, currently B2
..Issuer: Novo Banco S.A., Luxembourg Branch
....Senior Unsecured Regular Bond/Debenture, Placed on Review Direction Uncertain, currently B3
....Senior Unsecured Deposit Rating, Placed on Review Direction Uncertain, currently B2
..Issuer: Novo Banco, S.A.
....Senior Unsecured Regular Bond/Debenture, Placed on Review Direction Uncertain, currently B3
....Senior Unsecured Deposit Rating, Placed on Review Direction Uncertain, currently B2
..Issuer: Novo Banco, S.A., Cayman Branch
....Senior Unsecured Deposit Rating , Placed on Review Direction Uncertain, currently B2
..Issuer: Novo Banco, S.A., Madeira Branch
....Senior Unsecured Deposit Rating , Placed on Review Direction Uncertain, currently B2