Rating Action:
Moody's affirms Novo Banco's deposit ratings at Caa1, outlook developing
10 Jul 2018
Senior debt ratings affirmed at Caa2, outlook remains positive
Madrid, July 10, 2018 -- Moody's Investors Service has today affirmed the long-term deposit ratings of Novo Banco, S.A. (Novo Banco) at Caa1 and changed the outlook to developing from positive. The rating action is triggered by Moody's assessment of the bank's liability structure following the announcement on 29 June 2018 of the outcome of the exchange offer on Novo Banco's outstanding senior debt and the issuance of EUR400 million of subordinated debt. The rating action also reflects the bank's lower volume of junior deposits as of the end of March 2018 (latest data available), which has resulted in an overall reduction in the stock of Novo Banco's bail-in-able liabilities despite recent market- funded debt issuance.
The rating agency has also taken the following actions on Novo Banco: (1) affirmed the bank's baseline credit assessment (BCA) and adjusted BCA at caa2; (2) affirmed the bank's long-term senior unsecured debt ratings at Caa2; (3) affirmed the bank's long-term Counterparty Risk (CR) Assessment at B2(cr) and (4) affirmed the bank's long-term Counterparty Risk Rating at B2. The outlook on the long-term senior unsecured debt ratings remains positive.
All of the bank's short-term ratings and assessments are unaffected by the today's rating action.
The developing outlook on the bank's long-term deposit ratings and the positive outlook on the long-term senior debt ratings reflects Moody's expectation of a gradual improvement of Novo Banco's very weak credit fundamentals over the next 12 to 18 months if the bank starts to deliver on the key targets of its restructuring plan, namely a reduction of problematic assets and downsizing of its operations as well as a sustained improvement on its very weak revenue generation capacity.
Conversely, the developing outlook on Novo Banco's long-term deposit ratings also reflects the adverse effect on these ratings should there be a further reduction in the stock of junior deposits.
A full list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
---RATIONALE FOR THE AFFIRMATION OF THE RATINGS
The affirmation of Novo Banco's standalone BCA at caa2 reflects the ongoing challenges to the bank's credit profile stemming from the bank's very weak asset risk and loss making operations. In particular the rating agency has taken into consideration Novo Banco's (1) very weak asset risk, with its nonperforming asset (nonperforming loans + foreclosed real estate assets) ratio estimated at a very high 37% as of the end of December 2017 (latest data available); and (2) very weak profitability metrics, unlikely to recover before some visible progress is achieved in the restructuring plan.
Despite recent improvements in the bank's loss-absorbing buffers, Moody's still views that there remain significant challenges to Novo Banco's credit profile, given the lack of visibility into its strategy and the planned actions to ensure the institution's long-term viability.
The affirmation of Novo Banco's Caa1 long-term deposit and Caa2 long-term senior debt ratings, reflects (1) the affirmation of the bank's caa2 BCA; (2) the outcome of Moody's revised advanced Loss Given Failure (LGF) analysis, which indicates low loss given failure for depositors and moderate for senior debt creditors, resulting in one notch of uplift and no uplift, respectively, from the BCA; and (3) the low probability of government support, which results in no further uplift for the deposits and senior debt ratings.
--RATIONALE FOR THE OUTLOOK
The developing outlook on the long-term deposit ratings and the positive outlook on the bank's long-term senior debt ratings, reflects the potential benefit to the bank's weak credit fundamentals if Novo Banco starts to deliver on the key targets of its restructuring plan, namely an improvement in its asset-risk profile, a transformation of its operations and a recovery in its very weak revenue generation capacity. The bank's credit profile could also benefit from enhanced visibility into its medium-term strategy and timeline of the measures that are being considered to ensure Novo Banco's future viability.
The developing outlook on the long-term deposit ratings also reflects the potential for downward pressure on these ratings if upward pressure on Novo Banco's BCA does not materialize over the next 12 to 18 months and the bank's liability structure evolves to offer less protection for depositors as the stock of junior deposits is further reduced. This could lead to a higher loss given failure for junior deposits and hence a lower ratings uplift from Moody's advanced LGF analysis. Over the outlook horizon, the rating agency will assess the liability profile of Novo Banco along with its near-term funding plan, as well as the bank's performance and progress toward achieving its restructuring targets.
WHAT COULD CHANGE THE RATING UP/DOWN
Novo Banco's standalone BCA could be upgraded if the bank makes progress in reducing its stock of problematic assets and improving its very weak profitability metrics as a result of the planned restructuring of its operations.
An upgrade of the bank's BCA could trigger an upgrade of the bank's long-term deposit and senior debt ratings.
Given the positive outlook, a downgrade of Novo Banco's long-term senior debt ratings is currently unlikely. However, downward pressure on the bank's standalone BCA could result if the bank's risk-absorption capacity deteriorates owing to a further deterioration in its asset risk or larger-than-expected losses, or if the bank's liquidity deteriorates from its current position.
Downward pressure on Novo Banco's long-term deposit ratings could develop if the bank reduces further the stock of junior deposits while not being adequately compensated by the issuance of bail-in-able debt instruments and/or a very substantial shrinkage of its balance sheet.
In addition, a downgrade of the BCA would also be likely to affect the deposit and debt ratings because they are linked to the standalone BCA.