Moody's which is already not all that loved in Portugal, is about to make some more friends after it just downgraded the 7 biggest Portuguese banks, all of which, incidentally, passed the Stress Test that nobody remembers any more.
Moody's Investors Service has today downgraded the debt ratings of seven Portuguese banks.
Today's rating actions were triggered by the downgrade of the rating of the Republic of Portugal to Ba2 from Baa1 last week.
The following banks have been downgraded:
(i) Caixa Geral de Depositos ("CGD"): long-and short-term senior unsecured debt and deposit ratings were downgraded to Ba1/Not-Prime from Baa1/Prime-2.
(ii) Banco Espirito Santo ("BES"): downgraded to Ba1/NP from Baa2/P-2.
(iii) Espirito Santo Financial Group ("ESFG"): downgraded to Ba2/NP from Baa1/P-2.
(iv) Banco Comercial Portugues ("BCP"): downgraded to Ba1/NP from Baa3/P-3.
(v) Banco BPI ("BPI"): downgraded to Baa3/P-3 from Baa2/P-2.
(vi) Banco Santander Totta ("BST"): downgraded to Baa1/P-2 from A3/P-2; BST's standalone BFSR downgraded to D+/Baa3 from C-/Baa2.
(vii) Caixa Economica Montepio Geral ("Montepio"): downgraded to Ba2/NP from Ba1/NP.
At the same time, the downgrade of the banks' debt ratings also triggered a downgrade of most of the banks' dated and junior subordinated debt and preference share ratings.
All these banks' debt, standalone and prime short-term ratings remain on review for possible downgrade, pending the finalisation of their deleveraging plans which they are currently discussing with Portuguese and European authorities.
A full list of affected ratings can be found on this link:
Separately, the ratings of the following three banks are unaffected by today's rating action:
- Banco Itau BBA International ("Itau"), rated Baa2/P-2/D+ (mapping to
Baa3 on the long-term scale).
- Banco Internacional do Funchal ("Banif"), rated Ba2/NP/D- (mapping to
Ba3 on the long-term scale).
- Banco Portugues de Negocios ("BPN"), rated B1/NP/E (mapping to Caa1 on the long-term scale)
Itau's ratings are not under review for possible downgrade, whereas the review for possible downgrade continues for Banif.
RATIONALE FOR DOWNGRADES OF DEBT AND FINANCIAL STRENGTH RATINGS
Today's rating action on Portuguese banks has been driven by the downgrade of the Republic of Portugal on July 5, 2011. (Please see "Moody's downgrades Portugal to Ba2 with a negative outlook from Baa1").
Moody's downgrade of the Republic of Portugal to Ba2 implies a weakened ability of the Portuguese government to support its banking system.
Moody's therefore assumes that the possibility of support from the government could not take a bank's rating to more than one notch above the government rating of Ba2, and that only banks with a standalone financial strength rating at or below the Republic of Portugal's Ba2 rating could therefore benefit from ongoing government support.
The banks whose debt ratings are affected by this are:
- CGD, BCP and BES (and indirectly ESFG, its holding company), whose debt ratings have been downgraded to Ba1 (Ba2 for ESFG reflecting structural subordination to its operating company BES).
- BPI, which has been downgraded to Baa3, the same level as its standalone rating (D+/Baa3).
- Montepio, whose downgrade to Ba2 is a reflection of both its lower standalone rating at D/Ba2 and of its lower systemic importance in Moody's view, as compared to CGD, BES and BCP.
Only Banif retains its current level of support, which is providing uplift for its debt rating to Ba2 from its standalone rating of D-/Ba3.
Moody's has also downgraded the BFSR of Banco Santander Totta by one notch to D+/Baa3 from C-/Baa2. While the review for downgrade referred to below will assess the wider implications of the sovereign downgrade for Portuguese banks' standalone strength, Moody's is of the opinion that the rising pressures on asset quality, profitability, liquidity and capital levels that Moody's sees as likely consequences of the government austerity measures, are limiting the standalone strength of banks to be not more than two notches above the sovereign rating of Ba2. Banco Santander Totta's debt ratings continue to incorporate two notches of support from its parent, Banco Santander S.A., (rated Aa2/ B- mapping to
A1 on the long-term rating scale; negative outlook).
RATIONALE FOR CONTINUED REVIEW FOR DOWNGRADE OF DEBT AND FINANCIAL STRENGTH RATINGS
All the above standalone financial strength and long-term debt ratings (including the ratings of Banif and the Prime short-term ratings of BPI and BST) remain under review for downgrade until the review of these banks' standalone financial strength rating can be concluded.
The ongoing review on all banks' standalone financial strength ratings will focus on the deleveraging plans currently under discussion between the banks and Portuguese and EU authorities and will be key to determining the banks' capital and funding strategies over the short to medium term. Moody's expects these plans to be finalised over the next couple of months, which should allow the rating agency to conclude the reviews in the first half of September.
Moody's review will also take into account the following factors, as previously highlighted in its press release of 7 July 2011: (i) the magnitude of banks' direct exposure to government debt; (ii) their exposure to risk factors that are interrelated with the sovereign's credit risk, such as market confidence and access to market funding;
(iii) the high degree of correlation between the macroeconomic factors that affect financial institutions' asset quality and the sovereign's financial health, which can be partly mitigated by geographical diversification.
The review will incorporate any further news regarding the support that is likely to be available to Portuguese banks from either the Portuguese government or other European authorities.
The ratings of BPN will be reviewed separately, once the privatisation process of the bank has been concluded. BPN's weak standalone profile at
E/Caa1 already reflects very weak credit fundamentals and is unlikely to drop further, provided that the government maintains its ongoing support for this fully government-owned entity.
RATING RATIONALE FOR DOWNGRADE OF SENIOR SUBORDINATED DEBT
Moody's has downgraded the senior subordinated debt ratings of seven banks in line with the downgrade of these banks' senior unsecured debt ratings.
Moody's has not yet removed systemic support for the senior subordinated debt issuances in Portugal, but expects to also assess this during the current review. If, at that point, Moody's assessment results in the partial or full removal of systemic support for subordinated debt, then the rating agency would consider further downgrades of this type of debt.
RATING RATIONALE FOR THE DOWNGRADE OF HYBRID INSTRUMENTS
The one notch downgrade of junior subordinated debt of BES, BPI, Totta and Montepio -- for which no systemic support is incorporated -- to one notch below the dated subordinated debt reflects the risk differentiation between junior subordinated debt and dated subordinated debt due to the legal subordination of junior subordinated debt.
In the case of CGD, the junior subordinated debt and preference share ratings have been affected by the downgrade of the Portuguese sovereign, since Moody's incorporates support from the sovereign for all classes of debt instruments due to the parental role of the Portuguese government.
They are now notched off the Ba1 rating of CGD.
All of these ratings also remain on review for possible downgrade