DBRS: The resignation of António Domingues threatens CGD’s rating

The DBRS has placed Caixa Geral de Depósitos under negative review, this Tuesday. The decision concerns both the public bank and its subsidiaries, states the rating agency in a press release.

According to the Canadian agency, the review of CGD’s rating reflects “the increased risks that the Group is facing in relation to corporate governance issues, the planned recapitalization, and the Group’s ongoing difficulties in improving profitability and asset quality”.

Additionally, this review aims to evaluate how the recent resignation of António Domingues, CGD’s chairman and CEO, and also the resignation of the majority of the board of directors will affect “the planned restructuring of the Group”.

"The recent resignation of the board of directors is, in DBRS’s view, posing further challenges for the Group to return to profitability, reduce asset quality problems and improve investor confidence in the Group.”

Pla

cing CGD under negative review is particularly relevant because the recapitalization plan for CGD, which the current Portuguese government, headed by prime minister António Costa, pre-approved along with the European Commission, means private investors must participate. Aside from the injection of public capital, that can go up to 2.7 billion euros, the 500 million euros in shares transferred from ParCaixa (holding company of the Group) and the conversion of 900 million euros worth of CoCo bonds (contingent convertibles) into equity, the plan includes raising one billion euros of capital through subordinated debt for private investors.

"DBRS sees the successful placement of the subordinated instruments in the market as challenging given the present global financial volatility and the very limited access of CGD to the non-secured funding markets.”

This review means “positive rating pressure is unlikely in the short-to-medium term”. In order for the pressure to be positive, the ag

ency declares, Portugal’s rating would need to have an upgrade, with a simultaneous “sustained track record of sound profitability” and a significant decrease in the risks of the bank’s balance sheets, as well as “further strengthening of the Group’s domestic franchise”.

For these reasons, CGD’s rating is “under review with negative implications” during a time frame that can surpass three months, the rating agency warns. In this assessment, they highlight: “DBRS will focus on the recapitalization process, including the placement of subordinated debt instruments to private investors, as well as the corporate governance issues and asset quality and profitability challenges”.

Losses, in a weak economic environment

DBRS paints a rather worrying picture of CGD. The agency recalls the bank has reported losses of 189.3 million euros in the first three quarters of 2016, which compare to the 3.4 million euros of net attributable income reported in the same period of 2015. “The Group has remained loss making since 2012”, the press release points out, highlighting the difficulties of generating income in a context “characterized by low interest rates, increasing regulation and sluggish economic prospects for Portugal”.

In addition, as calculated by DBRS, the gross operating revenues were down 26.5% from January to September 2016, compared to 2015, at the same time the registered impairments increased 14.3%, adding up to 407.4 million euros.