OREANDA-NEWS. Fitch Ratings has affirmed Banco BPI, S.A.'s Long-term Issuer Default Rating (IDR) at 'BB', Short-term IDR at 'B' and Viability Rating at 'bb'.

The IDRs have been removed from Rating Watch Positive following Spain's CaixaBank S.A.'s (BBB/Positive) decision to withdraw its tender offer for Banco BPI's shares on 18 June 2015. The Outlook on the Long-term IDR is Stable.

A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS, VR AND SENIOR DEBT
The bank's IDRs, VR and senior debt ratings reflect weak domestic earnings, but also take into account Banco BPI's stronger asset quality indicators and funding and liquidity profile than domestic peers and reasonable capitalisation, after the repayment of EUR920m cocos in 2014.

International activity, mainly Angola, made up the bulk of Banco BPI's net income in 1Q15, while it represented only around 20% of the group's assets. In 1Q15 the bank just broke even in Portugal, reflecting lower business volumes, interest rates and spreads, which were partially offset by lower funding costs following the repayment of state cocos in 2014 and re-pricing of deposits.

Fitch expects Banco BPI to be fairly well placed to cope with the slowdown in the Angolan economy, supported by the subsidiary's wide margins, strong cost efficiency, deposit-driven activity and absence of private sector loan growth in 2010-2014, reflecting the group's prudent approach towards risk-taking.

The group's Fitch Core Capital (FCC) ratio was 10.4% at end-2014 and unreserved credit-at-risk loans/FCC remained a manageable 18%. Banco BPI's capital ratios have been affected in 2015 by Angola not being recognised as having supervisory and regulatory equivalence to the EU. At end-1Q15, Banco BPI's common equity tier 1 fully loaded ratio was still acceptable at 9.1%, compared with 9.6% at end-2014.

Banco BPI has weathered the domestic recession better than peers. Its credit-at-risk remained fairly stable at 5.4% of gross loans at end-1Q15, with ample reserve coverage of above 70%. This reflects the bank's loan mix, lower exposures to troubled economic sectors and more moderate risk appetite.

The bank's main funding source is deposits. Loan de-leveraging enabled it to improve the regulatory net loans/deposits ratio to 83% at end-1Q15 from 94% at end-1Q14. Wholesale and European Central Bank funding has declined. Liquidity is supported by a large portfolio of liquid assets.

The Stable Outlook reflects the stabilisation of the bank's risk profile. Fitch expects Banco BPI's profitability to improve, but at a slow pace given low interest rates and still declining loan volumes.

SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that any of these banks becomes non-viable. In Fitch's view, the EU's BRRD and the SRM are now sufficiently progressed to provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

In the EU, BRRD has been effective in member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Portugal transposed BRRD into the national regulatory framework on 26 March 2015, including the bail-in tool.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The subordinated debt and preference shares issued by Banco BPI are all notched down from the bank's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.

SUBSIDIARY AND AFFILIATED COMPANIES
The ratings of Banco Portugues de Investimento (BPI) are equalised with those of its 100% parent, Banco BPI. The equalisation is driven by BPI's integration within its parent bank and the benefits derived from parent support. Fitch does not assign VR to the institution as the agency does not view it as an independent entity.

RATING SENSITIVITIES

IDRS, VR AND SENIOR DEBT
The bank's IDRs and senior debt ratings are sensitive to a change in its VR. They could be upgraded if Banco BPI enhances its recurrent profitability in its domestic operations, particularly at pre-impairment operating level. A continued improvement of the operating environment should support business volumes, benefit asset quality and result in a reduction in impairment charges. This will ultimately benefit profitability and enhance the bank's capitalisation.

Downward rating pressure would primarily come from a substantial deterioration in asset quality and a material deterioration of its Angolan subsidiary. The bank's ratings are also sensitive to the conclusion of the sale process of NovoBanco and potential related costs and capital impact, if any.

The ratings do not currently incorporate Banco BPI's potential role in further sector consolidation. Fitch would therefore treat any corporate transactions involving Banco BPI as event risk.

SUPPORT RATING AND SUPPORT RATING FLOOR
The SR is potentially sensitive to a change in assumptions around the propensity of Portugal to provide timely support to the bank. While not impossible, this is highly unlikely in Fitch's view. The SR may also change in the event of a successful alternative offer for Banco BPI's shares but Fitch does not currently factor that into the ratings.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of Banco BPI's subordinated debt and preference shares are primarily sensitive to change in the bank's VR.

SUBSIDIARY AND AFFILIATED COMPANIES
The ratings of BPI are sensitive to rating actions on Banco BPI's IDRs.

The rating actions are as follows:

Banco BPI
Long-term IDR affirmed at 'BB'; removed from RWP, Outlook Stable
Short-term IDR affirmed at 'B'; removed from RWP
Viability Rating: affirmed at 'bb'
Support Rating: affirmed at '5'; removed from RWP
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: affirmed at 'BB'; removed from RWP
Commercial paper programme: affirmed at 'B'; removed from RWP
Lower Tier 2 subordinated debt: affirmed at 'BB-'; removed from RWP
Preference shares: affirmed at 'B'; removed from RWP

BPI:
Long-term IDR affirmed at 'BB'; removed from RWP, Outlook Stable
Short-term IDR affirmed at 'B'; removed from RWP
Support Rating: affirmed at '3'; removed from RWP