Amid market concerns about Portuguese bank Banco Espirito Santo S.A., a couple of credit rating agencies are taking action on their ratings for the firm.
Moody’s Investors Service downgraded its long-term debt ratings of Banco Espirito to B3 from Ba3 and the long-term deposit ratings to B2 from Ba3 today, following the downgrade of the bank’s standalone bank financial strength rating. The bank’s long-term debt and deposit ratings also remain on review for downgrade, it notes.
The rating agency says that the downgrade reflects its concerns regarding the bank’s “creditworthiness that are heightened by the lack of transparency on the ring-fencing of BES against any troubles emerging from its holding company … or any other group entity.”
Yesterday, July 10, the bank disclosed a balance sheet exposure of approximately €1.2 billion ($1.75 billion)to the Espirito Santo Group (ESFG), Moody’s notes; adding that “the weakened financial position of ESFG, and its vulnerability to a default by any of Espirito Santo Group’s companies, raises concerns for the spill-over effect that this may cause for BES.”
Moody’s says that the continued review for possible further downgrades “reflects the downside risks to BES’s standalone credit strength should the bank be required to support any of the Espirito Santo Group companies or become liable for any of its obligations.”
The Toronto-based rating agency DBRS, Inc. has also placed its ratings for the bank on review with negative implications, citing, “… the pressure that the bank is facing on its fundamentals.”
In addition to its exposure to ESFG, it notes that changes in senior management at the bank are also being implemented. “This has elevated DBRS’s concerns regarding BES’s inter-company lending, risk management processes/procedures, as well as the quality and independence of senior management,” it says, adding that it also has concerns regarding the bank’s subsidiary in Angola, “which has potential problems in its €6 billion ($8.75 billion) loan portfolio that required a guarantee from the Angolan government in December 2013.”
As it reviews the ratings, DBRS says it will “focus on these concerns and any impact on investor and client confidence.” It says that any weakening of the bank’s franchise, particularly in its home market of Portugal, has the potential to impact the rating.
It also intends to assess “the quality and competency” of the bank’s new management and directors. “The impact of senior management changes can take some time to permeate throughout the organization, but DBRS will look for a clear statement on the bank’s strategy and focus from the new management team,” it says.
And, DBRS says that it is seeking “further clarification on contingent exposures or other linkages” to other firms with the bank group. “Given the high level of intercompany exposures that have been reported, DBRS views BES as being vulnerable to the deteriorating financial position of ES Group entities,” it says. “DBRS’s concern is that these exposures significantly impact BES’s financial profile and capital position, which could have consequences for its rating especially if accompanied by significant franchise deterioration.”
It also worries that the bank’s ability to generate capital will be hampered by weak domestic earnings and reduced international earnings, which, it says, “are not sufficient to absorb the elevated cost of risk”.
Both rating agencies indicate that they expect that the bank would receive some form of systemic support, if necessary, although DBRS notes that “accepting state capital would be likely to have negative implications for subordinated debt holders and for the strategic flexibility of the bank.”