Rating action

Scope Ratings has today affirmed the BBB+ issuer rating on Bankia SA, with a Stable Outlook.
The agency has also affirmed the BBB+ rating on preferred senior unsecured debt as well as the BBB rating on non-preferred senior unsecured debt and the S-2 short term rating. All ratings have a Stable Outlook.

Rating rationale

The ratings acknowledge Bankia’s retail and commercial banking business model, with a focus on low-risk mortgages. The group’s franchise is domestically oriented, with a strong presence in Madrid, Andalusia and the Mediterranean regions. The franchise was strengthened through the merger with BMN in 2017.

The operating environment has deteriorated materially, and Scope expects the Spanish economy to contract by 12.5% in 2020 before rebounding next year. The agency expects the recession to drive an increase in Spanish banks’ cost of risk, which was at cyclical lows in 2019.

Profitability remains the main shortcoming in an otherwise impressive turnaround for Bankia, an institution that has undergone a profound transformation over the past decade. Bankia’s revenues and profits remain under pressure from a difficult interest rate environment. Moreover, the ongoing shift in the business mix towards higher-margin segments (business and consumer lending) has not been enough to deliver revenue growth in recent years. Scope believes Bankia is on track to meet most of its strategic targets for 2020 – cost of risk and profitability being the main exceptions.

When it comes to the derisking of legacy non-performing assets, Bankia looks set to overdeliver on its strategic targets. However, the Covid-19 recession will lead to an increase in non-performing loans that will have to be dealt with over time.

The Outlook is Stable, reflecting Scope’s expectation that Covid-19 impacts for the rest of the year will be manageable for the bank.

Key rating drivers

• Focused retail and commercial banking franchise in Spain
   
• Rapidly deteriorating economic environment, which could affect the bank’s performance going forward
   
• Strong management track record of strategic delivery, though profitability remains the bank’s Achilles heel
   
• Effective derisking of legacy bad assets, but Covid-19 recession will pose new challenges

Rating-change drivers

Positive rating-change drivers include:

• A clarification in group structure and control

Negative rating-change drivers include:

• A worse-than-expected deterioration in credit quality
   
• A significant deterioration in Spain’s sovereign credit strength

Scope also flags M&A activity as a potential rating-change driver. If executed well, an acquisition could increase the bank’s geographic and product diversification, and boost its domestic market shares; however, M&A could also be detrimental to the credit if it resulted in a material weakening of financial fundamentals.

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodology used for this rating(s) and/or rating outlook(s) (Bank Rating Methodology, 4 May 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Marco Troiano, Executive Director
Person responsible for approval of the rating: Dierk Brandenburg, Managing Director
The ratings/outlooks were first released by Scope on 30 November 2017. The ratings/outlooks were last updated on 9 May 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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