1. Art and Diseño

Credit Opinion: Caja Rural de Navarra
Global Credit Research - 21 Oct 2014
Pamplona, Spain
Ratings
Category
Moody's Rating
Outlook
Bank Deposits -Dom Curr
Bank Financial Strength
Baseline Credit Assessment
Adjusted Baseline Credit Assessment
Stable
Baa3/P-3
D+
baa3
baa3
Contacts
Analyst
Maria Vinuela/Madrid
Alberto Postigo/Madrid
Johannes Wassenberg/London
Phone
34.91.768.8200
44.20.7772.5454
Key Indicators
Caja Rural de Navarra (Consolidated Financials)[1]
Avg.
9,656.9 9,594.3 7,991.1 7,381.7 6,803.0 [3]9.2
13,306.7 12,649.0 10,373.6 9,902.9 9,760.5 [3]8.1
765.4 703.6 737.7 697.0 635.1 [3]4.8
1,054.7 927.6 957.6 935.1 911.3 [3]3.7
1.4
1.5
1.1
1.2
1.8 [4]1.4
1.7
1.8
1.2
1.1
1.8 [5]1.5
0.6
-0.6
0.5
0.6
0.9 [5]0.4
3.7
11.4
9.6
10.4
12.5 [4]9.5
88.2
87.8
79.5
81.6
80.8 [4]83.6
12.2
11.3
12.5
12.0
11.5 [5]11.9
12.2
11.3
12.5
12.0
11.7 [5]12.0
69.9
50.1
60.6
63.9
52.9 [4]59.5
5.2
4.3
3.9
3.5
2.4 [4]3.9
31.3
28.0
26.9
25.5
17.9 [4]25.9
[2]12-13 [2]12-12 [2]12-11 [2]12-10 [2]12-09
Total Assets (EUR million)
Total Assets (USD million)
Tangible Common Equity (EUR million)
Tangible Common Equity (USD million)
Net Interest Margin (%)
PPI / Average RWA (%)
Net Income / Average RWA (%)
(Market Funds - Liquid Assets) / Total Assets (%)
Core Deposits / Average Gross Loans (%)
Tier 1 Ratio (%)
Tangible Common Equity / RWA (%)
Cost / Income Ratio (%)
Problem Loans / Gross Loans (%)
Problem Loans / (Equity + Loan Loss Reserves) (%)
Source: Moody's
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel II; IFRS [3] Compound Annual
Growth Rate based on IFRS reporting periods [4] IFRS reporting periods have been used for average calculation
[5] Basel II & IFRS reporting periods have been used for average calculation
Opinion
SUMMARY RATING RATIONALE
The Baa3 (stable outlook) long-term deposit rating assigned to Caja Rural de Navarra (CRN) reflects the bank's
overall solid standalone credit strength (as evidenced by its baa3 baseline credit assessment (BCA)). We believe
that CRN's senior depositors will benefit from a low probability of systemic support given the bank's low systemic
importance in the Spanish Banking system. As such, CRN's debt rating does not benefit from any systemic
support uplift.
CRN's baa3 BCA reflects the bank's sound financial fundamentals, namely (1) its stronger asset quality
performance compared with that of the system; (2) its adequate capitalisation levels; (3) its sound retail deposit
base and low reliance on wholesale funding; and (4) the fact that it mainly operates in Navarra, one of the
wealthiest regions in Spain.
Factors constraining CRN's BCA are the bank's historically modest profitability and efficiency levels when
compared with those of other rated Spanish peers.
Rating Drivers
- CRN is well established in Navarra and has benefited from the restructuring of the Spanish financial system
- CRN asset quality indicators perform better than the system average, and are showing signs of stabilisation
- CRN reports higher-than-average capital ratios
- Historically modest profitability indicators are slowly improving
- Retail funding has proven resilient throughout the crisis
Rating Outlook
All CRN's ratings carry a stable outlook. The stable outlook on CRN's BFSR reflects the bank's resilient credit
performance throughout the crisis, with solid asset-quality indicators that compare favourably with the system
average, as well as Moody's view that the downside risks to CRN's credit profile have substantially diminished,
aided by the gradual recovery of the Spanish economy.
What Could Change the Rating - Up
An improvement of CRN's standalone credit profile could be driven by a continued improvement of the bank's
financial performance, primarily a turnaround in the deteriorating trend of asset quality that proves sustainable, i.e.
at least over a six-month period, accompanied by an increase in its recurring earnings with higher profitability
metrics.
What Could Change the Rating - Down
Downward pressure could be exerted on CRN's standalone BCA as a result of (1) an unexpected considerable
worsening in the asset quality indicators, which would align the bank's performance closer to that of the weaker
banking system; (2) weakening of the bank's risk-absorption capacity through earnings generation capacity or
capital levels compared with Moody's estimated credit losses; and/or (3) any worsening in operating conditions in
the Spanish operating environment, in particular in the region of Navarra, beyond Moody's current expectations.
Moreover, any change to the BCA would likely affect the bank's deposit ratings since the two are linked.
DETAILED RATING CONSIDERATIONS
CRN IS WELL ESTABLISHED IN NAVARRA AND HAS BENEFITED FROM THE RESTRUCTURING OF THE
SPANISH FINANCIAL SYSTEM
With total assets of EUR 9.7 billion and 244 branches at end-December 2013, CRN is the third largest rural
cooperative bank in Spain and is associated with 28 other rural cooperatives under the Spanish Rural
Cooperatives Association (Asociacion Espanola de Cajas Rurales). Despite its size, CRN has strong brand
recognition and market positioning in its home region.
CRN is primarily based in Navarra. It also operates in the neighbouring regions of La Rioja and the Basque
Country as the only rural credit cooperative. With market shares of 20.4% in lending and 24.6% in deposits at endJune 2014, CRN is the second major player in Navarra, behind Caixabank (Baa3 stable, D+/ba1 stable).
Navarra is one of the wealthiest regions in Spain with an unemployment rate of 16.8%, compared with the
nationwide unemployment of 26.0% (as of December 2013). Its GDP per capita was almost 30% higher than the
Spanish average at the same date.
Spanish rural cooperatives have benefited from the integration of some of their direct local competitors - former
savings banks - into big financial groups that have a nationwide presence, following the restructuring process of
the Spanish financial system. In particular, CRN's direct competitor Caja de Ahorros de Navarra was integrated
into Caixabank (through Banca Civica). These integrations have led to the merged entities weakening or losing
their regional identity, which prompted some customer flight from the integrated entities to rural cooperatives.
CRN ASSET QUALITY INDICATORS PERFORM BETTER THAN THE SYSTEM AVERAGE, AND ARE
SHOWING SIGNS OF STABILISATION
CRN's asset-quality indicators have historically performed better than the Spanish banking system average,
owing to (1) the bank's more prudent risk management; (2) its relatively low exposure to the real estate sector
(accounting for 10% of the loan book at end-June 2014 compared to 15% for the system); and (3) its activities
being limited to its regional territories.
CRN's non-performing loan (NPL) ratio is significantly lower than the system average. Moreover, the gap between
the NPL ratio of CRN and that of the system has been widening over the last years as the entity exhibited a much
slower pace of deterioration. At the end of June 2014, CRN reported an NPL ratio of 5.0%, down from 5.2% at endDecember 2013. The same ratio on the banking system stood at 13.1% at the end of June 2014.
In addition to the NPLs, CRN had gross real estate assets of EUR176 million at end-June 2014 that were acquired
during the crisis through repossessions and negotiations with troubled borrowers, which, if included, increase the
NPL ratio to 7.6% (Moody's estimated system average: 19.4% at end-December 2013). Furthermore, we note that
the percentage of refinanced loans at the bank is also low (3.2% of gross loans). The aggregation of performing
refinanced loans would increase the overall non-earning assets ratio to 9.6%, compared to Moody's estimated
system average of around 26% at the end of 2013.
In 2012, after the new provisioning requirements introduced by the Spanish government, CRN reported a very high
coverage ratio of 107%. This coverage ratio went down to 82% at end-June 2014, although it still compares very
favourably with the system average of 59.5% as of the same date. This decline since 2012 resulted from various
factors, such as the increase in NPLs and the utilisation of provisions assigned to charge-off loans.
We expect CRN's asset quality to continue to outperform the system in 2014, because of its more prudent risk
management, limited exposure to real estate and the fact that its activities are limited to its regional territories.
CRN REPORTS HIGHER-THAN-AVERAGE CAPITAL RATIOS
CRN's capital ratios have historically been higher than the Spanish banking system average. CRN's capital is
composed of "aportaciones", on which it pays interest. In line with Spanish legislation, CRN allocates part of its net
profit to a welfare fund, although it retains most of it to support capital generation and to fund future growth. This
translates into CRN's higher-than-average capital ratios.
The impact of Basel 3 introduction on CRN's capital ratios will be limited. At end-June 2014, CRN reported a
phased in Common Equity Tier 1 (CET1) ratio of 14.4% and a fully loaded CET1 of 13.8%. The only relevant
impact of Basel 3 will arise from the deduction of deferred tax assets (DTAs) generated in 2012, when the entity
reported net losses stemming from new provisioning rules. These DTAs amount to EUR 52 million or 6.8% of the
entity's core capital. The bank plans to generate enough profits during the phase-in period so as to amortise those
DTAs.
We note that CRN performs better in our scenario analysis than other Spanish banks do, because of its higherthan-average capital ratios and stronger asset quality performance when compared with the system average.
HISTORICALLY MODEST PROFITABILITY INDICATORS ARE SLOWLY IMPROVING
Due to the retail nature of CRN's business, recurring earnings sources - such as net interest income and fees and
commission income - account for the bulk of the bank's total revenues (83% at end-June 2014).
CRN has historically displayed modest profitability indicators, although we note an improvement in the bank's
performance in 2014. The entity reported a pre-provision income/risk-weighted assets ratio of 2.2% at end-June
2014, compared with 1.7% a year earlier. This increase is mainly due to a decrease in the amount of risk weighted
assets, but also to an 8% increase in operating income. We note that the share of net interest income stemming
from the securities carry trade (primarily borrowing cheap ECB money and investing those funds into higheryielding Spanish government securities) went down to 12% at end-June 2014 from 17% a year before. We view
positively the fact that CRN has managed to increase its operating income with a lower contribution from this nonrecurrent source of income, which has been supporting the bank's earnings since 2012.
Bottom line profitability of CRN has also improved in 2014. At end-June, the entity reported a profit of EUR27
million, 59% above the EUR17 million reported a year earlier. This increase was driven by a higher pre-provision
income and lower provisioning charges (EUR27 million vs. EUR31 million a year before).
For the remainder of 2014 and 2015, we expect CRN's revenue generation capacity to remain challenged in light
of the still weak domestic operating environment; in particular, the low interest rate environment and subdued
business volumes. However, we expect bottom-line profitability to continue benefiting from a lower level of credit
impairments, as the pace of asset quality deterioration is expected to continue stabilising in line with the forecast of
modest recovery of the Spanish economy.
RETAIL FUNDING HAS PROVEN RESILIENT THROUGHOUT THE CRISIS
CRN is predominantly retail-funded and has low levels of wholesale debt maturing over the next few years. At endJune 2014, deposits accounted for around 85% of its total funding, excluding European Central Bank (ECB) funds.
Most of CRN's wholesale funding represents covered bonds and government-guaranteed debt. In addition, the
entity took advantage of ECB funding to boost profitability given the favourable terms and conditions of long-term
refinancing operations. Most of these funds are used for carry-trade purposes on Spanish sovereign debt.
Spanish banks overall have maintained their sound retail deposit franchises, albeit with some flight-to-quality to
stronger institutions, and retail funds have been resilient over the more stressed periods of the crisis. In CRN's
case, its regional identity adds a component of stability to its retail funding base, especially considering that its
direct competitor - a former savings bank - has been integrated into Caixabank, a large financial group that has a
nationwide presence. Aggregate deposits for CRN increased by around 4% in the first six months of 2014.
Global Local Currency Deposit Rating (Joint Default Analysis)
CRN's global local currency deposit rating is Baa3 and reflects its baa3 BCA as well as its support from Spain.
We believe that the probability of systemic support in the event of a stress situation is low, as a result of the
relatively low importance of this institution at the national level. Given our support assessment, the global local
currency deposit rating does not receive a rating uplift from the baa3 BCA.
Foreign Currency Deposit Rating
CRN's foreign currency deposit ratings are Baa3/P-3.
ABOUT MOODY'S BANK RATINGS
Bank Financial Strength Ratings
Moody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety and
soundness and, as such, exclude certain external credit risks and credit support elements that are addressed by
Moody's Bank Deposit Ratings. BFSRs do not take into account the probability that the bank will receive such
external support, nor do they address risks arising from sovereign actions that may interfere with a bank's ability
to honor its domestic or foreign currency obligations. Factors considered in the assignment of BFSRs include
bank-specific elements such as financial fundamentals, franchise value, and business and asset diversification.
Although BFSRs exclude the external factors specified above, they do take into account other risk factors in the
bank's operating environment, including the strength and prospective performance of the economy, as well as the
structure and relative fragility of the financial system, and the quality of banking regulation and supervision.
Global Local Currency Deposit Rating
A deposit rating, as an opinion of relative credit risk, incorporates the BFSR as well as Moody's opinion of any
external support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's ability to repay punctually
its deposit obligations. As such, they are intended to incorporate those aspects of credit risk relevant to the
prospective payment performance of rated banks with respect to deposit obligations, which includes: intrinsic
financial strength, sovereign transfer risk (in the case of foreign currency deposit ratings), and both implicit and
explicit external support elements. Moody's Bank Deposit Ratings do not take into account the benefit of deposit
insurance schemes which make payments to depositors, but they do recognize the potential support from
schemes that may provide assistance to banks directly.
According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bank
is determined by the incorporation of external elements of support into the bank's Baseline Risk Assessment. In
calculating the Global Local Currency Deposit rating for a bank, the JDA methodology also factors in the rating of
the support provider, in the form of the local currency deposit ceiling for a country, Moody's assessment of the
probability of systemic support for the bank in the event of a stress situation, and the degree of dependence
between the issuer rating and the Local Currency Deposit Ceiling.
National Scale Ratings
National scale ratings are intended primarily for use by domestic investors and are not comparable to Moody's
globally applicable ratings; rather they address relative credit risk within a given country. A Aaa rating on Moody's
National Scale indicates an issuer or issue with the strongest creditworthiness and the lowest likelihood of credit
loss relative to other domestic issuers. National Scale Ratings, therefore, rank domestic issuers relative to each
other and not relative to absolute default risks. National ratings isolate systemic risks; they do not address loss
expectation associated with systemic events that could affect all issuers, even those that receive the highest
ratings on the National Scale.
Foreign Currency Deposit Rating
Moody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the same
class of obligation. The implementation of JDA for banks can lead to high local currency ratings for certain banks,
which could also produce high foreign currency ratings. Nevertheless, it should be noted that foreign currency
deposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits. This may
result in the assignment of a different, and typically lower, rating for the foreign currency deposits relative to the
bank's rating for local currency obligations.
Foreign Currency Debt Rating
Foreign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign
currency deposit ratings, foreign currency debt ratings may also be constrained by the country ceiling for foreign
currency bonds and notes; however, in some cases the ratings on foreign currency debt obligations may be
allowed to pierce the foreign currency ceiling. A particular mix of rating factors are taken into consideration in order
to assess whether a foreign currency bond rating pierces the country ceiling. They include the issuer's global local
currency rating, the foreign currency government bond rating, the country ceiling for bonds and the debt's eligibility
to pierce that ceiling.
About Moody's Bank Financial Strength Scorecard
Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial
strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and
regions. The model output and the individual scores are discussed in rating committees and may be adjusted up or
down to reflect conditions specific to each rated entity.
Rating Factors
Caja Rural de Navarra
Rating Factors [1]
Qualitative Factors (50%)
Factor: Franchise Value
Market share and sustainability
Geographical diversification
Earnings stability
Earnings Diversification [2]
Factor: Risk Positioning
Corporate Governance [2]
A
B
C
D
E
Total Score Trend
D+
E+
Neutral
x
x
x
D+
Neutral
- Ownership and Organizational Complexity
- Key Man Risk
- Insider and Related-Party Risks
Controls and Risk Management
- Risk Management
- Controls
x
x
x
Financial Reporting Transparency
- Global Comparability
- Frequency and Timeliness
- Quality of Financial Information
x
x
x
x
Credit Risk Concentration
--
--
--
--
--
- Borrower Concentration
- Industry Concentration
---
---
---
---
---
Liquidity Management
Market Risk Appetite
Factor: Operating Environment
Economic Stability
Integrity and Corruption
Legal System
Financial Factors (50%)
Factor: Profitability
PPI % Average RWA (Basel II)
Net Income % Average RWA (Basel II)
Factor: Liquidity
(Market Funds - Liquid Assets) % Total Assets
Liquidity Management
Factor: Capital Adequacy
Tier 1 Ratio (%) (Basel II)
Tangible Common Equity % RWA (Basel II)
Factor: Efficiency
Cost / Income Ratio
Factor: Asset Quality
Problem Loans % Gross Loans
Problem Loans % (Equity + LLR)
Lowest Combined Financial Factor Score (15%)
Economic Insolvency Override
Aggregate BFSR Score
Aggregate BCA Score
Assigned BFSR
Assigned BCA
x
x
C-
Neutral
C
D
Neutral
C
Neutral
A
Neutral
C
Neutral
C
Neutral
x
x
x
1.57%
0.16%
8.23%
x
12.00%
12.02%
60.21%
4.47%
28.70%
D+
Neutral
Cbaa1/baa2
D+
baa3
[1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.
[2] - A blank score under Earnings Diversification or Corporate Governance indicates the risk is neutral.
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