Fitch Downgrades 4 Portuguese Banks on Support Revision

Fitch Ratings has downgraded Banco Comercial Portugues, S.A.'s (Millennium bcp) Long-term Issuer Default Rating (IDR) to 'BB-' from 'BB+' and that of Banco BPI, S.A. to 'BB' from 'BB+'.

At the same time, the agency has downgraded Caixa Economica Montepio Geral's (Montepio) Long-term IDR to 'B+' from 'BB' and that of Banif - Banco Internacional do Funchal, S.A. (Banif) to 'B-' from 'BB'.

The Outlooks are Stable for Millennium bcp, Montepio and Banif. The Rating Watch on Banco BPI's Long-term IDR has been revised to Positive from Evolving. The RWP reflects potential rating upside related to CaixaBank, S.A.'s announced voluntary tender offer for all outstanding shares of BPI that it does not already own on 17 February 2015. A full list of rating actions is available at the end of this rating action commentary.

The rating actions are in conjunction with Fitch's review of sovereign support for banks globally, which the agency announced in March 2014. In line with its expectations announced in March last year and communicated regularly since then, Fitch believes legislative, regulatory and policy initiatives have substantially reduced the likelihood of sovereign support for US, Swiss and European Union commercial banks.

As a result, Fitch believes that, in line with our Support Rating (SR) definition of '5', extraordinary external support while possible can no longer be relied upon for Millennium bcp, Banco BPI, Montepio and Banif. We have, therefore, downgraded their SRs to '5' from '3' and revised their Support Rating Floors (SRFs) to 'No Floor'.

As a result of the revision to the SRFs, these banks' Long-term IDRs are now driven by their standalone creditworthiness, as expressed in their respective Viability Ratings (VRs). The VRs have been affirmed today. Fitch has downgraded the banks' senior debt issues in line with their Long-term IDRs and the agency has assigned Recovery Ratings to Montepio's senior unsecured and subordinated debt issues and to Banif's subordinated debt and preference shares.

The rating actions are also part of a periodic portfolio review of the Portuguese banking groups rated by Fitch. The system continues its path towards stabilisation, particularly for asset quality indicators, and is gradually returning to profitability, supported by improved macro-economic trends. Fitch expects GDP growth of 1.5% in 2015 and a steady decline in unemployment to 13.8%. While Fitch expects problematic assets to peak in 2015, meaningful improvements will take time to materialise as the stock of problematic assets is large. We expect banks' profitability to be supported by lower funding costs, particularly for deposits, a reduction of domestic overheads, income from international operations and declining impairment needs.

However, profitability will remain subdued due to low interest rates, asset de-risking and declining loan spreads. The bank system has a contingent risk related to the sale of Novo Banco, given that it would need to make up any potential losses stemming from the process. Fitch assumes that in the event of large losses, these would be deferred over several years, but there is still uncertainty over the mechanism that would be deployed for absorbing such losses.