Abanca: Q1 2020 Supported by Integrations but Affected by COVID- 19 Related Provisions
Abanca Corporación Bancaria S.A. (Abanca or the Bank) reported EUR 127 million of net attributable income in Q1 2020, down 13.2% year-on-year (YoY). Results included EUR 78 million of provisions, of which a large part to cover for the expected deterioration in economic conditions as a result of the Coronavirus Disease (COVID-19). Nonetheless, the Bank's Q1 performance remained solid, supported by the integration of Abanca Portugal and Banco Caixa Geral and also underlying core revenue growth, despite higher operating expenses. DBRS Morningstar expects the COVID-19 crisis to impact the Bank’s profitability and asset quality in a more significant way in coming quarters.Most of Abanca´s reported figures do not reflect the full impact of the COVID-19 pandemic as the results only incorporate a few days of the crisis, and the Bank reported similar dynamics to previous quarters. Net Interest Income (NII) was up 13.8% YoY. Excluding the integrations, NII was still up YoY on strong volume growth despite the low interest rate environment. Fees and commissions grew 27.7% YoY thanks to the integrations but also growth of off-balance sheet products. Abanca's operating expenses increased 12.3% on the integration costs. Nonetheless, the cost-to-income ratio improved to 48% from 54% a year ago.
However, the crisis has started to affect the cost of risk, as the Bank reported EUR 78 million in provisions for credit losses related to the COVID-19 outbreak and incorporating the future deterioration in economic conditions. As a result, the cost of risk increased to 82 bps in Q1 2020 from an average of 24 bps in 2019. DBRS Morningstar expects similar levels of loan loss provisioning in coming quarters. Abanca´s NPL ratio stood at 2.7% fairly stable quarter-on-quarter (QoQ) but down 73 bps YoY. Nonetheless, we expect to see asset quality deterioration in coming quarters.
Abanca's CET1 ratio was 12.7% on a phased-in basis at end-March 2020 and the Total Capital stood at 15.6%. This provides the Bank with large cushions of 394 bps and 335 bps over the SREP requirement for 2020. The Bank's decision to suspend dividend distribution provides, in our view, extra flexibility to cope with the COVID-19 crisis which could pressure Abanca's capitalisation.
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