TEXT-S&P cuts Bankia ratings

Fri May 25, 2012 1:30pm EDT

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(The following statement was released by the rating agency)	
 	
Overview	
     -- We have reviewed the wider implications for the Spanish banking sector 	
following our two-notch downgrade of the Kingdom of Spain (BBB+/Negative/A-2). 	
As a result, we have maintained our Banking Industry Country Risk Assessment 	
on Spain at group '5' and revised our economic risk score to '6' from '5'. 	
     -- We have also reviewed our assessment of expected government support 	
following an announcement on May 14, 2012, by Spain's Fondo de Restructuracion 	
Ordenada Bancaria (FROB) that it accepted the request made by Banco Financiero 	
y de Ahorros S.A. (BFA; Bankia group holding company) to convert into share 	
capital the preference shares it holds in BFA. We have also assessed the 	
likelihood of the group receiving additional state funds to comply with the 	
Spanish government's new regulatory requirements and maintain a capital buffer 	
in excess of the regulatory minimum.  	
     -- We are lowering the long- and short-term ratings on Bankia S.A.    
  to 'BB+/B' from 'BBB-/A-3', and our long-term rating on BFA to 'B+'
from 'BB-'. 	
We are keeping our long-term ratings on Bankia and BFA on CreditWatch 	
negative. In addition, we affirmed our 'B' short-term rating on BFA and 	
removed the short-term ratings on both banks from CreditWatch negative.	
     -- The rating actions reflect our view of Bankia's weakened capital and 	
risk positions, mitigated by our expectation that the bank will likely receive 	
capital support from the state. 	
     -- The CreditWatch reflects our assessment of the significant 	
uncertainties surrounding Bankia's restructuring and recapitalization plan, as 	
well as the implementation risks it may entail. Specifically, we are uncertain 	
about the amount of capital to be disbursed and its impact on our view of the 	
bank's capital cushions, as well as whether the year-end 2011 financial 	
accounts (on which we base our estimates) are final, given that the audit 	
report has not yet been published.	
	
	
Rating Action	
	
On May 25, 2012, Standard & Poor's Ratings Services lowered its long- and 	
short-term counterparty credit ratings on Spain-based Bankia S.A. (Bankia) to 	
'BB+/B' from 'BBB-/A-3', and its long-term counterparty credit rating on 	
Bankia's parent Banco Financiero y de Ahorros S.A. (BFA) to 'B+' from 'BB-'. 	
The long-term ratings on both banks remain on CreditWatch with negative 	
implications, where we placed them on April 30, 2012. At the same time, we 	
affirmed our 'B' short-term counterparty credit rating on BFA and removed our 	
short-term ratings on both banks from CreditWatch negative, where we placed 	
them on the same date.	
	
In a related action, we lowered our issue ratings on Bankia and BFA's 	
nondeferrable subordinated debt to 'B-' from 'BB-' and to 'CCC+' from 'B', 	
respectively, and keeping them on CreditWatch with negative implications, 	
where we placed them on April 30, 2012. We also lowered our issue rating on 	
BFA's preference shares to 'CCC-' from 'B-' and removed them from CreditWatch 	
negative, where we placed them on April 30, 2012.	
	
Rationale	
The downgrades reflect our revision of Bankia's stand-alone credit profile 	
(SACP) to 'b+' from 'bb+', mitigated by our expectation that the bank will 	
likely receive capital support from the Spanish government (Kingdom of Spain; 	
BBB+/Negative/A-2). The lowering of the SACP followed our revised assessment 	
of Bankia's capital and earnings to "weak" from "moderate" and our 	
reassessment of Bankia's risk position to "moderate" from "adequate," as our 	
criteria define these terms. Our assessment of Bankia's SACP is based on 	
published unaudited financial information as of year-end 2011. If the final 	
audited accounts were to include any material negative adjustments to the 	
published information we could potentially lower Bankia's SACP by up to three 	
notches. 	
	
We revised downward our assessment of Bankia's capital and earnings to reflect 	
the group's modest capital position at year-end 2011. We estimate our 	
risk-adjusted capital (RAC) ratio before diversification at about 3.8% at 	
year-end 2011, according to currently available unaudited financial 	
information. This estimate factors in the substantial negative adjustment to 	
the group's capital base to build up part of new provisions required under the 	
Spanish government's new regulatory requirements ("RD 2/2012"). Our projected 	
RAC ratio for Bankia already takes into account our view of the heightened 	
economic risks that Spanish banks face. 	
	
The ratings also reflect our assumption that the Spanish government would 	
likely provide capital support to Bankia in the short term to absorb 	
provisioning requirements and maintain a capital buffer in excess of the 	
regulatory minimum. This includes the upcoming conversion into share capital 	
of the preference shares held by the Spanish government's bailout program the 	
Fondo de Restructuracion Ordenada Bancaria's (FROB). Although the total amount 	
of capital support has not yet been disclosed, we expect Bankia's RAC ratio to 	
increase in the short term to a level consistent with our "moderate" capital 	
assessment (RAC ratio before diversification between 5% and 7%) according to 	
our criteria. Our view of the likelihood of Bankia receiving short-term 	
extraordinary government support is reflected in two of the three notches of 	
uplift we incorporate into the rating on the bank over its SACP.	
	
Our revised assessment of Bankia's risk position reflects the fact that, 	
following the upcoming conversion of FROB preference shares into share 	
capital, our RAC ratio will include all hybrid instruments that were 	
previously excluded from our total adjusted capital (TAC) calculation, thereby 	
fully capturing the existing loss-absorption cushions. It also reflects 	
Bankia's full use of its general reserves to comply with the specific 	
provisioning requirements of RD 2/2012. 	
	
The CreditWatch negative reflects our assessment of the significant 	
uncertainties and subsequent implementation risks surrounding Bankia's 	
restructuring and recapitalization plan (including the amount of capital to be 	
provided by the state and the characteristics of the capital instrument used 	
to provide this support). It also reflects the uncertainty on whether the 	
financial statements filed with the Spanish securities exchange commission 	
("Comision Nacional del Mercado de Valores") on May 4, 2012, are in final 	
form, given that the associated auditing report has not yet been published. We 	
currently believe that the downside potential for the long-term ratings on 	
Bankia and BFA will not be substantial enough to affect the short-term ratings 	
upon resolution of the CreditWatch.	
	
Our ratings on Bankia reflect our 'bbb-' anchor for banks operating primarily 	
in Spain, and our view of the bank's "adequate" business position, "weak" 	
capital and earnings, "moderate" risk position, "average" funding, and 	
"adequate" liquidity, as our criteria define these terms. 	
	
The ratings benefit from three notches of uplift over Bankia's SACP. Two of 	
the three notches reflect our expectation that Bankia will receive capital 	
support in the short term, through the conversion of FROB's preference shares 	
into share capital and an additional capital injection by the state. The 	
additional notch of support reflects our opinion of the "moderately high" 	
likelihood of Bankia receiving additional extraordinary support from the 	
Spanish government in a crisis. This is because we consider Bankia to have 	
"high systemic importance" in Spain, a jurisdiction we view as "supportive" 	
toward its banking system. 	
	
Under our bank criteria we use our BICRA methodology and our economic risk and 	
industry risk scores to determine a bank's anchor, the starting point in 	
assigning a bank an issuer credit rating. Our anchor for Bankia, as a 	
commercial bank operating almost exclusively in Spain, is 'bbb-'. The BICRA 	
for Spain is group '5', under our criteria. Our '6' economic risk score for 	
Spain primarily reflects our view that the correction of the economic 	
imbalances accumulated during the boom is still underway and will have a very 	
high impact on the financial system. We expect asset quality deterioration, 	
mostly concentrated in the real estate sector, to continue, and we believe 	
Spanish banks' provisioning efforts will be very high. The private sector's 	
ongoing deleveraging will constrain Spain's already weak growth prospects, in 	
our view. With regard to industry risk, our score of '5' reflects our view of 	
the Spanish banking sector's high reliance on foreign funding, which makes it 	
vulnerable to ongoing turbulence in the capital markets. It also reflects our 	
view that weakening profitability, in the context of difficult economic and 	
financing conditions, could impair the otherwise stable competitive 	
environment in which Spanish banks operate.	
	
We assess Bankia's business position as "adequate." Created following the 	
merger of seven former savings banks, Bankia has a leading market position in 	
the Spanish banking system. It ranks as the largest deposit taker in the 	
country and the second-largest lender, controlling market shares of about 	
11.5% of the system's loans and deposits. Bankia holds particularly dominant 	
business positions in some wealthy economic areas (Madrid and the central 	
region, Levante, the Canary Islands, and Rioja). We believe, however, that the 	
integration process is still in its early stages and that significant 	
implementation risks remain. The recent change at the top management level 	
adds further uncertainties on the future strategic direction of the bank. 	
	
Our assessment of Bankia's capital and earnings as "weak" takes into account 	
the group's tight capital position at year-end 2011, following the substantial 	
negative adjustment to the group's capital base to recognize part of the 	
provisions required by RD 2/2012. We estimate our pro forma RAC ratio for 	
Bankia, before diversification, at year-end 2011 to stand at a modest 3.8% 	
(pro forma to incorporate the revised economic risk score of '6' for the 	
Spanish banking system) according to available unaudited financial 	
information. 	
	
We believe that, over the coming weeks, the FROB, according to its public 	
statements, will complete the conversion into share capital of its EUR4.4 	
billion preference shares, which will result in the state becoming the group's 	
majority shareholder. We view this move by the FROB as short-term 	
extraordinary capital support. Additionally, in line with some recent 	
statements by the Ministry of Finance, we expect the state to provide 	
additional capital to the group to help it absorb the additional EUR4.8 billion 	
of provisions required by the recently enacted regulation (RD 18/2012) and 	
maintain a capital buffer in excess of the regulatory minimum. Although the 	
amount of capital support has not yet been disclosed, we expect it to be in an 	
amount sufficient to raise Bankia's RAC ratio in the short term to a level 	
consistent with our "moderate" capital assessment (RAC ratio before 	
diversification between 5% and 7%) according to our criteria. 	
	
Our view of the likelihood of Bankia receiving short-term extraordinary 	
government support is reflected in two of the three notches of uplift 	
incorporated into the ratings over its SACP. Once these capital injections are 	
completed, and all other things being equal, we would likely revise our 	
assessment of Bankia's SACP to 'bb' from 'b+'. 	
	
Our assessment of Bankia's risk position as "moderate" reflects our opinion of 	
Bankia's weak asset quality performance during the downturn. It also 	
incorporates our expectation that the volume of problem assets that it will 	
accumulate and their related credit losses will exceed those of the banking 	
system average.	
	
We assess Bankia's funding as "average" compared with the Spanish banking 	
industry and its liquidity as "adequate." Customer deposits are the bank's 	
main funding source. The loan-to-deposits ratio stood at 168% at end 2011. 	
Bankia benefits from its dense branch network and recognized brand name to 	
attract and retain depositors. However, it is also relatively reliant on 	
wholesale funding, which shows concentration of maturities in 2012. Bankia 	
relies on funding from the European Central Bank (ECB, unsolicited 	
AAA/Stable/A-1+) to a larger degree than some domestic peers, but all ECB 	
funding is now medium term (three years). Bankia has resorted to the ECB's 	
long-term refinancing operations (LTRO) to refinance upcoming maturities in 	
2012 and 2013. We expect Bankia's wholesale funding needs to gradually decline 	
as the group deleverages. Wholesale short-term funding takes the form of 	
repurchase agreements provided by financial institutions and investors 	
(through international clearing houses). 	
	
The lowering of Bankia's long-term rating led to the lowering of BFA's 	
long-term rating. In accordance with our criteria, we analyze Bankia and its 	
controlling holding company BFA on a consolidated basis, using BFA's 	
consolidated financial information. We consider Bankia to be the group's 	
"core" operating entity, as our criteria define this term. We rate BFA three 	
notches below Bankia to reflect the structural subordination of BFA's 	
creditors toward those of Bankia and BFA's high double leverage.	
	
We lowered the debt ratings on Bankia's nondeferrable subordinated debt and 	
BFA's nondeferrable subordinated debt and hybrid instruments following our 	
revision of Bankia's SACP. In line with our criteria, we rate Bankia's 	
subordinated debt two notches below its SACP. We rate BFA's nondeferrable and 	
hybrid instruments one notch below the rating that the equivalent instruments 	
would have had if they had been issued by the group's core operating company 	
(Bankia).	
	
	
CreditWatch	
	
We would expect to resolve the CreditWatch as soon as more information on 	
Bankia's restructuring is made available, including confirmation by the 	
Spanish government of its capital support to Bankia.	
	
All other things being equal, we could lower our ratings on Bankia if the 	
amount of capital to be injected by the state is insufficient to improve, in 	
the short term, our view of Bankia's capital to a level commensurate with our 	
"moderate" capital and earnings assessment. Alternatively, we could also lower 	
the ratings if we revised downward Bankia's SACP and the benefits of 	
potentially receiving capital support are not enough to offset such an 	
adjustment. 	
	
Given that the auditor's report on the 2011 accounts has not yet been 	
published, we could potentially revise downward Bankia's SACP if there were 	
any material negative adjustments to the published financial statements. In a 	
worse-case scenario, we could revise the SACP to 'ccc+' if we viewed Bankia as 	
noncompliant with minimum regulatory requirements and therefore effectively 	
subject to regulatory forbearance. 	
	
Additionally, we could lower Bankia's SACP if: 	
	
     -- We were to conclude that the new management team will not successfully 	
implement a plan to turnaround the institution, the franchise is severely 	
damaged by the financial stress that the bank is currently suffering, or the 	
institution is required to downsize its operations significantly and loses its 	
current strong market position, leading us to revise downward our "adequate" 	
assessment of Bankia's business position; 	
     -- We were to believe that the group's asset quality would underperform 	
our expectations this year and the next; or 	
     -- Pressures on funding and liquidity intensify.	
	
	
In addition, given that our outlook on Spain is negative, if we were to 	
downgrade Spain we would remove one of the three notches of uplift 	
incorporated into our ratings on Bankia, which would lead us to lower our 	
ratings on Bankia and consequently our ratings on BFA.	
	
Conversely, we could affirm the ratings if, following our review of Bankia's 	
plan and upon confirmation of the amount of short-term capital support to be 	
provided by the state, we conclude that we should revise our assessment of 	
Bankia's SACP to 'bb' from 'b+'.	
	
The CreditWatch on Bankia and BFA's subordinated debt reflects the possibility 	
of the SACP falling further. Conversely, the ratings on the preference shares 	
were removed from CreditWatch negative because we would typically only lower 	
the issue ratings to 'CC' in the event the bank announces it will suspend the 	
payments.	
	
	
Ratings Score Snapshot	
Issuer Credit Rating          BB+/Watch Neg/B	
	
SACP                          b+ 	
 Anchor                       bbb-	
 Business Position            Adequate (0)	
 Capital and Earnings         Weak (-3)	
 Risk Position                Moderate (-1)	
 Funding and Liquidity        Average and Adequate (0)	
	
Support                       0	
 GRE Support                  0	
 Group Support                0	
 Sovereign Support            3	
 Short-term extraordinary 	
 support                      2	
	
Additional Factors            0	
	
Related Criteria And Research	
     -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011	
     -- Banking Industry Country Risk Assessment Methodology And Assumptions, 	
Nov. 9, 2011	
     -- Group Rating Methodology And Assumptions, Nov. 9, 2011	
     -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 	
     -- Bank Capital Methodology And Assumptions, Dec. 6, 2010	
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009	
     -- General Criteria: Nonsovereign Ratings That Exceed EMU Sovereign 	
Ratings: Methodology And Assumptions, June 14, 2011	
     -- Analytical Approach To Assessing Nonoperating Holding Companies, March 	
17, 2009	
     -- BICRA On Spain Maintained At Group 5, Economic Risk Score Revised To 	
'6' Following Sovereign Downgrade, May 25, 2012	
     -- Various Rating Actions On Spanish Financial Institutions Following 	
Spain Banking Sector Review, May 25, 2012	
	
	
	
Ratings List	
Downgraded; Remain On CreditWatch	
                                        To                 From	
Bankia S.A.	
Long-Term Counterparty Credit Rating    BB+/Watch Neg      BBB-/Watch Neg	
Senior Unsecured                        BB+/Watch Neg      BBB-/Watch Neg	
	
Banco Financiero y de Ahorros S.A.	
Long-Term Counterparty Credit Rating    B+/Watch Neg       BB-/Watch Neg	
Certificate Of Deposit                  B+/Watch Neg/B     BB-/Watch Neg/B	
Subordinated                            CCC+/Watch Neg     B/Watch Neg	
	
Caymadrid International Ltd. 	
Senior Unsecured                        BB+/Watch Neg      BBB-/Watch Neg	
	
	
Downgraded; CreditWatch/Outlook Action	
                                        To                 From	
Bankia S.A.	
Short-Term Counterparty Credit Rating   B                  A-3/Watch Neg	
Commercial Paper                        B                  A-3/Watch Neg	
	
Caja Madrid Finance Preferred S.A.	
Preference Stock*                       CCC-               B-/Watch Neg	
	
Caymadrid International Ltd.	
Commercial Paper(4)                      B                  A-3/Watch Neg	
	
Madrid Finance B.V.	
Commercial Paper(4)                      B                  A-3/Watch Neg	
	
*Guaranteed by Banco Financiero y de Ahorros S.A.	
(4)Guaranteed by Bankia S.A.	
	
	
Affirmed; CreditWatch/Outlook Action	
                                        To                 From	
Banco Financiero y de Ahorros S.A.	
Short-Term Counterparty Credit Rating   B                  B/Watch Neg	
	
 (Caryn Trokie, New York Ratings Unit)
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