TEXT-S&P cuts Bankia ratings
(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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