TEXT-Fitch revises Banesto's CH rating watch to positive

Wed Jan 30, 2013 11:23am EST

Jan 30 - Fitch Ratings has revised the Rating Watch on Banco Espanol de
Credito S.A.'s (Banesto, 'BBB+'/Negative/'F2') Cedulas Hipotecarias (CH;
mortgage covered bonds) 'A-' rating to Positive from Negative. The RWP is
expected to be resolved before summer time pending finalisation of the announced
merger with Banco Santander (Santander; 'BBB+'/Negative), that is
expected to take place in May 2013.

The RWP reflects Fitch's view that the rating of these securities is likely to
be upgraded by one notch and equalised with the rating of Santander CH
('A'/Negative Outlook) upon the completion of the merger, as long as Santander's
current Issuer Default Rating (IDR) holds firm, the post-merger level of
over-collateralisation (OC) ranges between 90% and 95% at the minimum, and the
Fitch break even OC analysis is not materially affected. The Fitch breakeven OC
for a given rating will be affected, among others, by the profile of the cover
assets relative to outstanding covered bonds, which can change over time, even
in the absence of new issuances. Therefore, it cannot be assumed to remain
stable over time.

The rating action follows the announcement on 17 December 2012 that Banesto will
be absorbed by its parent, Banco Santander, and it also takes into account the
agency analysis on the anticipated post-merger credit risk profile of the cover
pool and the consolidated profile of all CH.

Fitch understands Banesto will cease to exist as a separate legal entity after
transferring all of its assets and liabilities to Santander, including those
related to the covered bond business. The absorption is expected to close in May
2013. As such, Fitch has conducted the rating analysis both on the Banesto cover
pool and CH pre-merger and expected post-merger profile, based on data submitted
by both entities.

In relation to Banesto pre-merger situation, and according to updated
information provided by the issuer, the total outstanding balance of CH has been
reduced to EUR17.59bn (from EUR18.19bn as of year-end 2012) and the cover pool
volume is projected to remain stable at EUR32.31bn as of 31 January 2013 after
incorporating c.EUR300m of mortgage loans from an amortised securitisation
transaction. As a consequence, the CH's level of OC has increased to 83.7% from
77% in December 2012, a level that is able to withstand the Fitch estimated
breakeven OC for the 'A-' rating scenario of 81% but not high enough to support
the breakeven OC estimate for the 'A' rating scenario of 86%.

Banesto CH's OC ratio is expected to range between 90% and 100% from
end-February 2013 until the merger effective date, considering the amortisation
profile of existing CH, the estimate of potential CH issuances and the projected
balance of the mortgage portfolio. In terms of portfolio credit analysis, Fitch
view remains unchanged with a weighted-average (WA) default rate of 33.1%, a WA
recovery rate of 32.9% and a WA loss rate of 22.2% in the 'A-' stress
environment. These metrics take into account that 66% of the total cover pool is
linked to residential credit risk profile, 14% to commercial/SME and 20% to real
estate developers.

In relation to Banesto and Santander post-merger situation, based on information
provided by the two issuers, the aggregated outstanding balance of CH stands at
EUR43.8bn as of today and is secured over an approximated aggregated cover pool
of EUR83.3bn, resulting in a total OC of 90%. In line with Fitch's covered bond
criteria for 'F2' rated Spanish issuers in the absence of contractual minimum
levels of OCs, the agency applies a 10% OC haircut on the lowest OC observed of
the last 12 months (87%) to derive a total OC credited level of 79% within its
analysis. This relied upon level of OC is above the 'A' estimated breakeven OC
of 76% by Fitch as of now.

Fitch's D-Cap of 0 for Banesto's CH remains unchanged, implying full
discontinuity of payments on the CH upon the issuer default. This continuity
risk analysis is driven by the liquidity gap and systemic risk assessment for
Spanish covered bonds issued by banks rated above the sovereign
('BBB'/Negative/'F2'). In Fitch's opinion, there is a lack of specific
protection against liquidity shortfalls post an assumed issuer insolvency and
only intervention by the Spanish authorities would avoid a default on the
covered bonds in this scenario.


Additional information is available on www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 September 2012,
'Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum
' dated 14 November 2012, 'EMEA Residential Mortgage Loss Criteria' dated 7 June
2012, 'EMEA Criteria Addendum - Spain - Mortgage Loss and Cash Flow
Assumptions', dated 24 July 2012, 'Criteria for Rating Granular Corporate
Balance-Sheet Securitisations (SME CLOs)', dated 27 November 2012 are available
on www.fitchratings.com

Applicable Criteria and Related Research:
Covered Bonds Rating Criteria - Amended
Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum
EMEA Residential Mortgage Loss Criteria
EMEA Criteria Addendum - Spain - Mortgage and Cashflow Assumptions
Criteria for Rating Granular Corporate Balance-Sheet Securitisations (SME CLOs)
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