Fitch Takes Rating Actions on Spain's BFA-Bankia and NCG Banco

Thu Apr 18, 2013 12:22pm EDT

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(The following statement was released by the rating agency) BARCELONA, April 18 (Fitch) Fitch Ratings has placed Spain-based Bankia, S.A.'s Long-term Issuer Default Rating (IDR) of 'BBB', Short-term IDR of 'F2', Support Rating of '2' and Support Rating Floor (SRF) of 'BBB' on Rating Watch Negative (RWN). At the same time, Fitch has maintained NCG Banco, S.A.'s (NCG) Long-term IDR of 'BB+', Short-term IDR of 'B', Support Rating of '3' and SRF of 'BB+' on RWN. The agency has also upgraded Bankia's Viability Rating (VR) to 'b' from 'f' and NCG's to 'b+' from 'f'. Fitch has simultaneously taken rating actions on Bankia's parent bank, Banco Financiero y de Ahorros, S.A. (BFA), including an upgrade of its VR to 'b-' from 'f' and placing its Long-term IDR and SRF of 'BB' on RWN. A full list of rating actions is at the end of this rating action commentary. These rating actions follow a review by Fitch of these banks' credit profile, after receiving capital support from Spain's Fund for Orderly Bank Restructuring (FROB) under the terms and conditions approved by the European Commission on 28 November 2012. While this capital support is the primary reason behind the upgrade of Bankia, BFA, and NCG's VRs , Fitch has also factored into these banks' VR the impacts on credit risk and liquidity of the transfer of the vast majority of their real estate exposure to the Spanish bad bank (SAREB) and the benefits on these banks' capital from the forthcoming burden sharing, which entails exchanges of hybrid and subordinated debt securities into the banks' equity. The RWNs on Bankia's and NCG's IDRs, Support Ratings and SRFs reflect potential pressures on the propensity of future support being available to these banks, which have been recent beneficiaries of significant state aid. For example, Bankia and NCG are substantially downsizing their franchises, which will result in relatively smaller institutions of reduced systemic importance. In its assessment of support, Fitch also notes the intent within the EU to reduce implicit state support for banks. In addition to these considerations, the RWN on BFA's Long-term IDR and SRF reflects potential additional support pressures arising from its effective status as a bank holding company, rather than an active deposit-taking bank. The RWNs on the Support Ratings reflect the potential for the banks' SRFs and Long-term IDRs to be downgraded by more than one notch. KEY RATING DRIVERS - IDRS AND SENIOR DEBT, SUPPORT RATING AND SRF Bankia and NCG's IDRs and senior debt ratings and BFA's IDRs are driven by their SRFs. Bankia's SRF reflects a relatively high likelihood of support given its size and systemic importance as Spain's fourth-largest banking group with a market share of around 10%. BFA, like Bankia, has benefited from extraordinary support but its SRF (reflecting a moderate probability of support) is lower than that of Bankia because it is effectively a bank holding company, rather than an active deposit-taking bank. NCG's SRF reflects a moderate probability of support due to its smaller national franchise than Bankia but also its relatively high importance in the north-western region of Galicia. As noted previously, these SRFs and Long-term IDR are on RWN, which the agency expects to resolve within the next three months. RATING SENSITIVITIES - IDRS AND SENIOR DEBT, SUPPORT RATING AND SRF Bankia, BFA and NCG's IDRs will be downgraded if their SRFs are downgraded. The SRFs are on RWN for the reasons noted previously but could also be downgraded were Spain's sovereign rating ('BBB'/Negative) to be downgraded. For lower-rated NCG, the mostly likely cause of an IDR upgrade would be its acquisition by a higher rated entity. KEY RATING DRIVERS - BANKIA'S AND NCG'S VRs The upgrade of Bankia's and NCG's VR reflects the improvement in capital. Bankia received EUR10.7bn in contingent convertibles (CoCos) from the state through the parent bank (BFA), which will be converted shortly, and NCG increased capital by EUR5.4bn. Further strengthening will arise from burden sharing of subordinated and hybrid instruments, which is expected by Fitch to generate EUR4.8bn of additional capital for Bankia and EUR1.8bn for NCG. Fitch calculates that, after completing the recapitalisation, Bankia's and NCG's pro forma Fitch Core Capital (FCC) ratio will be a weak 4.6% and vulnerable 8.9%, respectively, under further asset quality stress. Fitch also considers that these banks' pre-impairment profitability will remain modest at the early stage of the restructuring. The VR also reflects their improved risk profile after transferring most of the real estate assets to SAREB. At end-2012, Bankia's and NCG's real estate exposure was only 6% and 5%, respectively, of total loans and foreclosed assets. Non-real estate loans however deteriorated further in 2012 and Bankia's end-2012 non-performing loan (NPL) ratio at 12.9% and NCG's at 13.9% were above the sector average (10.4%). While reserves held against impaired assets, at about 62% and 60%, respectively, at end-2012, seem reasonable both banks also had large stocks of restructured and watch-list loans, which Fitch regards as an additional source of risk. Bankia's and NCG's liquidity was boosted by the receipt of state-guaranteed debt in exchange of SAREB transfers and FROB capital via European Stability Mechanism bonds. Bankia's unencumbered assets, at 8.8% of total assets at end-2012, are sufficient to meet debt repayments scheduled for 2013-2015. While the bank's retail funding imbalances have reduced dramatically, the deposit base remains small at one-third of total assets. Fitch anticipates that it will be challenging for Bankia to turn around its franchise, whilst meeting restructuring plans and facing burden sharing on instruments that were in part sold to retail customers. Bankia's level of wholesale funding is high, in particular ECB borrowings, which are well above peers despite recent reductions and are needed to protect margins. NCG's pool of liquid assets amounted to EUR11bn at end-2012, which sufficiently covers scheduled debt maturities. The bank's loan/deposit ratio declined to 118%, or 106% if adjusted for retail bonds, impairment reserves and self-funded loans. Nevertheless, NCG remains reliant on wholesale funding, particularly ECB funding, which Fitch sees, like for Bankia, as needed to support profitability. NCG's VR also takes into account the risks involved in the execution of the restructuring plan and challenges in managing the reputational issues related to burden sharing, largely affecting retail customers. While the latter could impair its strong regional franchise, the agency expects, at the current VR level, the impact of this on deposits and funding costs to be limited. RATING SENSITIVITIES - BANKIA'S AND NCG'S VRs Bankia's and NCG's VRs are sensitive to weaker than currently expected economic and operating conditions, failure to implement the restructuring and recapitalisation targets as planned and/or a substantial impairment of their business franchise and financial profile, for example due to further weakening of asset quality and/or of deposit levels following burden sharing. Conversely, upgrade potential could mainly arise from a stabilisation of the asset quality trends, improvement of their underlying profitability as well as further rebalancing of their funding profiles. KEY RATING DRIVERS AND SENSITIVITIES - BFA'S VR BFA is wholly-owned by the FROB and will have the majority ownership of Bankia, after the conversion of CoCos and burden sharing. BFA, as the parent of the group, received EUR22.5bn of capital from the FROB, EUR10.7bn of which related to Bankia. BFA's equity will be further reinforced by burden sharing. In its assessment, Fitch concluded that the risk profile of BFA is closely correlated with that of Bankia, which is seen by Fitch as BFA's main operating subsidiary. The one-notch difference in the VRs of Bankia and BFA mainly highlights BFA's high double leverage ratio and weak performance because of limited dividend up-streaming potential from Bankia. BFA's debt servicing ability depends on existing liquidity reserves, which were boosted by FROB capital and SAREB transfers, and by proceeds from planned divestments. At end-2012, BFA had EUR34.2bn of debt outstanding, mostly related to ECB borrowings and state guarantees. Excluding ECB debt, EUR7.1bn is due in 2013-2015, while BFA has EUR13.5bn of unencumbered liquid assets. BFA's VR is sensitive to a downgrade of Bankia's VR. Any further requirement for write downs of the equity portfolio or its large bond holdings, and/or any unforeseen liquidity shock could also trigger a downgrade of BFA's VR. Conversely, upside potential would come from a lowering of the double leverage ratio, and/or from an upgrade of Bankia's VR. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and preferred stock of BFA and NCG have been affirmed because they are subject to burden-sharing, as established by the Memorandum of Understanding signed in July 2012 and Royal Decree Law 24/2012. Burden sharing, whose terms and conditions were approved by the Steering Committee of the FROB on 22 March 2013, is expected to be completed in May 2013, with the holders of the tendered bonds absorbing losses through the distressed exchange into equity. On burden-sharing completion, the ratings of these instruments will be withdrawn in accordance with Fitch's criteria for distressed debt exchange. The rating actions are as follows: Bankia, S.A.: Long-term IDR: 'BBB'; placed on RWN Short-term IDR: 'F2'; placed on RWN VR: upgraded to 'b' from 'f' Support Rating: '2'; placed on RWN SRF: 'BBB'; placed on RWN Long-term senior unsecured debt: 'BBB'; placed on RWN Commercial paper: 'F2'; placed on RWN Market-linked senior unsecured securities: 'BBBemr'; placed on RWN State-guaranteed debt: affirmed at 'BBB' Banco Financiero y de Ahorros, S.A. (BFA): Long-term IDR: 'BB'; placed on RWN Short-term IDR: affirmed at 'B' VR: upgraded to 'b-' from 'f' Support Rating: '3'; placed on RWN SRF: 'BB'; placed on RWN Subordinated lower tier 2 debt: affirmed at 'CC' Subordinated upper tier 2 debt: affirmed at 'C' Preferred stock: affirmed at 'C' State-guaranteed debt: affirmed at 'BBB' NCG Banco, S.A.: Long-term IDR: 'BB+', maintained on RWN Short-term IDR: affirmed at 'B' VR: upgraded to 'b+' from 'f' Support Rating: '3', maintained on RWN SRF: 'BB+', maintained on RWN Long-term senior unsecured debt: 'BB+', maintained on RWN Commercial paper: affirmed at 'B' State-guaranteed debt: affirmed at 'BBB' Subordinated lower Tier 2 debt: affirmed at 'C' Subordinated upper Tier 2 debt (ISIN: ES0214958045): affirmed at 'C' Preferred stock: affirmed at 'C' Contact: Primary Analyst (Bankia and BFA) Josep Colomer Director +34 93 323 8416 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Primary Analyst (NCG Banco) Roger Turro Director +34 93 323 8406 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Secondary Analyst (Bankia and BFA) Roger Turro Director +34 93 323 8406 Secondary Analyst (NCG Banco) Josep Colomer Director +34 93 323 8416 Committee Chairperson Maria Jose Lockerbie Managing Director +44 203 530 1083 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012; 'Distressed Debt Exchange Criteria', dated 8 August 2012; 'Rating FI Subsidiaries and Holding Companies', dated 10 August 2012; 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012; and 'Evaluating Corporate Governance', dated 12 December 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research Global Financial Institutions Rating Criteria here Distressed Debt Exchange Criteria for Structured Finance here Rating FI Subsidiaries and Holding Companies here Assessing and Rating Bank Subordinated and Hybrid Securities here Evaluating Corporate Governance here Spanish Bank Restructuring Largely on Track here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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