RPT-Fitch Affirms Santander's, BBVA's and CaixaBank's Ratings

Thu May 23, 2013 9:44am EDT

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May 23 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has today affirmed the Long-term Issuer Default Ratings (IDR) of Banco Santander, S.A. (Santander) and Banco Bilbao Vizcaya Argentaria (BBVA) at 'BBB+' and CaixaBank, S.A. at 'BBB'. The Rating Outlook on the Long-term IDRs is Negative. At the same time, the agency has also affirmed the IDRs of these three banks' Spanish banking subsidiaries, issuing vehicles and of CaixaBank's bank holding company La Caixa. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS - IDRS, VRS AND SENIOR DEBT RATINGS

The IDRs and senior debt ratings of the three largest Spanish banks are driven by their stand-alone creditworthiness, as expressed by their VRs. The affirmation of their VRs primarily reflects their leading retail franchise in Spain, which supports good funding and liquidity bases. The VRs also reflect an adequate level of loss absorption buffers and capital and relatively resilient asset quality versus domestic peers, despite macro-economic pressure in Spain. In the case of Santander and BBVA, their VRs are one notch above Spain's sovereign rating, reflecting their geographically diversified strong retail franchises, which uphold solid pre-impairment operating profitability and place the banks in a better position than other domestic banks to absorb credit shocks. Benefits of international diversification include, but are not limited to, the ability of subsidiaries to upstream dividends, the financial flexibility related to the potential disposal of stakes in subsidiaries, and in some cases fungibility of liquidity and capital. Santander generated only 16% of its pre-impairment operating profitability from Spain and BBVA 32% in Q113.

While this diversification positively differentiates Santander and BBVA from more domestically-focused Spanish banks, like CaixaBank, in Fitch's view it does not entirely insulate them from the challenging environment in Spain. At the current sovereign rating level ('BBB'/Negative Outlook), the uplift above the sovereign is limited to one notch as Fitch considers that there is a close correlation between bank and sovereign credit risk. Performance and asset quality of Santander's and BBVA's Spanish businesses are vulnerable to the adverse economic environment. Funding access, stability and costs for banks are also typically closely linked to broad perceptions of sovereign risk.

While Fitch expects operating earning generation to be under pressure in 2013 due to low interest rates and limited volumes, operating profitability and net income of these three banks should benefit from lower impairment charges, though these charges should remain at high levels due to a still tough operating environment in Spain.

At end-2012 impaired loan (NPL) ratios at Santander (4.8%), BBVA (5.5%) and CaixaBank (8.6%, excluding Banco de Valencia) were better than the sector average (10.4%) and all three entities currently have NPL reserve coverage in excess of 70%, which Fitch views as adequate to cover their expected losses in the absence of further stress.

The three banks are primarily funded by deposits and are improving their funding and liquidity, mainly through loan de-leveraging. Fitch expects these banks to benefit from the restructuring of the Spanish banking system, for example as a result of flight to quality but also due to a reduction of excess capacity.

While they also have wholesale market funding, the banks hold ample unencumbered assets and have the capacity to access debt markets. Santander's and BBVA's funding is supported by subsidiaries being locally funded.

In Fitch's opinion the three banks are adequately capitalised, particularly BBVA. The latter's Fitch core capital (FCC)/weighted risks ratio was 9.5% at end-2012, while Santander's was 8.5% and CaixaBank's 8.1%. All three banks have improved their capitalisation in the past few years, excluding CaixaBank's corporate activities. Santander's and CaixaBank's FCC is held back by goodwill from acquisitions and tax loss carry-forwards. Fitch expects FCC for the three banks to improve swiftly upon a return to more normalised profitability, supported by the recovery of deferred tax assets (DTAs).

The Negative Outlook on the IDRs of the three entities included in this comment mirrors the Rating Outlook on Spain's sovereign rating. These entities have a large presence in the Spanish market and ratings are highly correlated, especially in the case of domestically focused CaixaBank.

RATING SENSITIVITIES - IDRS, VRS AND SENIOR DEBT RATINGS

While one notch above the sovereign, Santander's and BBVA's VR and IDR are sensitive to a potential downgrade of the Spanish sovereign rating. Downward rating pressure may also arise from a marked deterioration of asset quality and/or profitability as a result of a sustained tough operating environment in Spain or other key geographies for these banks and a reduction in the capacity of the parent to upstream dividends from banking subsidiaries. Santander's and BBVA's upward rating potential would arise from an outstanding overall financial performance, in terms of profitability, asset quality, funding and capital at their Spanish parent level in combination with an improvement of the sovereign credit dynamics.

CaixaBank's IDRs and senior debt ratings would be downgraded only if the bank's VR and Support Rating Floor (SRF) are simultaneously downgraded. The bank's VR will be downgraded if asset quality weakening is more intense than currently assumed, from a failure to create synergies from recent bank acquisitions and/or because of any unforeseen liquidity shock. A downgrade of Spain's sovereign IDRs would also trigger a downgrade of CaixaBank's IDRs. Any potential for upgrading CaixaBank's IDRs, VR and senior debt ratings is limited by Spain's economic environment.

KEY RATING DRIVERS - LA CAIXA'S IDRS AND VR

La Caixa's ratings are driven by those of its 72.8%-owned CaixaBank, which is seen by Fitch as its main operating subsidiary. While their credit profiles are highly correlated, La Caixa is notched down once from CaixaBank to highlight the dilution of its stake in CaixaBank to about 62%, once CaixaBank's mandatory convertible bonds are converted in 2015; and high double leverage, although this is expected to reduce. The Outlook remains Negative, matching that of CaixaBank, and reflects Spain's weak economic environment.

Debt currently totals around EUR7.1 bn, mainly related to subordinated borrowings maturing between 2017 and 2020. Since June 2011, when La Caixa was converted into a holding company, EUR1.5 bn of debt has been repaid, some of it ahead of schedule, reflecting the bank's focus on reducing leverage. However, Fitch estimates La Caixa's double leverage ratio to be somewhere between moderate and high at close to 120%. Further reduction in double leverage is expected by Fitch during the remainder of 2013.

La Caixa's debt-servicing ability depends on the cash flows from CaixaBank and a portfolio of equity stakes held by another subsidiary (Criteria CaixaHolding). The largest stakes of Criteria CaixaHolding are in Gas Natural SDG, S.A. (BBB+/Stable) and Abertis Infraestructuras, S.A. (BBB+/Negative), whose dividends have proven to be stable. In the event of stress, further liquidity could be obtained from partial asset sales and/or secured borrowings.

RATING SENSITIVITIES - LA CAIXA'S IDRS AND VR

La Caixa's VR (and hence IDRs) is sensitive to any rating action on CaixaBank. A downgrade could also arise from any unforeseen material weakening of cash flows, which could ultimately affect La Caixa's debt-servicing ability, and/or from the need to make significant write-downs on any of its equity investments, especially on CaixaBank and/or Criteria CaixaHolding. On the other hand, upgrade potential for La Caixa's VR and IDRs is currently very limited.

KEY RATING DRIVERS -SUPPORT RATING AND SUPPORT RATING FLOOR

The SRFs of Santander, BBVA and CaixaBank reflect Fitch's view that there is a high likelihood of support from the authorities if ever needed. For Santander and BBVA this is due to their systemic importance both domestically and internationally, while for CaixaBank this reflects its domestic importance. La Caixa's SR of '5' and SRF of 'No Floor' reflect that La Caixa is viewed by Fitch as a bank holding company and hence support from the authorities cannot be relied upon, if needed.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOORS

The banks' SR and SRF are sensitive to any change in assumptions around the authorities' ability (as reflected in Spain's rating) or willingness to provide timely support.

The SRs and SRFs are also sensitive to a change in Fitch's assumptions around the availability of sovereign support for Spanish banks. There is a clear political intention to ultimately reduce the implicit state support for banks in Europe. This might result in Fitch revising SRFs downwards in the medium term. In this context, Fitch is paying close attention to on-going policy discussions around support and 'bail in' for eurozone banks. Until now, senior creditors in Spanish banks have been supported in full, but resolution legislation is developing quickly and the implementation of creditor 'bail in' is starting to make it look more feasible for taxpayers and creditors to share the burden of support for banks.

KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital instruments issued by Santander, BBVA, CaixaBank and by La Caixa are all notched down from their VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in the VRs of Santander, BBVA or CaixaBank.

Unnim Banc's upper tier 2 and preferred stock are still not performing but have been placed on Rating Watch Positive (RWP) reflecting a higher likelihood of coupons being resumed on these instruments post-merger with BBVA. Upon completing the merger process, Unnim Banc's upper tier 2 debt will be upgraded to 'BB+' and preferred stock to 'BB-'.

KEY RATING DRIVERS AND SENSITIVITIES - SUBSIDIARIES

Santander Consumer Finance (SCF) is 100% owned by Santander and it benefits from being an integral part of the group and a core business of the group, as it manages most of the consumer finance operations.

Banesto's ratings have been affirmed and withdrawn as it was merged into Santander on May 6, 2013 and it ceased to exist as a legal entity.

Unnim Banc is a 100%-owned bank subsidiary of BBVA. Fitch considers Unnim Banc to be part of BBVA's core banking business in Spain and it will be merged into the parent by end-May or in June, at which point Unnim Banc will cease to exist as a separate entity. Once this occurs, Fitch will withdraw the ratings of Unnim Banc.

Banco de Valencia (BdV) is a 98.9%-owned bank subsidiary of CaixaBank and is fully consolidated into the group accounts. BdV's IDRs are aligned with those of CaixaBank, because Fitch considers BdV to be a core subsidiary of the group and, as indicated by the European Commission on Nov. 27, 2012, BdV will be merged into CaixaBank, at which point BdV will cease to exist as a separate entity. Once the latter occurs, which is expected in the second half of 2013, Fitch will withdraw the ratings of BdV.

Until Unnim Banc and BdV cease to exist, their IDRs are sensitive to the same factors that would drive a change in BBVA's and CaixaBank's IDRs. Unnim Banc's and BdV's SRs are sensitive to a change in the level of importance of the bank within BBVA and CaixaBank, which is seen as unlikely. The impact, if any, on Santander's, Banesto's and Unnim's covered bonds will be covered in a separate comment.

The rating actions are as follows:

Santander:

Long-term IDR: affirmed at 'BBB+'; Outlook Negative

Short-term IDR: affirmed at 'F2'

VR: affirmed at 'bbb+'

Support Rating: affirmed at '2'

Support Rating Floor (SRF): affirmed at 'BBB'

Senior unsecured debt long-term rating and certificates of deposit: affirmed at 'BBB+'

Senior unsecured debt short-term rating, commercial paper and certificate of deposits: affirmed at 'F2'

Market-linked senior unsecured securities: affirmed at 'BBB+emr'

Subordinated debt: affirmed at 'BBB'

Preference shares: affirmed at 'BB-'

Santander International Debt, S.A. Unipersonal

Senior unsecured debt long-term rating: affirmed at 'BBB+'

Senior unsecured debt short-term rating: affirmed at 'F2'

Market-linked senior unsecured securities: affirmed at 'BBB+emr'

Santander International Preferred, S.A. Unipersonal

Preference shares: affirmed at 'BB-'

Santander Commercial Paper, S.A. Unipersonal

Commercial paper: affirmed at 'F2'

Santander Finance Capital, S.A. Unipersonal

Preference shares: affirmed at 'BB-'

Santander Finance Preferred, S.A. Unipersonal

Preference shares: affirmed at 'BB-'

Santander Financial Issuance Ltd.

Subordinated debt: affirmed at 'BBB'

Santander Perpetual, S.A. Unipersonal

Upper Tier 2: affirmed at 'BB+'

Santander US Debt, S.A.U.

Senior unsecured debt long-term rating: affirmed at 'BBB+'

SCF:

Long-term IDR: affirmed at 'BBB+'; Outlook Negative

Short-term IDR: affirmed at 'F2'

Support Rating: affirmed at '2'

Senior unsecured debt long-term rating: affirmed at 'BBB+'

Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2'

Subordinated debt: affirmed at 'BBB'

Banesto

Long-term IDR: affirmed at 'BBB+'; Outlook Negative; withdrawn

Short-term IDR: affirmed at 'F2'; withdrawn

VR: affirmed at 'bbb-'; withdrawn

Support Rating: affirmed at '2'; withdrawn

Senior unsecured rating: affirmed at 'BBB+'; transferred to Santander

Short-term debt rating: affirmed at 'F2'; transferred to Santander

Subordinated debt: upgraded to 'BBB' from 'BB+'; removed from Positive Watch; transferred to Santander

Preferred stock: upgraded to 'BB-' from 'B'; removed from Positive Watch; transferred to Santander

Market-linked senior unsecured securities: affirmed at 'BBB+emr'; transferred to

Santander

Banesto Financial Products plc :

Senior unsecured rating: affirmed at 'BBB+'; transferred to Santander

Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2'; transferred to Santander

BBVA:

Long-term IDR: affirmed at 'BBB+'; Negative Outlook

Short-term IDR: affirmed at 'F2'

VR: affirmed at 'bbb+'

Support Rating: affirmed at '2'

SRF: affirmed at 'BBB'

Senior unsecured debt long-term rating: affirmed at 'BBB+'

Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2'

Market-linked senior unsecured securities: affirmed at 'BBB+emr'

Subordinated debt: affirmed at 'BBB'

Preference shares: affirmed at 'BB-'

BBVA Capital Finance, S.A. Unipersonal

Preference shares: affirmed at 'BB-'

BBVA International Preferred, S.A. Unipersonal

Preference shares: affirmed at 'BB-'

BBVA Senior Finance, S.A. Unipersonal

Senior unsecured debt long-term rating: affirmed at 'BBB+'

Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2'

BBVA U.S. Senior, S.A. Unipersonal

Senior unsecured debt long-term rating: affirmed at 'BBB+'

Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2'

Unnim Banc

Long-term IDR: affirmed at 'BBB+'; Outlook Negative

Short-term IDR: affirmed at 'F2'

Support Rating: affirmed at '2'

Lower tier 2 subordinated debt: affirmed at 'BBB'

Upper tier 2 subordinated debt: 'CC', placed on RWP

Preferred stock: 'C', placed on RWP

Senior state-guaranteed notes: affirmed at 'BBB+'

CaixaBank:

Long-term IDR: affirmed at 'BBB'; Outlook Negative

Short-term IDR: affirmed at 'F2'

VR: affirmed at 'bbb'

Support Rating: affirmed at '2'

Support Rating Floor: affirmed at 'BBB'

Senior unsecured debt long-term rating: affirmed at 'BBB'

Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2'

State-guaranteed debt: affirmed at 'BBB'

Lower tier 2 subordinated debt: affirmed at 'BBB-'

Upper tier 2 subordinated debt: affirmed at 'BB'

Preferred stock: affirmed at 'B+'

Banco de Valencia:

Long-term IDR: affirmed at 'BBB'; Outlook Negative

Short-term IDR: affirmed at 'F2'

Support Rating: affirmed at '2'

La Caixa:

Long-term IDR: affirmed at 'BBB-'; Outlook Negative

Short-term IDR: affirmed at 'F3'

VR: affirmed at 'bbb-'

Support Rating: affirmed at '5'

SRF: affirmed at 'No floor'

Subordinated debt: affirmed at 'BB+'

State-guaranteed debt: affirmed at 'BBB'

FILED UNDER:
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