Fitch Affirms Andorran Banks' Ratings

Fri Jun 7, 2013 11:16am EDT

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(The following statement was released by the rating agency) BARCELONA/LONDON, June 07 (Fitch) Fitch Ratings has affirmed Credit Andorra S.A.'s and Andorra Banc Agricol Reig's (Andbank) Long-term Issuer Default Ratings (IDR) at 'A-', and Banca Privada d'Andorra's (BPA) at 'BB+'. The Outlook on Andbank's IDR has been revised to Stable from Negative. The Outlook on BPA's IDR is Stable and Credit Andorra's is Negative. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS AND VRS The IDRs for all the entities are driven by their standalone strength as reflected by their Viability Ratings. All three banks continued to increase their Assets under Management (AuM) in 2012, focusing on expanding their businesses in foreign subsidiaries. Credit Andorra reached EUR11.3bn (up by 12%), Andbank EUR11bn (up by 21%) and BPA EUR5.4bn (up by 18%). Their profitability mostly compares well with that of international peers although an increased proportion of earnings is derived from potentially volatile debt securities holdings. Domestic loan books have been under pressure from the contracting local economy and remain relatively concentrated, reflecting the industry and corporate concentrations in the country. However, collateral backing the loan books is high and all three banks' problematic asset ratios still compare well with similarly rated international banks. Andorran banks are primarily funded by customer deposits and hold a comfortable level of liquid assets. RATING SENSITIVITIES - IDRS AND VRS All three banks' VRs are sensitive to continued international pressure over jurisdictions with banking secrecy laws, although they are reducing the potential impact thanks to international expansion. Their ratings are also sensitive to a continued recession of the Andorran economy beyond 2013, which could result in further deterioration in asset quality. KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS Fitch has affirmed all three banks' Support Ratings and Support Rating Floors at '5' and 'NF' respectively. This reflects the agency's view that the probability of Andorran banks receiving support in case of need is low. Although Fitch does not rate Andorra's sovereign risk, the banking system's large size relative to the Andorran economy means that, while authorities' propensity to provide support may be high, it cannot be relied upon given limited resources at authorities' disposal. RATING SENSITIVITIES - SUPPORT RATINGS AND SUPPORT RATING FLOORS It is unlikely that Fitch will upgrade these banks' Support Ratings and Support Rating Floors, although this could happen should there be a significant increase in resources available at authorities' disposal or if there is a change in ownership, which Fitch views as unlikely. KEY RATING DRIVERS AND SENSITIVITIES - Andbank The Outlook on Andbank's IDR has been revised to Stable from Negative reflecting Fitch's view that the entity's increasing geographic diversification in AuM and the comparatively lower reliance on Andorra's retail banking business balances some additional deterioration in asset quality. The agency does not expect to either upgrade or downgrade the bank's ratings in the short- to medium-term as it continues to perform solidly, its cost efficiency remains on track, risk management policies and procedures are adequate, liquidity is comfortable and its capitalisation is strong (Fitch Core Capital (FCC) ratio of 22% at end-2012). KEY RATING DRIVERS AND SENSITIVITIES - Credit Andorra Although Credit Andorra's VR is also supported by similar drivers as Andbank (solid performance, control over costs, growth in AuM overseas, adequate risk management policies and procedures, confortable liquidity position) it has a larger domestic presence and is hence more prone to weakening performance with the expected continued contraction of the Andorran economy in 2013. Its reserve coverage for problematic loans and capitalisation is weaker (FCC of 14% at end-2012) than Andbank's and its loan book is more concentrated. The Outlook on Credit Andorra's Long-term IDR therefore remains Negative. Credit Andorra is expected to strengthen its core capital ratios by increasing internal capital generation and reducing dividend payouts. Its ratings will be downgraded if asset quality worsens and the ratio of unreserved problematic assets (including foreclosures) to equity continues to increase. Conversely, the Outlook will be revised to Stable if the Andorran economy returns to a growing path, resulting in lower pressure on asset quality and the bank continues the successful development and consolidation of the international private banking franchise. KEY RATING DRIVERS AND SENSITIVITIES - BPA BPA's domestic franchise as well as its international presence are smaller than its' peers. Furthermore, its profitability is more modest, undermined by a high cost base, credit risk concentration and by asset quality pressure. Its liquidity and capitalisation are adequate, although there has been some further pressure on its FCC (this declined to just 10.3% at end-2012) as a result of a charge taken against reserves to redeem its commitments with customers and further activation of tax losses carry forward, which Fitch deducts from FCC. The Outlook on BPA's Long-term IDR is Stable reflecting the group's increase in AuM, which Fitch expects will support earnings generation, and cost rationalisation measures that are being implemented in 2013-2014. Fitch also views positively the small improvement in asset quality seen in 2012, although from a weaker base, and the reduction in commitments with customers and financial risks with hybrid exposures (BPA acquired securities, mostly hybrids, amounting to EUR117m at end-2012 following the dissolution of two leveraged funds and in Q409 cancelled the related loans. The bank committed to return clients' initial position in the funds in 10 years, but anticipated most payments in 2011 and 2012 and from now on, the impact on its profit and loss statement should be limited. The bank is keeping these instruments on its books due to their high yields). Overall, Fitch views its VR as being below investment grade. BPA's ratings will be upgraded if BPA improves its profitability based on maintaining core earnings generation capacity while reducing its cost base, contention of asset quality deterioration and an increase in the core capital base. A reduction of its legacy exposure to hybrids will also be a positive rating driver. Its ratings will be downgraded if BPA fails to improve its underlying profitability and FCC is further eroded and asset quality deteriorates more than expected or if its exposure to hybrids heightens financial risks. KEY RATING DRIVERS - CREDIT ANDORRA'S PREFERRED STOCK Credit Andorra had preference shares outstanding, to which Fitch gives 50% equity credit. These are notched down five times from the bank's VR to reflect higher loss severity than the average for senior unsecured creditors and the higher than average risk of non-performance given that the payment of coupons is discretionary. The rating actions are as follows: Credit Andorra Long-term IDR affirmed at 'A-'; Outlook Negative Short-term IDR affirmed at 'F2' Viability Rating affirmed at 'a-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'NF' Preferred Stock affirmed at 'BB' Andbank Long-term IDR affirmed at 'A-'; Outlook revised to Stable from Negative Short-term IDR affirmed at 'F2' Viability Rating affirmed at 'a-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'NF' BPA Long-term IDR affirmed at 'BB+'; Outlook Stable Short-term IDR affirmed at 'B' Viability Rating affirmed at 'bb+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'NF' Contact: Primary Analyst Roger Turro Director +34 93 323 8406 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Secondary Analyst Josu Fabo Associate Director +44 20 3530 1513 Committee Chairperson Claudia Nelson Senior Director +44 20 3530 1191 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; and 'Evaluating Corporate Governance' dated 12 December 2012, and 'Assessing and Rating Bank Subordinated and Hybrid Securities' dated 5 December 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Evaluating Corporate Governance here Assessing and Rating Bank Subordinated and Hybrid Securities 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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