Fitch Rates Spain's Ibercaja Banco and Affirms BCaja3 at 'BB+'; Stable Outlooks

Tue Feb 4, 2014 11:10am EST

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(The following statement was released by the rating agency) LONDON/BARCELONA, February 04 (Fitch) Fitch Ratings has assigned Spain-based Ibercaja Banco, S.A. a Long-term Issuer Default Rating (IDR) of 'BB+' with Stable Outlook and a Viability Rating (VR) of 'bb+'. Fitch has also assigned a Support Rating and Support Rating Floor (SRF) respectively of '3' and 'BB+'. At the same time, Fitch has taken rating actions on Ibercaja Banco's subsidiary, Banco Grupo Cajatres, S.A. (BCaja3). A full list of rating actions is provided at the end of this rating action commentary. KEY RATING DRIVERS - IBERCAJA BANCO's IDRS AND VR Ibercaja Banco's Long-term IDR is driven by its intrinsic strengths, as captured by the VR. The VR reflects a loan book heavily weighted towards retail mortgages (around 65% of loans) where asset quality is holding up better than the average Spanish bank. Other supporting factors for the VR are a comfortable funding and liquidity profile and a leading franchise in Aragon. Both factors were boosted following the acquisition of BCaja3 and its ample customer deposit base. On the other hand, Ibercaja Banco's VR also reflects its modest earning capacity, due to low interest rates and limited growth prospects in the bank's traditional markets resulting from Spain's weak operating environment. Fairly weak capital ratios also weigh on the VR, as do the execution risks arising from the restructuring and subsequent integration of BCaja3. The impaired loan (NPL) ratio reached 8.9% at end-3Q13 following a spike in 1H13. This reflected deterioration in the bank's real estate development loan portfolio and the consolidation of BCaja3's loans. However, the NPL ratio remains below that of many peers, reflecting conservative underwriting standards applied to residential mortgages and real estate development loans representing just 10% of total lending, which is low relative to other Spanish banks. Reserve coverage for NPLs (66%) is reasonable as the bulk of these loans are secured by tangible collateral. Fitch expects asset quality to weaken further, but the agency considers the bank's loss absorption capacity as compatible with the current VR. The bank is predominantly funded by deposits, with a loan/deposit ratio of 107%. The stock of unencumbered assets is considered ample at 15% of total assets given the diversified structure of the bank's wholesale debt repayments. Fitch expects Ibercaja Banco's profitability to remain modest given weak growth, low interest rates and additional provisions. Any profitability improvement will mainly arise from synergies from the BCaja3 merger. Ibercaja Banco's 9M13 figures show only marginal profitability, due to tight margins and high, albeit declining, impairments, following heavy losses in 2012. Fitch believes Ibercaja Banco's level of capital, coupled with weak earnings prospects, provides the bank with a fairly moderate capacity to absorb unforeseen losses. However, capital should benefit from the conversion of deferred tax assets into tax credits, risk-weighting optimisation and one-off items. At end-3Q13, Ibercaja Banco's Fitch eligible capital-to-weighted risks ratio was 8.3% and included EUR407m of convertibles from Spain's Fund for Orderly Bank Restructuring. These convertibles were injected into BCaja3 prior to its acquisition. RATING SENSITIVITIES - IBERCAJA BANCO's IDRS AND VR A downgrade of Ibercaja Banco's VR may lead to a corresponding action on the IDRs, provided the Support Rating Floor is also being revised lower. This is because the VR is at the same level as the Support Rating Floor. The VR remains sensitive to a higher-than-currently-assumed deterioration in asset quality, especially if this results in an even lower level of earnings or inability to sustain capital. The VR could also be downgraded if expected synergies from the BCaja3 acquisition fail to materialise. Modest upward potential on the VR could arise if asset quality stabilises, and if earnings generation and capital ratios see material improvements. The VR would also benefit from a smooth implementation of BCaja3's restructuring. KEY RATING DRIVERS - IBERCAJA BANCO's SUPPORT RATING AND SRF The SR of '3' and SRF of 'BB+' reflect Fitch's opinion of a moderate likelihood of government support for the bank, if needed. This is due to a small franchise at national level (deposit market share: 3%), although Fitch also considers Ibercaja Banco's large presence in Aragon, and in Castilla-Leon and Extremadura. RATING SENSITIVITIES - IBERCAJA BANCO's SUPPORT RATING AND SRF A downgrade of Spain's Long-term IDR (BBB/Stable) could put pressure on Ibercaja Banco's SR and SRF. The SR and SRF could also be downgraded if the bank's franchise are significantly eroded, which is, however, not Fitch's base case. The SR and SRF could also be downgraded should state support for senior creditors of EU banks weaken, as signalled in a series of legislative, policy and regulatory initiatives (see "The Evolving Dynamics of Support for Banks", "Bank Support: Likely Rating Paths" and "Sovereign Support For Banks: Update on Position Outlined in 3Q13" available at www.fitchratings.com). KEY RATING DRIVERS - BCAJA3 Fitch aligns BCaja3's IDRs with the parent's because BCaja3 is viewed as a core subsidiary and will be merged into the parent by end-2014, when BCaja3 will cease to exist as a separate legal entity. Ibercaja Banco acquired BCaja3 on 23 July 2013. BCaja3 is 100% owned by Ibercaja Banco and is fully-consolidated into the group's accounts. BCaja3's SRF of 'BB+' is affirmed and withdrawn. Fitch believes the main source of support for BCaja3 to be Ibercaja Banco, rather than the Kingdom of Spain. Fitch does not assign SRFs to banks whose primary source of support is institutional. RATING SENSITIVITIES - BCAJA3 Until BCaja3 ceases to exist as a separate legal entity, its IDRs are sensitive to the same factors that could impact Ibercaja Banco's IDRs. BCaja3's Stable Outlook reflects its parent's. BCaja3's SR may be downgraded if its importance to the group diminishes, which Fitch considers as unlikely at present. The rating actions are as follows: Ibercaja Banco: Long-term IDR: assigned at 'BB+'; Stable Outlook Short-term IDR: assigned at 'B' Viability Rating: assigned at 'bb+' Support Rating: assigned at '3' Support Rating Floor: assigned at 'BB+' BCaja3: Long-term IDR: affirmed at 'BB+'; Stable Outlook Short-term IDR: affirmed at 'B' Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB+'; withdrawn Contact: Primary Analyst Josep Colomer Director +34 93 323 8416 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Secondary Analyst Josu Fabo Associate Director +44 203 530 1513 Committee Chairperson Janine Dow Senior Director +44 203 530 1464 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 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria 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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