Fitch Affirms Spain's NCG at 'BB+'/Negative; Upgrades VR to 'bb-'

Tue Apr 15, 2014 11:46am EDT

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(The following statement was released by the rating agency) BARCELONA/LONDON, April 15 (Fitch) Fitch Ratings has affirmed NCG Banco, S.A. (NCG)'s Long-term Issuer Default Rating (IDR) at 'BB+', Short-term IDR at 'B', Support Rating (SR) at '3' and Support Rating Floor at 'BB+' (SRF). At the same time, the agency upgraded NCG's Viability Rating (VR) to 'bb-' from 'b+'. The Outlook for the Long-term IDR is Negative. A full list of rating actions is provided at the end of this comment. The VR has been upgraded to reflect an improvement in the bank's capital adequacy ratios, following balance sheet restructuring and deleveraging. Profitability is improving slightly but core earnings and asset quality remain weak. NCG was privatised through an auction, concluded in December 2013. Once regulatory approvals are received, expected by May 2014, Banco Etcheverria - Banesco Group will own 88.3% of NCG. The new owners' stated aim is to focus on retail banking, particularly in the bank's home region of Galicia, and to continue to restructure the bank with a view to boosting earnings. KEY RATING DRIVERS - IDRS AND SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR NCG's IDRs, Support Rating (SR), Support Rating Floor (SRF) and senior debt rating are driven by Fitch's expectation of a moderate probability of support from the Spanish state (BBB/Stable) if required. The Long-term IDR is at its SRF. The SRF reflects NCG Banco's regional systemic importance to Spain. The Negative Outlook reflects Fitch's view that there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU. This is demonstrated by a series of legislative, regulatory and policy initiatives, including the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) (see 'Fitch Revises Outlooks on 18 EU Commercial Banks to Negative on Weakening of Support' published on March 26, 2014 and available at www.fitchratings.com, for more details). RATING SENSITIVITIES - IDRS AND SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR As the Long-term IDR of NCG Banco is at its SRF, the sensitivities of its IDRs and senior debt ratings are predominantly the same as those for the SRF. A downgrade of Spain's sovereign rating would put pressure on NCG's SR and SRF (and hence IDRs). The SR and SRF are sensitive to a weakening of the assumptions around Spain's ability and propensity to provide timely support to the group. Of these, the greatest sensitivity is to progress made in implementing BRRD and SRM. Fitch expects to downgrade NCG Banco's SR to '5' and its SRF to 'No floor' either during the course 2014 or 1H15. Timing will be influenced by progress made on bank resolution legislation. A downward revision of NCG Banco's SRF would likely trigger a downgrade of its Long-term IDR and long-term senior debt ratings to the level of the bank's VR. Currently, this would mean a two-notch downgrade to 'BB-' unless mitigating factors arise, for example an upgrade of NCG's VR. This is not Fitch's current base case. KEY RATING DRIVERS - VR The upgrade reflects progress made in the implementation of a restructuring plan. A portion of the bank's non-core branch network was sold in 2013. Balance sheet deleveraging and a slight improvement in profitability are improving capital adequacy. A change in legislation relating to corporation tax, effective at the outset of 2014, is also boosting the bank's capital ratios. The Fitch core capital/weighted risks ratio is estimated to have improved to 11.5% at end-2013 (2012: pro-forma 8.9%) following the legislation change. Nevertheless, Fitch considers the bank's capital is low, considering that unreserved impaired assets, including foreclosed assets, represented around 95% of equity at end-2013. NCG Banco's impaired loans/total loans ratio deteriorated to a high 18% in 2013 (2012: 14%). The bank maintains loan loss cover at a reasonable 56%. In addition, a large proportion of restructured loans are already classified as either impaired or substandard, which carry loan impairment reserves. Nevertheless, Fitch considers NCG Banco's loan quality weak, which along with currently limited earnings generation capability, exerts negative pressure on the VR. NCG Banco's funding profile is adequate, having improved slightly in 2013 to a loans-to- deposit ratio of 103%. Nevertheless, NCG Banco remains reliant on wholesale funding, in particular, sourced from the ECB. NCG Banco holds a buffer of unencumbered liquid assets totalling 18% of assets at end-2013. RATING SENSITIVITIES - VR NCG Banco's VR is sensitive to a change in Fitch's assumptions of asset quality prospects and the potential for developing sustainable core profits. Downward pressure could also arise from high future dividend payments negatively impacting capital ratios given that the new shareholders will need to repay by end-2018 around EUR600m of commitments taken on to fund the acquisition of the bank. The rating actions are as follows: NCG Banco Long-term IDR affirmed at 'BB+'; Outlook Negative Short-term IDR affirmed at 'B' Viability Rating upgraded to 'bb-' from 'b+' Support Rating affirmed at '3' Support Rating Floor: affirmed at 'BB+' Long-term senior unsecured debt: affirmed at 'BB+' Commercial paper: affirmed at 'B' State-guaranteed debt: affirmed at 'BBB' 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 Belen Vazquez Associate Director +44 20 3530 1504 Committee Chairperson Janine Dow Senior Director +44 20 3530 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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