Fitch Affirms 4 Andorran Banks

Mon Jun 2, 2014 12:22pm EDT

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(The following statement was released by the rating agency) BARCELONA/LONDON, June 02 (Fitch) Fitch Ratings has affirmed Andorra Banc Agricol Reig's (Andbank), Credit Andorra's, and Mora Banc Grup, SA's (MoraBanc) Long-term Issuer Default Ratings (IDR) at 'A-' and Viability Ratings (VR) at 'a-', and Banca Privada d'Andorra's (BPA) Long-term IDR at 'BB+' and VR at 'bb+'. The Outlooks on the Long-term IDRs of Andbank and BPA are Stable. The Outlook on Credit Andorra has been revised to Stable from Negative. The Outlook on Morabanc is Negative. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS AND VRS The banks' Long-term IDRs are driven by their intrinsic credit profiles, reflected by their VRs. All four banks focus on developing their private banking and asset management franchises and had positive net new money inflows in 2013, which supported their continued assets under management (AuM) growth. Andbank, Credit Andorra and BPA focused on growing through their foreign subsidiaries, while MoraBanc's international presence is more limited and its growth strategy lies in attracting private banking clients to Andorra. Credit Andorra reached EUR12.4bn AuM (up by 10%), Andbank EUR13.5bn (up by 22%), MoraBanc EUR6.7bn (up by 5%) and BPA EUR7.2bn (up by 35%). Fitch believes that the onshore nature of Andorran banks' recent AuM growth reduces the potential impact from future automatic tax information exchange agreements that Andorran banks may be subject to. Although Andorran banks concentrate on wealth management activities, they are also active in domestic retail banking. Their asset quality deteriorated during the recession of the Andorran economy. As GDP is expected to start growing moderately in 2014, Fitch expects pressure on banks' asset quality to ease, but asset quality ratios are likely to deteriorate further, albeit at a significantly slower pace. Together with the banks' generally healthy profitability, this should enable them to provide for impairment needs and build up capital through retained earnings. Andbank's strong capitalisation has a high influence on its VR. Its Fitch core capital (FCC) ratio was 20.8% at end-2013. The acquisition of the Spanish private banking business of Inversis Banco, which is expected to be completed by end-2014, will initially have a negative impact on capital ratios as it will generate EUR120m goodwill. The VR is based on Fitch's assumption that Andbank will recover its capital position within a short period of time through stronger internal capital generation, helped by a reduction in the dividend pay-out ratio. The bank's VR also considers healthy profitability and cost efficiency, as well as its deteriorated asset quality. The ratio of problematic assets (defined as non-performing loans and loans in arrears plus foreclosed assets) was 6.5% at YE13 and problematic loans (non-performing loans and loans in arrears) were well covered by provisions at 56%. The Outlook on Credit Andorra has been revised to Stable from Negative, supported by the bank's increased problematic asset coverage levels and capitalisation, which in Fitch's view largely outweighed the asset quality deterioration in 2013. The bank was able to increase coverage and capitalisation due to its strong and recurrent earnings generation capacity, which has relatively higher importance for its VR, combined with a conservative provisioning and earnings retention policy. Nevertheless, Fitch acknowledges that the bank's relatively large exposure to the domestic retail market affects its asset quality. Credit Andorra's problematic asset ratio was 8% at end-2013, with problematic loans 34% covered. The VR is based on Fitch's expectation that the bank will continue to increase its impairment reserve coverage following the provisioning approach set in 2013. Fitch considers capitalisation and leverage to have a high influence on MoraBanc's VR. The agency considers MoraBanc's capitalisation is strong compared with its peers, with an FCC ratio of 28.5% at end-2013. Combined with a sovereign debt securities portfolio that has higher average ratings than those of its peers, this compensates for the weaker quality of the bank's loan book. Its non-performing loans and loans in arrears represented 5.1% of loans, with a low 15% coverage, underscoring its reliance on the valuation of collaterals. Including foreclosed assets, its problematic assets ratio was 9%. MoraBanc's growth strategy, which consists of attracting private banking clients to Andorra instead of incrementing its international footprint, has resulted in relatively lower business growth in recent years. BPA's VR reflects its respectable domestic and growing international franchise, which is beginning to be reflected in profitability, and adequate liquidity. Capitalisation and leverage and asset quality have a high influence on BPA's VR. Fitch considers capitalisation tight as BPA only maintains moderate buffers. The bank's FCC/RWA ratio declined to 9.2% at end-2013 from 10.3% at end-2012. BPA's asset quality has been affected by a change in the bank's criteria for recognising problematic loans and a smaller loan book. Problem loans were 9.5% of gross loans at end-2013, and Fitch considers that relatively high concentration in the loan book and exposure to hybrid securities adds to the bank's credit risk. The VR also factors in a still weak cost/income ratio, which weighs on profitability. The Stable Outlooks on Andbank, Credit Andorra and BPA reflect Fitch's expectation that the banks' overall financial and credit profiles will remain stable. The Outlook on BPA also reflects the group's increase in AuM, which Fitch expects will support earnings generation and thus help build capital. The Negative Outlook on MoraBanc reflects continued asset quality deterioration amid the difficult operating environment in Andorra. It also reflects Fitch's view that the limited contribution of international business together with international pressure on off-shore banking business may debilitate margins and profitability in the medium to long term. RATING SENSITIVITIES - IDRS AND VRS The banks' IDRs are sensitive to changes in their VRs. All four banks' VRs are sensitive to the development of the domestic economy and its impact on their loan books. Further asset quality deterioration resulting in capital erosion, as reflected by a weaker unreserved problematic asset to FCC ratio could trigger a downgrade of the VR. The ratings would also come under pressure should any unexpected operational or legal cost jeopardise banks' current capital positions. Andbank's ratings are sensitive to the successful completion of the acquisition of Inversis Banco's private banking business. Fitch expects that the negative impact on capital ratios from the acquisition will be transitional as the bank plans to increase the earnings retention rate to restore capital within a relatively short period of time. If the bank fails to restore capitalisation as planned, the VR would likely be downgraded. Andbank's VR would also be downgraded should the acquired business be smaller than initially expected or should any additional cost related to the transaction (other than those already budgeted) arise. MoraBanc's VR is sensitive to the evolution of its AuM. Downward rating pressure may also arise if its international business or its other diversification initiatives do not increase their contribution to earnings and business volumes, because in Fitch's view this may limit the entity's long-term earnings generation capacity. An increase in Fitch's assessment of its business risk as a consequence of the roll-out of diversification activities could also put pressure on the ratings. Upward rating potential on BPA's VR could arise from a stabilisation in asset quality indicators, including foreclosed assets, which together with expected enhanced profitability and capital, would lead to a lower net problematic assets to equity ratio. A reduction of its exposure to hybrid instruments would also be a positive rating driver. An upgrade of Credit Andorra's and Andbank's VR is unlikely given its still modest franchise internationally and high risk concentration given the small size of the Andorran economy. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR The banks' Support Ratings of '5' and Support Rating Floors of 'No Floor' reflect Fitch's view that the probability of Andorran banks receiving support in case of need is low. Although Fitch does not publish a rating for Andorra, the banking system's large size relative to the Andorran economy means that while the authorities' propensity to provide support may be high, it cannot be relied upon given the limited resources at their disposal. RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The SRs are potentially sensitive to any change in assumptions around the propensity or ability of Andorran authorities to provide timely support to the banks. This might arise if there is 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 - CREDIT ANDORRA'S PREFERRED STOCK Credit Andorra's preferred stock is rated five notches below its 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. It has been affirmed due to the affirmation of Credit Andorra's VR. RATING SENSITIVITIES - CREDIT ANDORRA'S PREFERRED STOCK Credit Andorra's preferred stock ratings are broadly sensitive to the same considerations that might affect its VR. The rating actions are as follows: Credit Andorra 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 'No Floor' Preferred stock affirmed at 'BB' Andbank Long-term IDR affirmed at 'A-'; Outlook Stable Short-term IDR affirmed at 'F2' Viability Rating affirmed at 'a-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' 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 'No Floor' MoraBanc 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 'No Floor' 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 (Andbank, Credit Andorra and BPA) Josu Fabo Director +44 20 3530 1513 Secondary Analyst (MoraBanc) Belen Vazquez Associate Director +44 20 3530 1504 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 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, is 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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