RPT-Fitch: Catalunya Banc Ties BBVA More to Spain, Risks Manageable

Wed Jul 23, 2014 5:44am EDT

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

BBVA's deal announced Tuesday to acquire Catalunya Banc will strengthen the group's sound domestic franchise and increase its exposure to the Spanish operating environment, raising the correlation with the Spanish sovereign rating, Fitch Ratings says.

At one notch above the sovereign rating, BBVA's 'A-' rating, is likely to be maintained since more than 50% of earnings are still expected to originate outside Spain after the acquisition. The geographical diversification places the group in a stronger position than pure domestic banks to absorb unexpected credit shocks. We view the risks of the transaction as limited, particularly in light of Spain's improved operating environment.

The transaction is likely to weaken BBVA's credit profile slightly, but the overall impact should be manageable because Catalunya Banc is moderate in size, at around 11% of group assets at end-2013 and the group's capital is sound at 10.8% at end-1Q14. BBVA's strong retail focus and proven track record in integrating banks means it is well placed to manage execution risks. Additional guarantees on non-credit risks as part of the deal, including insurance agreement penalties and other potential litigation risks, provide BBVA with additional risk protection.

BBVA estimates a 55bp drop in its capital ratio. We expect its asset quality indicators to deteriorate given Catalunya Banc's weak credit profile. But loan reserve coverage levels are ample and are likely to be strengthened by additional provisions. The improved operating outlook in Spain should support the workout of problem loans.

The transaction gives BBVA the opportunity to enlarge its franchise and critical mass in Spain, particularly in the relatively wealthy region of Catalonia. BBVA expects to generate synergies in excess of EUR1.2bn in net present value terms and Catalunya Banc should make positive contributions to group results from 2016.

The transaction, which is still subject to regulatory approval, is expected to close by 1Q15. We will re-assess BBVA's risk profile once the acquisition is completed and information made available.

The transaction is another milestone in the restructuring of Spain's banking sector. Catalunya Banc is the last bank majority owned by the Fund for Orderly Bank Restructuring (FROB) that was auctioned, following its nationalisation in 2011. Banco Mare Nostrum, which is still 65% state owned, plans to start its privatisation process in 2015.

Catalunya Banc had EUR63bn of assets at end-2013 and provides banking services to individuals and corporates through 773 branches. The bank has been undergoing a clean-up process. It sold practically all of its problem real-estate loans to Spain's bad bank SAREB, heavily reduced branch and staff numbers and more recently agreed to sell a significant portfolio of poorly performing retail mortgages to an asset securitisation fund.

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