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Fitch Affirms BMN & Liberbank at 'BB+'; Upgrades VRs
June 23, 2014 / 3:16 PM / in 3 years

Fitch Affirms BMN & Liberbank at 'BB+'; Upgrades VRs

(The following statement was released by the rating agency) BARCELONA/LONDON, June 23 (Fitch) Fitch Ratings has affirmed Spain-based Banco Mare Nostrum S.A.'s (BMN) and Liberbank, S.A.'s Long-term Issuer Default Ratings (IDR) at 'BB+' in line with their Support Rating Floor (SRF). Fitch has also upgraded BMN's Viability Rating (VR) to 'bb-' from 'b+' and Liberbank's VR to 'bb' from 'bb-'. The Outlooks on the Long-term IDRs are Negative. The agency has simultaneously affirmed Liberbank's bank subsidiary Banco de Castilla-La Mancha, S.A. (Banco CLM). A full list of rating actions is at the end of this rating action commentary. The upgrade of the banks' VRs mainly reflects their strengthened capital, supported chiefly by balance-sheet deleveraging. In the case of Liberbank, capital ratios have also improved following a recently completed capital increase. The upgrades also consider the improving operating environment in Spain, which should potentially benefit asset quality and revenue prospects. KEY RATING DRIVERS - IDRS, SENIOR DEBT, SUPPORT RATING AND SRFS BMN's and Liberbank's IDRs, Support Ratings (SR), SRFs and senior debt ratings are driven by Fitch's expectation of a moderate probability of support from the Spanish state (BBB+/Stable), if required. The Long-term IDRs are at their SRFs. The SRFs currently reflect the two banks' regional systemic importance to Spain. The Negative Outlooks reflect Fitch's opinion that there is a clear intent to reduce implicit state support for financial institutions in the EU, as shown 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). RATING SENSITIVITIES - IDRS, SENIOR DEBT, SUPPORT RATING AND SRF BMN's and Liberbank's Long-term IDRs and senior debt ratings are predominantly sensitive to the same factors that may drive a change in their SR and SRF. The SR and SRF are sensitive to a weakening of Fitch's assumptions around the ability and willingness of the authorities to support banks. Of these, the greatest sensitivity is to progress made in the implementation of BRRD and SRM, which will result in a revision of the SR and SRF to '5' and 'No Floor', most likely in the remainder of 2014 or 1H15. Such a downward revision of BMN's and Liberbank's SR and SRF will result in the Long-term IDRs becoming driven by the VRs at that time. KEY RATING DRIVERS - VRs The upgrade of BMN's and Liberbank's VRs largely reflects capital improvements. Both banks' capital ratios have continued to improve thanks to further asset de-risking, in compliance with restructuring plans approved by the European authorities; and from lower deductions on capital for deferred tax assets, especially BMN, as a result of the government's amendment to corporate tax legislation in November 2013. Liberbank's capital base has also been materially reinforced by an equity issue of EUR575m completed on 17 June 2014, raising its Fitch core capital (FCC)/weighted risks ratio to an estimated 10.5% at end-1Q14. This compares with an estimated FCC/weighted risks ratio of 9.5% for BMN at that date. Fitch expects capital to be further supported by earnings and additional de-leveraging. Liberbank's Fitch eligible capital/weighted risks ratio (12.7%) is higher as it includes EUR0.2bn of convertibles and EUR124m of CoCos from Spain's Fund for Orderly Bank Restructuring (FROB). While Liberbank expects to repay state aid in full by late 2014, BMN remains 65%-owned by the FROB. BMN will be challenged by its privatisation process, which it plans to start ahead of schedule by no later than 2015. Asset quality weakened further in 2013 at both banks. This continued into 1Q14 at BMN, due to restructured loan reclassifications. However, the pace of deterioration has slowed, particularly at Liberbank. Fitch's base case is that this trend will continue as the economy recovers. At end-1Q14, BMN's non-performing loan (NPL) ratio was 13.8% and Liberbank's was a below-average 10.7%. This reflects the resilience of Liberbank's large residential mortgage book. While coverage ratios appear relatively low under a stress scenario at 36% for BMN and 44% for Liberbank, the majority of NPLs have mortgage collateral, providing additional risk protection. Liberbank also has an asset protection scheme (APS) from the Deposit Guarantee Fund over a legacy stock of gross loans equivalent to 14%. The bulk of APS loans are linked to real estate developers, virtually all of which are classified as NPLs, heavily affecting asset quality. Fitch believes Liberbank's most sizeable challenge will be to manage down the APS assets. BMN has a larger restructured loan portfolio, which could carry add-on credit risks. The banks' profitability remained weak in 2013 due largely to margin contraction and impairments. However, the restructurings agreed with the European Commission are now virtually completed and funding costs are trending downwards. In Fitch's view, these factors should support underlying profitability, although impairments will remain high for at least the rest of 2014, reducing the banks' ability to boost capital through internal generation. BMN's and Liberbank's funding and liquidity compare favourably with many peers, aided by asset transfers to SAREB (a "bad bank" created by the Spanish government) and strong de-leveraging. Furthermore, deposit franchises have remained resilient, despite the banks' restructurings. Fitch calculates loan/deposit ratios slightly below 100% for both banks and unencumbered liquid asset pools are ample in relation to debt maturities. ECB borrowings, at 10.5% of total assets for Liberbank and 12.4% for BMN, are relatively large and used to support profitability, while funding from the repo markets is limited. RATING SENSITIVITIES - VRs Liberbank's and BMN's VR are largely sensitive to developments in asset quality and earnings. A further upgrade of Liberbank's VR would most likely arise from progress made in the reduction of the APS portfolios and further evidence of asset quality stabilisation. The latter also applies to BMN, whose VR would also be upgraded if capital is reinforced. Conversely, while the probability is currently limited, BMN's and Liberbank's VRs would potentially be downgraded due to failure to achieve improved profitability following recent restructurings and/or if there is any unforeseen stress in asset quality. SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS AND SENSITIVITIES Banco CLM, a 75%-owned bank subsidiary of Liberbank, is the spun-off banking business of the failed Caja de Ahorros de Castilla-La Mancha (CCM) and is fully consolidated into the group accounts. Banco CLM's IDRs and senior debt ratings are aligned with Liberbank's as Fitch views Banco CLM as an integral part of Liberbank's core business. Banco CLM strengthens the bank's franchise and expands geographical diversification. Banco CLM is also highly-integrated into the group. Banco CLM's IDRs are sensitive to those of Liberbank and/or to any change in the level of relative importance of Banco CLM within the group, which Fitch sees as very unlikely. The rating actions are as follows: BMN: Long-term IDR: affirmed at 'BB+'; Outlook Negative Short-term IDR: affirmed at 'B' VR: upgraded to 'bb-' from 'b+' Support Rating: affirmed at '3' SRF: affirmed at 'BB+' Commercial Paper Long-term rating: affirmed at 'BB+' Commercial Paper Short-term rating: affirmed at 'B' Senior unsecured debt Long-term rating: affirmed at 'BB+' Senior unsecured debt Short-term rating: affirmed at 'B' State-guaranteed debt: affirmed at 'BBB+' Liberbank: Long-term IDR: affirmed at 'BB+'; Outlook Negative Short-term IDR: affirmed at 'B' VR: upgraded to 'bb' from 'bb-' Support Rating: affirmed at '3' SRF: affirmed at 'BB+' Banco CLM: Long-term IDR: affirmed at 'BB+'; Outlook Negative Short-term IDR: affirmed at 'B' Support Rating: affirmed at '3' Senior unsecured debt: affirmed at 'BB+' 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 Belen Vazquez Associate Director +44 203 530 1503 Committee Chairperson Janine Dow Senior Director +44 20 3530 1464 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1003, Email: Elaine.Bailey@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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