RATING ACTION RATIONALE AND DRIVERS - IDRs, SUPPORT RATING AND SRF
The downgrade of Popular’s IDRs is a consequence of the downgrade of its VR combined with a downgrade of its Support Rating and SRF. The latter reflect Fitch’s opinion that the propensity for timely support being available to Popular has declined from high to moderate. This comes against the background of the significant restructuring process taking place in the Spanish banking sector. In Fitch’s opinion, Popular’s size and systemic importance place it outside the top tier of systemically important Spanish banks with SRFs in the ‘BBB’ range.
The EUR100bn banking sector support package for Spanish banks agreed between Spain and the Eurogroup was formalised under a Memorandum of Understanding (MOU) which was followed by the enactment of Royal Decree Law 24/2012. As part of the MOU, stress tests are being undertaken for 14 Spanish banking groups, including Popular. Fitch expects that Popular will have additional capital needs as a result of the stress test. In the near term, Popular’s VR is sensitive to the amount of the recapitalisation needs as well as to any changes in Fitch’s assessment of its ability to execute on its solvency-boosting action plans and how it elects to do so.
Popular’s VR is also sensitive to an even deeper recession or real estate crash in Spain than currently assumed and/or a failure to continue rebalancing its funding mix or mitigate liquidity risks.
On the other hand, an upgrade could arise from improved economic prospects in Spain and asset quality, further capital strengthening and improvements in its funding and liquidity.
RATING SENSITIVITIES - SUPPORT RATING, IDRs AND SRF
Popular’s Support Rating and SRF are potentially sensitive to a downgrade of the Spanish sovereign rating or to any further change in Fitch’s judgement around the propensity for the Spanish and European authorities to support banks. A further downgrade of Popular’s SRF would only trigger a downgrade of its Long-term IDR if the VR was also downgraded.
The rating actions on BPP’s IDRs reflect a weakening of potential parent bank support following the downgrade of Popular’s Long-term IDR. Fitch considers BPP a strategically important subsidiary of Popular. The IDRs and Support Rating of BPP are primarily sensitive to a downgrade of Popular’s Long-term IDR. However, Fitch considers Popular’s propensity and ability to support BPP also to be linked to Portuguese sovereign and banking sector risks, and BPP’s Long-term IDR could also be affected in the event of a material downgrade of Portugal’s sovereign rating (‘BB+'/Negative). The Stable Outlook on BPP’s Long-term IDR is based on that of the parent bank.
Subordinated debt and preferred stock are notched down from Popular’s VR of ‘bb+', in line with the agency’s criteria on Rating Bank Regulatory Capital and Similar Securities and their downgrades reflect Fitch’s assessment of heightened non-performance risk for each instrument. Their ratings are mainly sensitive to any change in Popular’s VR.
Popular is Spain’s sixth-largest banking group, with total assets of EUR158m at end-H112. It focuses on retail and commercial banking for SMEs and individuals. Its presence is sound in the regions of Andalusia, Catalonia, Galicia and Madrid and its national market share is around 6% for both loans and deposits.
The rating actions are as follows:
Long-term IDR: downgraded to ‘BB+’ from ‘BBB-'; Outlook Stable
Short-term IDR: downgraded to ‘B’ from ‘F3’
Viability Rating: downgraded to ‘bb+’ from ‘bbb-’
Support Rating: downgraded to ‘3’ from ‘2’
Support Rating Floor: downgraded to ‘BB+’ from ‘BBB-’
Commercial paper: downgraded to ‘B’ from ‘F3’
Senior unsecured debt: downgraded to ‘BB+’ from ‘BBB-’
Subordinated debt: downgraded to ‘BB’ from ‘BB+’
Preference shares: downgraded to ‘B-’ from ‘B’
BPE Financiaciones SA:
Long-term senior unsecured debt: downgraded to ‘BB+’ from ‘BBB-’
Short-term senior unsecured debt: downgraded to ‘B’ from ‘F3’
Long-term IDR: downgraded to ‘BB’ from ‘BB+'; Outlook Stable
Short-term IDR: affirmed at ‘B’
Support Rating: affirmed at ‘3’
The impact, if any, of the above rating actions on BPP’s covered bonds will be detailed in a separate comment.