August 7, 2014 / 4:12 PM / 3 years ago

Fitch Affirms Unicaja at 'BBB-' on Banco CEISS Acquisition; Removes Rating Watch Negative

(The following statement was released by the rating agency) BARCELONA/LONDON, August 07 (Fitch) Fitch Ratings has affirmed Spain-based Unicaja Banco, S.A.'s (Unicaja) Long-term Issuer Default Rating (IDR) at 'BBB-', its Viability Rating (VR) at 'bbb-' and its Short-term IDR at 'F3'. The Rating Watch Negative (RWN) on its Long- and Short-term IDRs and VR have been removed and the Outlook on the Long-term IDR is Stable. At the same time the agency has affirmed the bank's Support Rating (SR) and Support Rating Floor (SRF) at '3' and 'BB+', respectively. A full list of rating actions is available at the end of this commentary. The rating action follows our analysis of the effect on Unicaja from the acquisition of Banco de Caja Espana de Inversiones, Salamanca y Soria, S.A. (Banco CEISS). This transaction concluded on 28 March 2014 with Unicaja taking majority control, since diluted to a 60.7% stake following the conversion of convertible bonds in June 2014. Fitch views the acquisition of Banco CEISS as manageable for Unicaja and tolerable for the 'bbb-' VR despite the erosion of some of Unicaja's capital strength. KEY RATING DRIVERS - IDRs and VR Unicaja's IDRs are driven by its standalone credit fundamentals as expressed by its VR. The ratings would likely have been higher today without the Banco CEISS acquisition as Banco CEISS has a weaker overall risk profile and is loss-making. In affirming the ratings Fitch takes the view that management will complete the acquisition as targeted during the next three years, including repayment of EUR604m contingent convertible bonds held by the Fondo de Reestructuracion Ordenada Bancaria (FROB). Banco CEISS would have equalled to 46% of Unicaja's assets on an aggregate (Unicaja and Banco CEISS) basis at end-2013. Unicaja faces the challenge of implementing its risk management framework and lower risk appetite at Banco CEISS, further divesting equity stakes and continuing with the restructuring process. However, Unicaja's experience in integrating banks and Spain's improved operating environment should aid the process. Fitch also highlights other medium-term execution risks from Unicaja's plan to list in the capital markets by no later than 2016, raise a significant amount of capital to pay back Banco CEISS's state aid and thereafter proceed with the full integration of the two banks. Unicaja's capital ratios have been significantly affected by the acquisition. Estimated consolidated Fitch Core Capital (FCC) fell to a just adequate 8.4% at end-1H14 from 11.3% at end-2013 (taking into account the conversion of Banco CEISS's EUR442m mandatory contingent convertible bonds in June 2014 and including the resulting minority interests into FCC). Fitch gives no loss absorption credit to the EUR604m state's contingent convertible bonds issued by Banco CEISS, given that these bonds remain at the subsidiary level and Fitch expects them to be repaid by May 2017. As a result, Unicaja's Fitch eligible capital ratio was only marginally higher than its FCC at 8.7% at end-1H14. Fitch expects capital levels to gradually improve, due to Unicaja's improved internal capital generation and capital-raising plans. Unicaja's asset quality has also been negatively affected by the acquisition of Banco CEISS. The combined impaired loans/total loans (NPL) ratio was 11.5% at end-1Q14 (14.3% including foreclosed assets) but this still compares well with the system-average of 13.4%, helped by Unicaja's generally low risk appetite (pre-acquisition NPL ratio was 8.4% at end-2013) and the transfer of real estate assets by Banco CEISS to Spain's bad bank (SAREB). The group's coverage ratio was adequate and above sector average at 68%. Fitch expects the deterioration of asset quality to slow down in 2014, supported by the improving economy. A further challenge for Unicaja will be to turn around Banco CEISS's profitability, especially given the prevailing low interest rate environment and stagnant business volume. However, Unicaja's more resilient operating profitability, further scope to lower retail funding costs, recognition of expected losses and further cost cuts at Banco CEISS should support the group's operating profitability. Banco CEISS contributed to an improvement in the group's funding and liquidity profile, particularly by adding a large deposit base and a high level of liquid assets. The group's adjusted net loans/deposits ratio was 96% at end-1Q14 and unencumbered liquid assets (the vast majority of which are sovereign bonds) accounted for 21% of assets. RATING SENSITIVITIES - IDRs and VR Upward rating potential would arise from the successful achievement of Unicaja's plans to improve capital levels, return Banco CEISS's state aid and complete the integration process without a detrimental effect on its overall risk profile. This in turn should also help to enhance the group's profitability. Downside pressure would largely arise from unforeseen asset quality deterioration as well as any setback in the integration of Banco CEISS that could negatively affect Unicaja's standalone credit profile, mainly due to inability to improve its weak profitability and/or a deterioration of the bank's regional franchise. KEY RATING DRIVERS AND SENSITIVITIES - SR AND SRF Unicaja's SR of '3' and SRF of 'BB+' reflect Fitch's view that there is a moderate likelihood of support for the bank from the authorities, if needed. This is because of the bank's regional systemic importance to Spain with a deposit market share of around 14% and 23% in the Andalusia and Castilla Leon regions, respectively. 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 Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM). Fitch expects to downgrade Unicaja's SR to '5' and its SRF to 'No Floor' during 2H14 or 1H15. Timing will be influenced by progress made on implementing domestic bank resolution legislation. The rating actions are as follows: Unicaja Long-term IDR: affirmed at 'BBB-'; removed from RWN, Outlook Stable Short-term IDR: affirmed at 'F3'; removed from RWN Viability Rating: affirmed at 'bbb-'; removed from RWN Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB+' Contact: Primary Analyst Roger Turro Director +34 93 323 8406 Fitch Ratings Espana, S.A.U. Paseo de Gracia 85, 7a planta 08008 Barcelona Secondary Analyst Belen Vazquez Associate Director +44 20 3530 1504 Committee Chairperson Maria Jose Lockerbie Managing Director +44 20 3530 1083 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, 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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