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Fitch Revises Popular's Outlook to Negative; Affirms at 'BB+'
March 26, 2014 / 6:47 PM / 4 years ago

Fitch Revises Popular's Outlook to Negative; Affirms at 'BB+'

(The following statement was released by the rating agency) BARCELONA/LONDON, March 26 (Fitch) Fitch Ratings has revised the Outlook on Banco Popular Espanol S.A. (Popular) to Negative from Stable and affirmed its Long-term Issuer Default Rating (IDR) at 'BB+'. The agency has simultaneously downgraded the Viability Rating (VR) to 'bb-' from 'bb+'. A full list of rating actions is at the end of this rating action commentary. The revision of the Outlook on Popular's support-driven Long-term IDR to Negative reflects Fitch's expectation that the probability that the bank would receive support from the Spanish state, if ever required, is likely to decline within one to two years. The rating actions have been taken in conjunction with a review of support for banks globally. The downgrade of the VR mainly reflects Popular's asset quality deterioration, which is significantly beyond the agency's expectations, resulting in weak asset quality indicators and low reserve coverage levels. This limits Popular's loss-absorbing capacity for credit stresses, particularly in view of its still large exposure to real estate developers. KEY RATING DRIVERS - IDRS AND SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR Popular's IDRs, Support Rating (SR), Support Rating Floor (SRF) and senior debt rating are driven by Fitch's expectation that there remains a moderate probability of support from the Spanish state (BBB/Stable) if required. The Long-term IDR is at its SRF. The SRF reflects Popular's national systemic importance to Spain. The Negative Outlook on the Long-term IDR reflects Fitch's view that there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. We expect to see the EU's Bank Recovery and Resolution Directive (BRRD) voted through European parliament in the coming weeks and implemented into national legislation and practice within one to two years. We also expect progress towards the Single Resolution Mechanism (SRM) for eurozone banks in this timeframe. In Fitch's view, these two developments will dilute the influence European states have in deciding how their domestic banks are resolved and increase the likelihood of senior debt losses in its banks if they fail solvability assessments. A downgrade of Spain's sovereign rating would also put pressure on Popular's SR and SRF. RATING SENSITIVITIES - IDRS AND SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR As the Long-term IDR of Popular is at its SRF, the sensitivities of its IDRs and senior debt ratings are predominantly the same as those for the SRF. The SR and SRF are sensitive to a weakening of Fitch's assumptions around the ability or propensity of Spain to provide timely support to the group. Of these, the greatest sensitivity is to progress made in implementing the BRRD and the SRM. The directive requires 'bail in' of creditors by 2016 before an insolvent bank can be recapitalised with state funds. A functioning SRM and progress on making banks 'resolvable' without jeopardising the wider financial system are areas of focus for eurozone policymakers. Once these are operational they will become an overriding rating factor, as the likelihood of the bank's senior creditors receiving full support from the sovereign, despite its systemic importance will diminish substantially. Fitch expects that the BRRD will be enacted into EU legislation in the near term and progress made on establishing the SRM is looking close to being ready in one to two years. Therefore, Fitch expects to downgrade Popular's SR to '5' and revise its SRF to 'No Floor' later in 2014 or in 1H15. The timing will be influenced by Fitch's continuing analysis of progress made on bank resolution and could also be influenced by idiosyncratic events. The agency will release a special report on the topic shortly. The Negative Outlook reflects that a downward revision of Popular's SRF would likely cause downgrades of its Long-term IDR and long-term senior debt ratings to the level of the bank's VR, which as it currently stands would mean a two-notch downgrade to 'BB-' unless mitigating factors arise. These could include an upgrade of Popular's VR to the level of its current SRF, the existence of large buffers of junior debt or corporate actions. KEY RATING DRIVERS - VR Popular's VR is mainly driven by its weak asset quality ratios relative to peers and only just acceptable capitalisation for its risk profile. In 2013 the non-performing loan (NPL) ratio increased to 20.1% at end-2013 (11.6% at end-2012). This ratio was 25.8% when including foreclosed assets (net of reserves; FAs) at end-2013. A large portion of the increase in NPLs was because of stricter reclassifications of restructured loans and an anticipatory exercise by the bank, although Popular's large exposure to real estate developers was also a major driver of the deterioration. In Fitch's view, some additional asset quality pressures could arise from the lag recognition of NPLs in view of Spain's mild economic recovery and still weak housing sector dynamics. Following the spike, reserves held against NPLs were, in Fitch's view, at a fairly low 40% at end-2013 and further provisioning is likely. This is also important for capital protection against further stress, albeit this is now seen as low, as reflected by unreserved impaired assets, including FAs, that exceed 250% of Fitch core capital ratio (FCC) at end-2013, although most of the NPLs have mortgage collateral. Popular's FCC improved significantly to 8.4% at end-2013 from 5.7% at end-2012 and again by an estimated 86bp in early 2014 through the conversion of mandatory convertible notes (MCN), but is jeopardised by the bank's weak asset quality. Remaining MCN and preferred stocks provide additional loss absorbing buffers against losses from stresses, bringing its Fitch eligible capital ratio to 10.5% at end-2013. Popular has consistently demonstrated an above-average capacity to generate pre-impairment earnings, which Fitch views positively in light of potentially further provisioning efforts in the next quarters. However, Fitch notes that Popular's revenues might be pressured by still low interest rates and weak asset performance. Fitch also acknowledges improvements in the funding mix due to a combination of deleveraging and deposit-gathering. The level of liquid assets is also adequate in relation to debt maturities. Another factor supporting the VR includes the bank's sound franchise in Spain, as the fifth-largest banking group, with a strong presence in the SME market. RATING SENSITIVITIES - VR Popular's VR is largely sensitive to developments of Spain's macroeconomic environment and housing sector given the already high levels of impaired loans. Upward rating potential would arise from a reduction in problematic exposures, particularly NPLs and real estate related assets, or better reserve coverage levels. This would ease pressure on the bank's earnings generation capacity, allowing it to improve internal capital generation and capitalisation. While limited, downside risks would arise if Popular's asset quality deteriorates along the same magnitudes than 2013 and/or its loss absorption buffer reduces. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Popular and its vehicles are all notched down from its VR in accordance with Fitch's 'Assessing and Rating Bank Subordinated and Hybrid Securities' criteria. Their ratings are primarily sensitive to any change in Popular's VR. Subordinated (lower Tier 2) debt is rated one notch below Popular's VR to reflect below average loss severity of this type of debt when compared with average recoveries. The preference shares are rated three notches below Popular's VR to reflect higher loss severity risk of these securities when compared with average recoveries (two notches from the VR) as well as moderate risk of non-performance relative to its VR (an additional one notch). For the latter, coupons can be paid out of distributable reserves. The rating actions are as follows: Banco Popular Espanol, S.A. (Popular): Long-term IDR: affirmed at 'BB+; Outlook revised to Negative from Stable Short-term IDR: affirmed at 'B' VR: downgraded to 'bb-' from 'bb+' Support Rating: affirmed at '3' SRF: affirmed at 'BB+' Long-term senior unsecured debt programme: affirmed at 'BB+' Short-term senior unsecured debt programme and commercial paper: affirmed at 'B' Subordinated lower tier 2 debt: downgraded to 'B+' from 'BB' BPE Financiaciones S.A.: Long-term senior unsecured debt and debt programme (guaranteed by Popular): affirmed at 'BB+' Short-term senior unsecured debt programme (guaranteed by Popular): affirmed at 'B' BPE Preference International Limited Preference shares: downgraded to 'B-' from 'B' Popular Capital, S.A. Preference shares: downgraded to 'B-' from 'B' Fitch will hold a teleconference to discuss sovereign support for banks and give an update on rating paths on Friday 28 March at 15:00 GMT. Callers must register in advance using the link below and are requested to dial in early: here DA40C4B1FED21 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 Josu Fabo Director +44 20 3530 1513 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 44 29 9174 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014 and 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 31 January 2014 are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities 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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