April 7, 2017 / 4:53 PM / 4 months ago

Fitch Upgrades Kutxabank to 'BBB+'; Stable Outlook

(The following statement was released by the rating agency) BARCELONA/LONDON, April 07 (Fitch) Fitch Ratings has upgraded Spain-based Kutxabank, S.A.'s Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'BBB' and its Viability Rating (VR) to 'bbb+' from 'bbb'. The Outlook on the Long-Term IDR has been revised to Stable from Positive. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The upgrade of the IDRs, VR and senior debt ratings reflects Kutxabank's robust loss-absorption capacity, the progress it has made in reducing problem assets and equity investments, and Fitch's expectation that these will be reduced further. While our assessment of capitalisation is a key rating driver, the ratings also factor in: the bank's modest profitability; high, albeit declining, concentrations by name (particularly related to a few large equity investments); and Kutxabank's adequate funding and liquidity. Kutxabank maintains satisfactory capital buffers over minimum regulatory requirements. At end-2016, the fully loaded common equity Tier 1 (CET1) and leverage ratios stood at 14.8% and 8% respectively, above many peers. The bank has ample loss-absorbing buffers to protect creditors against downside risks. Unreserved problem assets (non-performing loans (NPLs) and foreclosed assets) are trending downwards and at end-2016 accounted for an acceptable 53% of fully loaded CET1 capital, indicating that capital is modestly vulnerable to severe asset quality shocks. The sensitivity of capital to market risk is also declining as the bank gradually divests its equity holdings. Positive developments in the Spanish economy are resulting in lower unemployment rates and a modest recovery of the property sector, leading to a continuous improvement in the bank's asset quality metrics. Kutxabank's NPL ratio, while still high by international standards, improved to 6.8% at end-2016 (from 8.7% at end-2015) due to higher recoveries and write-offs offsetting lower NPL entries. Including foreclosed assets, the problem asset ratio was 8.7%. Domestically, Kutxabank's NPL levels compare well with peers', mainly reflecting the resilience of the bank's large mortgage lending business in the Basque Country. Kutaxbank's earnings are fairly modest, and we expect banking revenues to remain under pressure in 2017 from low interest rates and muted loan volumes. However, the bank's solid insurance and asset management businesses provide a certain degree of earnings diversification and stability. Internal capital generation should also benefit from lower provisioning needs as asset quality improves gradually. Kutxabank largely funds its retail lending through an ample retail deposit base and, to a lesser extent, covered bonds. The bank's liquidity position is adequate given a well-diversified debt maturity profile and stable deposits. SUPPORT RATING AND SUPPORT RATING FLOOR Kutxabank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the bank can no longer rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that is likely to require senior creditors participating in losses, instead of or ahead of a bank receiving sovereign support. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT A further upgrade of Kutxabank's ratings would be contingent on a sovereign upgrade, combined with marked and consistent improvements in the bank's asset quality and earnings as well as further progress in divesting equity investments, thus reducing market risk and risk concentration levels. Capital levels should also be maintained at current levels to support any upgrade. Downward pressure on the ratings could arise from sudden capital erosion due to unexpected losses or a material weakening of profitability, although Fitch does not expect this in the short term. A deterioration of the bank's funding and liquidity profile would also put pressure on the ratings. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support Kutxabank. While not impossible, this is highly unlikely, in Fitch's view. The rating actions are as follows: Kutxabank, S.A.: Long-Term IDR: upgraded to 'BBB+' from 'BBB'; Outlook Stable Short-Term IDR: upgraded to 'F2' from 'F3' Viability Rating: upgraded to 'bbb+' from 'bbb' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt long-term rating: upgraded to 'BBB+' from 'BBB' Senior unsecured debt short-term rating: upgraded to 'F2' from 'F3' Contact: Primary Analyst Josu Fabo, CFA Director +34 93 494 34 64 Fitch Ratings Espana, S.A.U. Avinguda Diagonal, 601, 2nd Floor 08029 Barcelona Secondary Analyst Arnau Autonell Associate Director +44 20 3530 1712 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 44 29 91 74 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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