December 13, 2016 / 12:12 PM / 9 months ago

Fitch: Asset Quality Drives Positive Spanish Bank Rating Outlook

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: 2017 Outlook: Spanish Banks here LONDON, December 13 (Fitch) The 2017 outlook for Spanish bank ratings is positive, driven by improving asset-quality trends supported by the economic recovery, Fitch Ratings says. Improving credit fundamentals could result in the upgrade of some of the banks with ratings on positive outlook. However, the sector outlook remains stable because the stock of problem assets will remain large and pressure on earnings will intensify. We expect non-performing loan volumes to decline further in 2017 supported by domestic economic growth that remains above the eurozone average and a gradual reduction in the unemployment rate to below 20% for the first time in six years. However, the clean-up of problem exposures from the real-estate crisis is not complete and banks still have sizeable problem assets, despite the material progress made. There could also be opportunities for banks to sell portfolios of real-estate assets to institutional investors if the property sector continues its steady recovery. The formation of a new government in October 2016 has reduced political uncertainty, providing a more conducive environment for asset disposals. We believe banks with higher reserve coverages will be better positioned to take advantage of portfolio sales and reduce their problem assets faster. The development of the housing market will be key to Spanish banks' ability to reduce legacy real-estate assets. We expect the positive trend in the residential housing market to continue in 2017 supported by economic growth and a competitive mortgage lending industry. A two-tier market will remain in place, with the recovery being more noticeable in above-average-quality dwellings in urban areas, particularly in large cities such as Madrid and Barcelona. Any recovery on lower-quality properties will lag behind. While there is potential for ratings upgrades as asset quality gradually recovers, the sector outlook is stable because there are still sizeable legacy exposures and pressure on profitability from prolonged low interest rates and subdued business volume growth. Spanish banks will reduce their operating costs further in response to revenue pressure. However, this will only be modest as savings from redundancy schemes and branch closures take time to feed through, and regulatory compliance and technology investment costs drag on cost-cutting efforts. Lower loan impairment charges will be the main cushion for operating profits. We expect these to decline in 2017, even when taking into account the Bank of Spain's new provisioning rules in 4Q16. We do not expect material reserve shortfalls for the sector as they implement the new rules to transition to the IFRS 9 impairment system since problem asset reserve coverages are generally adequate. Core capital levels for Spanish banks will be broadly stable, although they are likely to issue subordinated instruments in 2017 to increase loss-absorbing buffers and total capital ratios as many Spanish banks have relatively thin layers of these securities. For further information on Spanish banks, see our report "2017 Outlook: Spanish Banks" published today and available at www.fitchratings.com or click on the link. Contact: Josu Fabo Director Financial Institutions +34 93 494 3464 Fitch Ratings Espana S.A.U Av. Diagonal, 601, 2nd Floor 08028 Barcelona Roger Turo Director Financial Institutions +34 93 323 8406 Cynthia Chan Head of Fitch Wire Credit Policy Group +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. 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