September 26, 2012 / 2:06 PM / 5 years ago

TEXT-Fitch: route map for Spanish bank ratings

Link to Fitch Ratings' Report: Spanish Bank Ratings: A Ratings Route Map A
Ratings Route Map After the MoU and Royal Decree Law 24/2012Sept 26 - In a new special report, Fitch Ratings examines how Spanish bank
ratings might to evolve over the near and medium term. The report comes ahead of
the anticipated publication later this week of the results of stress tests
undertaken on 14 Spanish banking groups as part of the Euro Group's EUR100bn
bank recapitalisation package for Spanish banks.

"The clean-up and recapitalisation of the Spanish banking sector expected over
the coming months is a net positive for banking sector stability," says Carmen
Munoz, Senior Director in Fitch's Financial Institutions Group. "However,
ultimately its success will be heavily influenced by both the ability of
individual banks to respond to restructuring plans and by the collective ability
of pan-European initiatives to resolve the eurozone crisis and move to a more
stable macro-economic environment," Ms Munoz added.

As part of its agreement with the Euro Group, Spain enacted a new bank recovery
and resolution law (RD Law 24/2012) in August. This too should ultimately also
help overall banking sector stability as well as weaken the link between bank
and sovereign risk. However, it also provides the Spanish authorities with a
stronger legal framework under which to force losses onto bank creditors under
"orderly resolution". Consequently it will be an important ratings consideration
both in the near-term and in a 'post restructuring' world.

Fitch's bank rating framework explicitly includes an assessment of support in
formulating its rating opinions. Fitch's Support Ratings tend to assume a
continued strong probability of support for many eurozone banks in the near
term, and actions to date by policymakers and regulators seem to be consistent
with that view. There is momentum in general to reverse that path in the medium
to long term and expose both shareholders and creditors (including senior
unsecured), perhaps selectively, to loss. Fitch would reflect that in lower
Support Ratings and Support Rating Floors (SRF) in the future.

Following the stress tests, banks will be classified into one of 4 groups:

Group 0 banks are Spain's strongest banks for which no capital shortfall is
identified. Fitch believes Banco Santander, Banco Bilbao Vizcaya Argentaria,
CaixaBank and Kutxabank will be in this group. Unless they indicate weaker
underlying solvency and asset quality than Fitch currently factors into its
ratings, the stress test results should be ratings-neutral for banks in this
group.

Group 1 Banks are the weakest Spanish banks and already controlled by the Fund
for Orderly Bank Restructuring (FROB). Unless the stress test results cause
Fitch to reassess the likelihood support, the EC's approval or rejection of
restructuring plans in November is probably the next key rating event for these
banks.

Group 2 banks are those with capital shortfalls according to the stress test and
needing state aid. Fitch believes Banco Grupo Caja 3, Liberbank and Banco Mare
Nostrum will be Group 2 banks. The real possibility of extraordinary support
being needed and, if relevant, burden-sharing by junior debt-holders means banks
expected to fall into this category have Viability Ratings (VR) of 'ccc', with
junior debt rated 'CC' or 'C'.

Their VRs would likely be downgraded to 'f' if a restructuring plan involving
extraordinary support is confirmed. Upon recapitalisation, the VRs would be
upgraded to a level that reflects their post-recapitalisation financial and risk
profiles. These banks' Issuer Default Ratings (IDR) are at their SRFs in the
'BB' range, reflecting a moderate probability of support. The stress tests
results (possibly) and EC approval or otherwise of restructuring plans are the
next relevant events for the banks' SRFs and IDRs.

Group 3 banks are those with capital shortfalls per the stress test but with
credible recapitalisation plans, and which are able to meet any capital
shortfalls privately without recourse to state aid. Fitch believes Banco Popular
Espanol, Banco de Sabadell and Unicaja Banco, S.A.U. (provided it does not merge
with Banco CEISS) will be Group 3 banks. The stress test results should be
neutral for the VRs of these banks, unless they are inconsistent with Fitch's
expectations or analysis of solvency and asset quality, or give Fitch cause to
think extraordinary support might ultimately still be needed.

For more information see "Spanish Bank Ratings: A Ratings Route Map After the
MoU and Royal Decree Law 24/2012" at www.fitchratings.com.

Additional information is available on www.fitchratings.com

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