April 28, 2017 / 3:24 PM / 7 months ago

Fitch Affirms BBVA at 'A-'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA/LONDON, April 28 (Fitch) Fitch Ratings has affirmed Spain-based Banco Bilbao Vizcaya Argentaria, S.A.'s (BBVA) Long-Term Issuer Default Rating (IDR) at 'A-' and its Viability Rating (VR) at 'a-'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. In addition, Fitch has assigned an 'A-(dcr)' Derivative Counterparty Ratings (DCR) to BBVA as part of its roll-out of DCRs to significant derivative counterparties in western Europe and the US. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. KEY RATING DRIVERS IDRS, VR, DCR AND SENIOR DEBT BBVA's Long-Term IDR and VR are one notch above Spain's sovereign rating (BBB+/Stable), reflecting diversification benefits from the bank's solid retail franchises in several countries outside Spain, namely Mexico, Turkey, the US and a number of South American countries. The VR also factors in the bank's modest risk appetite, weaker, albeit improving, asset quality metrics relative to peers, satisfactory capitalisation and resilient earnings generation. BBVA's risk profile is nevertheless correlated to that of the Spanish sovereign, as reflected in sensitivity of the group's performance and asset quality to the economic environment in Spain. The bank's cost of market funding and the stability of the investor base are also typically influenced by perceptions of sovereign risk. Asset quality metrics are weaker than peers because of its exposure to Spain and emerging markets. Better economic conditions in Spain are helping the group to digest its stock of problem assets (NPLs and foreclosed assets), a large portion of which was integrated upon the acquisitions in 2012 and 2015 of two banks that received state support. At end-2016, Fitch calculates that the problem asset ratio stood at a still relatively high 6.6%, although it decreased from 7.3% a year earlier. At end-March 2017, the NPL ratio improved to 4.8% and we expect the positive asset quality trend to continue in 2017, mainly driven by improvements in Spain. The group's profitability has been fairly stable over the business cycle thanks to the geographical diversification and retail banking focus. Wider margins in emerging economies and good cost controls helped to absorb higher loan impairment charges over the past few years and to maintain strong internal capital generation capacity. We expect profitability to be resilient in 2017, as economic improvements in Spain should offset the headwinds from deteriorating operating environments in emerging markets and some potential foreign currency exchange volatility in the income statement. BBVA's capitalisation is broadly commensurate with its risk profile, with solid buffers above minimum regulatory requirements. However, given its strong presence in emerging markets, its capital levels could be more volatile relative to international peers. At end-March 2017, the bank reported fully loaded CET1 and leverage ratios of 11% and 6.6%, respectively. BBVA's funding profile is stable, as it benefits from solid retail deposit franchises in its core markets. The international subsidiaries have no material funding imbalances. The group is a regular issuer in local and international wholesale debt markets and has an adequate liquidity position. Fitch has also assigned a DCR to BBVA since the bank has significant derivatives activity and is swap counterparty to Fitch-rated structured finance transactions. The BBVA's DCR is at the same level as the Long-Term IDR because, in Spain, derivative counterparties have no preferential legal status over other senior obligations in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR BBVA's Support Ratings (SR) of '5' and Support Rating Floors (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 (BRRD) and the Single Resolution Mechanism (SRM) 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. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by BBVA are notched down from its VR, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated (lower Tier 2) debt is rated one notch below the bank's VR to reflect above average loss severity of this type of debt compared with average recoveries (one notch). Upper Tier 2 debt is rated three notches below the bank's VR to reflect above average loss severity of this type of debt compared with average recoveries (one notch) and high risk of non-performance (two notches) as there is the option to defer coupons if the issue reported losses in the last audited accounts. Preferred shares are rated five notches below the bank's VR to reflect higher loss severity risk of these securities when compared with average recoveries (two notches from the VR), as well as high risk of non-performance (an additional three notches) due to profit test for legacy issues and fully discretionary coupon payments for recent issues. RATING SENSITIVITIES IDRS, VR, DCR AND SENIOR DEBT The Stable Outlook reflects our expectation that the group's overall credit profile will remain stable in the foreseeable future. Currently, BBVA's VR (and hence its IDRs) is capped at one notch above Spain's sovereign rating. However, a Spanish sovereign upgrade would not automatically trigger a VR upgrade given the group's material exposures to emerging markets such as Turkey, Mexico and Latin America. A stabilisation of key emerging markets combined with a Spanish sovereign upgrade could be ratings positive, if accompanied by better asset quality metrics. A downgrade of Spain's sovereign rating would trigger a downgrade of the bank's VR. Downward rating pressure could also arise from sharp asset quality deterioration or a substantial weakening of earnings, which we view as unlikely. For the senior notes and the DCR to achieve a one-notch uplift from the Long-Term IDR, the buffer of qualifying junior debt and non-preferred senior debt would need to exceed our estimate of a 'recapitalisation amount'. This amount is likely to be around or above the bank's minimum pillar 1 total capital requirement. SUPPORT RATING AND SUPPORT RATING FLOOR Any upgrade of the SRs and upward revision of the SRFs would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Banco BBVA are primarily sensitive to any change in their VRs. Upper Tier 2 notes and preferred shares are also sensitive to Fitch changing its assessment of the probability of their non-performance relative to the risk captured in the banks' VRs. The rating actions are as follows: BBVA Long-Term IDR: affirmed at 'A-'; Outlook Stable Short-Term IDR: affirmed at 'F2' VR: affirmed at 'a-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: assigned at 'A-(dcr)' Senior unsecured debt long-term rating: affirmed at 'A-' Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2' Subordinated debt: affirmed at 'BBB+' Upper Tier 2 debt: affirmed at 'BBB-' Preference shares: affirmed at 'BB' BBVA Capital Finance, S.A. Unipersonal Preference shares guaranteed by BBVA: affirmed at 'BB' BBVA International Preferred, S.A. Unipersonal Preference shares guaranteed by BBVA: affirmed at 'BB' BBVA Senior Finance, S.A. Unipersonal Senior unsecured debt long-term rating: affirmed at 'A-' Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2' BBVA U.S. Senior, S.A. Unipersonal Commercial paper guaranteed by BBVA: affirmed at 'F2' BBVA Subordinated Capital, S.A. Unipersonal Subordinated debt guaranteed by BBVA: affirmed at 'BBB+' Contact: Primary Analyst Josu Fabo, CFA Director +34 93 494 3464 Fitch Ratings Espana, S.A.U. Av. Diagonal, 601, 2nd Floor 08028 Barcelona Secondary Analyst Olivia Perney Guillot Senior Director +33 1 44 29 91 74 Committee Chairperson Bjorn Norrman Senior Director +44 20 3530 1330 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com. 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