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Fitch Affirms Liberbank at 'BB'; Outlook Stable
April 7, 2017 / 4:58 PM / 8 months ago

Fitch Affirms Liberbank at 'BB'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA/LONDON, April 07 (Fitch) Fitch Ratings has affirmed Liberbank, S.A.'s Long-Term Issuer Default Rating (IDR) at 'BB' and Viability Rating (VR) at 'bb'. The Outlook on its Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The bank's IDRs and VR reflect its large problem assets, including a legacy real estate-related portfolio, relative to capital and its modest profitability. The ratings also factor in its stable funding structure and liquidity position. Liberbank's asset quality is heavily affected by a legacy portfolio of foreclosed real-estate assets and loans to developers that until end-2016 was under an asset protection scheme (APS) granted by Spain's deposit guarantee fund. This portfolio is carried at fair value with expected losses calculated by an independent consultant. This exposure results in a problem asset ratio (including non-performing loans and foreclosed assets) well above domestic peers at 20.9% at end-2016.The volume of problem assets decreased by 22% yoy in 2016 and we expect the bank to actively further reduce this exposure in the coming years, helped by the recovery of the property sector in Spain. In our view, the bank's capitalisation is maintained with moderate buffers over regulatory minimums. In line with our expectations, the bank's fully loaded Common Equity Tier 1 (CET1) ratio declined to 10.7% at end-2016 (from 11.7% at end-2015), as a result of the increase in risk-weighted assets following the expiration of the APS. At end-2016 unreserved problem assets accounted for 2x the fully loaded CET1, meaning that capital is highly vulnerable to asset quality shocks. Liberbank is focused on retail banking activities in its home regions, Asturias, Castile-La Mancha and Extremadura, where it has high market shares. However, the bank's profitability remains under pressure amid the low interest-rate and business volume environment. Its effort to cut funding and operating costs together with lower loan impairment charges should provide some relief, although we anticipate that profitability will remain modest in 2017. Liberbank's funding structure is well balanced with customer deposits fully funding the loan book. The bank's liquidity position is adequate as debt maturities are manageable and well spread over time. Refinancing risk is limited in light of the bank's ample stock of unencumbered ECB-eligible assets. Banco de Castilla-La Mancha (Banco CLM) is a 75%-owned bank subsidiary of Liberbank and fully consolidated into the group's accounts. Banco CLM is highly integrated into the group, including in terms of capital and liquidity fungibility between the entities, hence Fitch assigns a common VR. The group's management is centralised at Liberbank, underlining Fitch's view that individual credit profiles cannot be meaningfully disentangled. Banco CLM strengthens the group's franchise in Castile-La Mancha and provides geographical diversification. SUPPORT RATING AND SUPPORT RATING FLOOR Liberbank's and its subsidiary's Banco CLM's Support Ratings (SR) of '5' and Support Rating Floors (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the banks can no longer rely on receiving full extraordinary support from the sovereign in the event that Liberbank 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 Liberbank's subordinated Tier 2 debt issue is rated one notch below its VR to reflect the notes' greater expected loss severity than senior unsecured debt. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Upside rating potential could arise from a swift and material reduction in the bank's stock of problem assets without erosion of the capital ratios. Improvements in core banking earnings that result in better internal capital generation would also be ratings-positive. Conversely, a rating downgrade could come from an inability to significantly manage down its stock of problem assets which would keep capital at risk from asset quality shocks. A material deterioration in the bank's funding and liquidity profile would also put pressure on the ratings. Banco CLM's ratings are sensitive to a change in its integration in the group, which Fitch does not currently expect. 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 its banks. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT The rating of Liberbank's subordinated debt is primarily sensitive to a change in the bank's VR. The rating actions are as follows: Liberbank Long-Term IDR: affirmed at 'BB'; Outlook Stable Short-Term IDR: affirmed at 'B' VR: affirmed at 'bb' Support Rating: affirmed at '5' SRF: affirmed at 'No Floor' Subordinated debt: affirmed at 'BB-' Banco CLM Long-Term IDR: affirmed at 'BB'; Outlook Stable Short-Term IDR: affirmed at 'B' VR: affirmed at 'bb' Support Rating: affirmed at '5' SRF: affirmed at 'No Floor' Senior unsecured debt: affirmed at 'BB' 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: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021892 Solicitation Status here Endorsement Policy 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 WEB SITE AT <a href="">WWW.FITCHRATINGS.COM.. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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