February 15, 2017 / 5:22 PM / 9 months ago

Fitch Downgrades Popular to 'B+; Outlook Evolving

(The following statement was released by the rating agency) BARCELONA/LONDON, February 15 (Fitch) Fitch Ratings has downgraded Banco Popular Espanol S.A.'s (Popular) Long-Term Issuer Default Rating (IDR) to 'B+' from 'BB-' and its Viability Rating (VR) to 'b+' from 'bb-'. The Outlook is Evolving. A full list of rating actions is at the end of this rating action commentary. The downgrades reflect worse than expected losses and the recognition of sizeable additional problem assets in 2016. As a result the bank's asset quality and capitalisation metrics have deteriorated significantly leaving only a modest margin to absorb any unexpected losses. We believe that a revision of the bank's strategic plan is likely to follow the appointment of the new chairman in February 2017. However, we believe the bank's weakened balance sheet, with a very high stock of net problem assets and coverage levels that are still below levels originally anticipated by the bank and those of peers, represents a substantial strategic challenge for the incoming chairman at a time when other banks are also under regulatory and investor pressure to accelerate disposals of problem assets. Of note, net problem assets are far higher than we had previously anticipated at this stage of the bank's strategic plan and above peers rated in the 'bb' range. In the context of its high net non-performing assets, Popular's fully loaded common equity Tier 1 (CET1) ratio of just 8.2% is also weaker than peers. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT Popular's Long-Term IDRs and senior debt ratings are driven by the bank's standalone creditworthiness, as captured by the VR. Asset quality and capital have high influence on the VR, which reflects the bank's very weak asset quality metrics undermined by its large problematic exposure to real estate developers and its thin capital buffers relative to peers. The VR also factors in the bank's stable retail-based funding profile, which has moderate influence on the rating. Popular's asset quality indicators are the weakest among rated Spanish banks. The stock of problem assets (NPLs and net foreclosed assets) totalled EUR29.2bn and accounted for a very high 27% of gross loans and foreclosures at end-2016. The reserve coverage for problem assets increased following the large impairment charges booked in 4Q16 but remained slightly below domestic peers at around 45% at end-2016. Apart from loan and foreclosed asset impairment charges Popular also had several negative one-off items in 2016, including provisions to cover the full retroactivity of interest rate floor clauses, restructuring costs and goodwill impairments. These one-offs meant the bank reported a net loss of EUR3.5bn in 2016, exceeding the EUR2.5bn capital increase the bank completed in June 2016. The bank's fully loaded CET1 ratio fell to a low 8.2% and net problem assets accounted for 3.7x fully loaded CET1 at end-2016. Although the bank currently meets regulatory capital requirements, we believe its solvency is highly vulnerable to further asset quality shocks. Popular's profitability is undermined by its large exposure to the real estate and construction sectors. Excluding these, the bank's core SME banking business remains resilient amid the low interest rate and volume environment thanks to its strong nationwide franchise. Nonetheless, pre-provision earnings fell in 2016 due to lower net interest income and trading gains. The bank's recent cost-cutting measures, which included a voluntary exit scheme and the closure of branches, will improve operating efficiency. The bank's funding profile is underpinned by its retail deposit base. At end-2016 the gross loans/deposits ratios was 125% and available liquidity buffers were acceptable in light of upcoming wholesale debt maturities. The bank reported a regulatory liquidity coverage ratio of 135% at end-2016. The 'RR4' Recovery Rating reflects average recovery assumptions for senior debt. SUPPORT RATING AND SUPPORT RATING FLOOR Popular's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Popular's subordinated (lower Tier 2) debt issues are rated one notch below the bank's VR to reflect the below-average loss severity of this type of debt compared with average recoveries. Popular's preferred stock and additional tier 1 high trigger contingent convertible perpetual preferred securities are rated three notches below the bank's VR to reflect the higher loss severity risk of these securities (two notches) compared with average recoveries as well as moderate incremental risk of non-performance relative to its VR (one notch). RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT The Evolving Outlook reflects Fitch's opinion that there are both positive and negative trends that could affect the rating. A decisive new strategy to strengthen capital and accelerate the reduction of non-performing loans could, over time, lead to an upgrade of the VR and Long-Term IDR if complemented by an extended track record of profit generation and more positive ongoing asset quality dynamics (loan impairment charge rates, non-performing loan and foreclosed asset flows). Conversely, Popular's VR and Long-Term IDR could be downgraded if its weakened balance sheet impedes its plans to reduce non-performing assets at a time when other banks are also looking to reduce problem assets and the low interest rate environment and intense competition is likely to maintain pressure on pre-provision earnings. The long-term senior debt ratings are additionally sensitive to changes in recovery expectations. SR AND SRF 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 the senior creditors of bank. This is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES These ratings are primarily sensitive to changes in Popular's VR. Fitch has taken the following rating actions: Popular: Long-Term IDR: downgraded to 'B+' from 'BB-', Outlook Evolving Short-Term IDR: affirmed at 'B' Viability Rating: downgraded to 'b+' from 'bb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'NF' Long-term senior unsecured debt programme: downgraded to 'B+'/RR4 from 'BB-' Short-term senior unsecured debt programme and commercial paper: affirmed at 'B' Subordinated lower Tier 2 debt: downgraded to 'B'/RR5 from 'B+' Preferred Stock: downgraded to 'CCC'/RR6 from 'B- BPE Financiaciones S.A.: Long-term senior unsecured debt and debt programme (guaranteed by Popular): downgraded to 'B+'/RR4 from 'BB-' Short-term senior unsecured debt programme (guaranteed by Popular): affirmed at 'B' Popular Capital, S.A.: Preference shares: downgraded to 'CCC'/RR6 from 'B-' Contact: Primary Analyst Josu Fabo Director +34 93 494 3464 Fitch Ratings Espana S.A.U. Avinguda Diagonal, 601 2nd Floor 08008 Barcelona Secondary Analyst Arnau Autonell Associate Director +44 20 3530 1712 Committee Chairperson Bjorn Norrman Senior Director +44 20 3530 1330 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019036 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 WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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