(The following statement was released by the rating agency)
Nov 23 -
-- We now see higher economic risk for banks operating in Spain following the rapid deterioration of the sovereign's creditworthiness, which has been reflected in our rating actions on Spain, including our recent two-notch downgrade.
-- In our view Spanish banks face increased credit risk as Spain's weakening economy, public sector cuts, austerity measures, and high unemployment will likely hamper the creditworthiness and resilience of public and private sector borrowers.
-- In light of the higher credit risk in the economy we believe iberCaja's capital position has deteriorated according to our methodology.
-- We are therefore lowering our long- and short-term ratings on iberCaja to 'BB+/B' from 'BBB-/A-3' and removing them from CreditWatch negative.
-- Following our revision of iberCaja's stand-alone credit profile to 'bb+' from 'bbb-', we are also lowering our issue ratings on iberCaja's senior unsecured debt to 'BB+' from 'BBB-' and its nondeferrable subordinated debt (not included in iberCaja's recent tender offer) to 'BB-' from 'BB+' and removing them from CreditWatch negative.
-- The negative outlook reflects our view of potential pressures on the bank's stand-alone creditworthiness, and therefore on the ratings, in the context of the difficult operating and economic environment.
On Nov. 23, 2012, Standard & Poor's Ratings Services lowered its long- and short-term counterparty credit ratings on Spanish savings bank iberCaja Banco S.A.(iberCaja) to 'BB+/B' from 'BBB-/A-3'. At the same time, we removed these ratings from CreditWatch, where we placed them on March 5, 2012. The outlook is negative.
We also lowered our issue ratings on iberCaja's senior unsecured debt to 'BB+' from 'BBB-' and its nondeferrable subordinated debt (not included in iberCaja's recent tender offer) to 'BB-' from 'BB+' and removed them from CreditWatch negative, where we placed them on March 5, 2012.
The downgrade follows our review of the wider implications for economic risk and industry risk in the Spanish banking sector of our two-notch downgrade of the Kingdom of Spain (BBB-/Negative/A-3) on Oct. 10, 2012. We believe banks operating in Spain face higher credit risk, not only from their increasing exposure to a weaker public sector, but also owing to a riskier, less resilient private sector, which will suffer the effects of the economic recession, austerity measures, and high unemployment.
To reflect the higher credit risk we now see in the Spanish market we lowered our Banking Industry Country Risk Assessment (BICRA) for Spain to group '6' from '5' and revised our economic risk score, a component of the BICRA, to '7' from '6' (see 'Various Rating Actions On Spanish Banks Due To Rising Economic Risks,' published Nov. 23, 2012).
Consequently, we also revised our anchor, the starting point for our ratings on financial institutions operating primarily in Spain, including iberCaja, to 'bb+' from 'bbb-'.
In the context of heightened credit risk in the economy, we believe iberCaja's capital position has deteriorated according to our methodology. We now estimate that Ibercaja's risk-adjusted capital (RAC) ratio before diversification will stand around 4%-4.5% by the end of 2013, versus about 5% previously. As a result, we have lowered our assessment of the bank's capital and earnings to 'weak' from 'moderate.' In our capital projections we are taking into account the bank's plans to cover the capital shortfall identified by the Oliver Wyman stress test exercise (which includes the bank's recently announced tender offer to buy back securities at a discount). We believe that iberCaja will be able to reinforce its capital to comply with the higher minimum regulatory requirements it has to meet starting Jan. 1, 2013. However, the cushion above the minimum will initially be limited and much lower than in the past.
We have also reviewed the funding and liquidity of Spanish banks, aiming to differentiate to a greater extent our assessments of these factors for the banks, in line with the approach we communicated earlier this year (see 'ECB's Funding 'Bazooka' Gives Eurozone Banks Time To Reshape Their Business Models And Balance Sheets,' published on Feb. 29, 2012, and 'CreditWatch Actions On Four Spanish Banks On Potential Implications Of State Recapitalization,' published on Aug. 7, 2012). Following this review, we have maintained our assessments of iberCaja's funding as 'average' and its liquidity as 'adequate.' Our assessment of funding reflects our view of iberCaja's balanced funding profile and its limited reliance on the long-term refinancing operations provided by the European Central Bank.
We have maintained our assessments of other factors underpinning iberCaja's SACP. Consequently, we continue to view iberCaja's business position as 'adequate and its risk position as 'strong.'
The downgrade of iberCaja's nondeferrable subordinated debt was triggered by the lowering of the bank's SACP. In line with our criteria, we have widened the notch differential below the SACP to two notches (from one previously) as the SACP is now in the noninvestment grade category.
The negative outlook reflects the possibility that we could revise down iberCaja's SACP and therefore lower the ratings if the operating environment in Spain became more difficult than we currently anticipate.
We might also consider lowering iberCaja's SACP if one or more of the following occurs:
-- We saw that iberCaja was not able to face strategic challenges in the increasingly consolidated Spanish financial system, or it undertook a merger with a weaker player;
-- IberCaja was unable, contrary to our current expectations, to reinforce its capital to comply with the new regulatory minimum, or if lower revenues threatened iberCaja's capacity to absorb credit losses leading to what we consider very weak capital levels; and
-- IberCaja's asset quality deteriorated to levels in line with the Spanish banking industry average, in contrast with the outperformance we currently anticipate.
If the sovereign rating were lowered by one notch, our ratings on iberCaja would likely remain unaffected as they do not benefit from any uplift above the SACP for extraordinary government support.
Given the challenging operating environment in Spain, we currently view an outlook revision to stable as unlikely in the next 12-18 months. We could revise the outlook to stable, nevertheless, if we observed that the pressure on iberCaja's SACP abates and the economic and operating environment improves.
Ratings Score Snapshot
Issuer Credit Rating BB+/Negative/B BBB-/Watch Neg/A-3
SACP bb+ bbb-
Anchor bb+ bbb-
Business Position Adequate (0) Adequate (0)
Capital and Earnings Weak (-1) Moderate (-1)
Risk Position Strong (+1) Strong (+1)
Funding and Liquidity Average Average
and Adequate (0) and Adequate (0)
Support 0 0
GRE Support 0 0
Group Support 0 0
Sovereign Support 0 0
Additional Factors 0 0
Related Criteria And Research
-- Various Rating Actions On Spanish Banks Due To Rising Economic Risks, Nov. 23, 2012
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Ibercaja's Hybrid And Subordinated Debt Downgraded To 'C' And 'D' On Distressed Exchange; No Other Ratings Affected, Nov. 15, 2012
-- Various Rating Actions on Spanish Financial Institutions Following Sovereign Downgrade, Oct. 15, 2012
-- Spain Ratings Lowered to 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative, Oct. 10, 2012
Downgraded; CreditWatch Action
Ibercaja Banco S.A.
Counterparty Credit Rating BB+/Negative/B BBB-/Watch Neg/A-3
Certificate Of Deposit BB+/B BBB-/Watch Neg/A-3
Ibercaja Banco S.A.
Preferred Stock C
(Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.email@example.com)
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