Wednesday, 12 October 2011

Standard & Poor and Fitch lower Spanish bank ratings

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SPAIN (Agencies) Ratings agencies Standard & Poor and Fitch yesterday lowered their ratings on 17 Spanish banks. S&P rated ten and Fitch, six, in both cases owing to the weakness of the overall Spanish economy and the problems the country is having with the real estate industry. S&P, however, also lowered its global rating specifically on the banking industry itself. So, Spain thus passes from level 3 to 4 (on a scale from 1 to 10, where 1 is best). This new level puts Spain on the same level as Mexico, South Korea, Czech, Slovakia and Israel. This overall rating is a global one, while credit ratings are attributed individually. S&P has lowered 10 entities by one point:>>>
Santander (incl. subsidiaries Banesto, SCF and Santander UK) and BBVA go from AA to AA-. And CECA, Ibercaja, Kutxa, BBK, Sabadell and Bankinter go from A to A-, whereas Bankia and Caixabank goes from 'stable' to 'negative'. In suspension is the rating for Banco Popular, which has just bought Banco Pastor.
The agency alleges that the Spanish economy is facing a downturn in short term growth, that the construction/real estate industry continues to be in depression and that the capital markets have been turbulent since the summer. "We are expecting that correction will still have a negative impact on the financial profile for the next 15 to 18 months," said a note from S&P, "which will extends the three-year period we had originally considered for the financial system to absorb the impact of a negative cycle." It goes to add that the agency foresees that the banking system will accummulate a growing number of problem assets and will have to face further obstacles in selling off real estate assets. In S&p's opinion, these 'problematic assets' will continue to accummulate through 2012 and possibly into the first months of 2013.

"We estimate that the problem assets generated by the recession, including bad debts, real estate assets acquired and adjudicated, could reach a maximum of between 296,000 and 313,000 millions," which would be the equivalent of 15.8% and 16.8%, respectively, of the total credit to the private sector as it was at closing of the 2008 figures, when the recession betgan.
For its part, Fitch lowered its rating on Santander and Banesto from AA to AA-.; BBVA from AA- to A+; Caixabank from A+ to A and those of Popular and Sbadell from A- to BBB+. Fitch's reasons for the downgrades are owed to the downgrade of Spain's sovereign debt of last week. In general, says Fitch, the banks should not have a better rating than the country in which they are domiciled. Therefore, Spain's largest bank, Santander, now no longer has a better rating than the Kingdom of Spain.

Fitch also points to the wek Spanish economy, high unemployment and the problems in the real estate industry as factors that will harm banking activity and the quality of its assets, particularly regarding those of national character.

"While purely national banks face more complex challenges, the two internationals, Santander and BBVA, benefit from their geographical spread, that allows them to compensate their results in Spain. However, they both have a significant presence in  Spain," says Fitch. "BBVA has over half its assets in Spain, and Santander, about 30%." The risk of contagion among their assets, though, is minimised by their focus on retail banking in most of their markets, "and liquidity benefits from the fact that their international affiliates are self-financing."

Fitch sees it as unlikely, though, that financing costs will return to the low levels present before the crisis. The possibility of growth in emerging markets have been downgraded, too, and are not totally immune from global economic tendencies, but income from these markets will continue to contribute significantly to the group's income.


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