Fitch cuts in Spain, again

Fitch Ratings said today it has downgraded the long-term issuer default ratings (IDR) of 18 Spanish banks and the viability ratings (VR) of 15 Spanish banks.

The agency has also placed the long-term and short-term IDRs of three banks on rating watch negative (RWN) and maintained five banks on RWN.

The actions follow the downgrade of the Spanish sovereign to ‘BBB’/negative from ‘A’/negative on June 7, and is based on concerns about the further deterioration of the loan portfolios of banks whose loan books are heavily exposed to the construction and real estate sectors, and those with low equity bases.

Spain is expected to remain in recession through the remainder of this year and 2013, despite a previous expectation that the economy would benefit from a mild recovery in 2013.

Institutions affected by rating cuts are domestic banks and their revenue generation capacity, risk profile, funding access and cost of funding are highly sensitive to the evolution of Spain’s economy and its housing market.

“The sovereign rating acts as a cap for the long-term IDRs of these domestic financial institutions,” Fitch said.

The weak Spanish economy will continue to affect business volumes which, together with low interest rates, will place pressure on revenues.

“Banks are being challenged to further increase loan impairment coverage levels for real estate assets while complying with stringent capital requirements. Some institutions are more vulnerable than others,” Fitch said.

The agency has not changed its view of Spanish government support for its banking sector following the announcement on June 9 on a €100bn loan from the European financial stability fund and European stability mechanism.

“The recent downgrade of Spain’s sovereign ratings by three notches already factors in the likely fiscal cost of restructuring and recapitalising the Spanish banking sector estimated by Fitch to be between €50bn to €60bn under its base case and as high as €100bn under a stress scenario. The support ratings and SRFs assigned to Spanish banks take into account the expectation that support for the banks will be forthcoming,” Fitch said.


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