TEXT-Fitch cuts Banco Santander and Banco Bilbao Vizcaya Argentaria

Mon Jun 11, 2012 8:54pm IST

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June 11 - Fitch Ratings has downgraded Banco Santander's 	
(Santander) and Banco Bilbao Vizcaya Argentaria's (BBVA) Long-term
Issuer Default Ratings (IDR) to 'BBB+' from 'A' and Viability Ratings (VR) to
'bbb+' from 'a'. The Outlooks on the Long-term IDRs are Negative. At the same
time, Fitch has downgraded Santander UK plc's (San UK) Long-term IDR to 'A' from
'A+' and VR to 'a' from 'a+'. The Outlook on San UK's Long-term IDR is Stable.
Fitch has also taken actions on various other Spanish subsidiaries of Santander
and issuing vehicles of both Santander and BBVA. A full list of rating actions
is at the end of this comment.	
	
The rating actions are primarily based on the downgrade of the Spanish sovereign	
to 'BBB'/Negative from 'A'/Negative (see "Fitch Downgrades Spain to 'BBB'; 	
Outlook Negative", dated 7 June 2012 at www.fitchratings.com). They reflect 	
similar concerns to those that have affected the Spanish sovereign rating, in 	
particular, that Spain is forecasted to remain in recession through the 	
remainder of this year and 2013 compared to the previous expectation that the 	
economy would benefit from a mild recovery in 2013 which directly affects the 	
banks' volumes of activities in Spain. The Negative Outlook mirrors that on the 	
sovereign rating. Santander's and BBVA's Long-term IDRs and VRs are sensitive to	
a further downgrade of Spain's sovereign rating.	
	
Santander's and BBVA's Long-term IDR are one notch above Spain's sovereign 	
rating, reflecting their geographical diversification, strong financial 	
performance and a proven capacity to absorb credit shocks. However, the agency 	
believes that there is a close link between bank and sovereign credit risk (and 	
therefore ratings) and it is exceptional for banks to be rated above their 	
domestic sovereign. Banks tend to own large portfolios of domestic sovereign 	
debt and are highly exposed to domestic counterparties, meaning profitability 	
and asset quality are vulnerable to adverse macroeconomic and market trends such	
as those being experienced in Spain. Funding access, stability and costs for 	
banks are also often closely linked to broad perceptions of sovereign risk. For 	
these reasons, the uplift over the sovereign rating is limited to one notch.  	
	
Santander and BBVA benefit from their international diversification in retail 	
banking, which gives them the capacity to generate earnings internationally, 	
making up for muted results in Spain and supporting good recurring performance. 	
This positively differentiates them from the more domestically-focussed Spanish 	
banks with lower VRs but, in Fitch's opinion, does not entirely mitigate the 	
rating constraints arising from their domicile. Growth prospects for emerging 	
markets in which Santander and BBVA subsidiaries operate have been revised down 	
and they are not entirely immune to global economic trends but earnings from 	
these markets will continue to contribute significantly to group earnings at 	
both institutions.	
	
Banking is a highly regulated industry and local regulatory scrutiny and 	
requirements mean capital and liquidity are not fully transferable within 	
banking groups, particularly cross border. The benefit to the parent bank of 	
owning subsidiaries mostly arises from potential dividend flows and the ability,	
subject to market conditions and appetite, to sell stakes if needed. Over the 	
long term, the market value of subsidiaries will invariably fluctuate as banks 	
and banking systems experience inevitable peaks and troughs.	
	
As a result of the downgrade of the sovereign rating, Fitch has also revised 	
Santander's and BBVA's Support Rating Floors (SRF) to 'BBB' from 'BBB+'. The 	
downgrade of Spain indicates a weakening of its ability to support its largest 	
banks.	
	
Under a recent stress test undertaken by Fitch (see "Fitch: New Base Case 	
Indicates Spanish Banks Need EUR50bn to EUR60bn Capital, dated 7 June 2012 at 	
www.fitchratings.com), Santander and BBVA fare better than many medium-sized 	
banks and savings banks, particularly those with high exposure to the real 	
estate sector and lower capital bases. They have sufficient pre-impairment 	
profit generation, reserves and capital to withstand Fitch's stress scenarios 	
and are therefore rated higher and, based on Fitch's current analysis, will not 	
require external support. 	
	
The Long-term IDRs of Banco Espanol de Credito (Banesto) and Santander Consumer 	
Finance (SCF) are based on the high probability of support from Santander and 	
their high integration into the group and are equalised with the parent bank's. 	
These have also been downgraded to 'BBB+' from 'A'. Banesto's VR is on Rating 	
Watch Negative (RWN), reflecting concerns over profitability and asset quality 	
as its activities are focused on Spain. SCF is the parent of a leading consumer 	
finance group in Europe present in 14 countries at end-2011. It is mainly 	
focused on vehicle finance and direct lending, with a large proportion of 	
operations centred in Germany. Fitch considers that SCF cannot be viewed as an 	
independent entity, so ithas not assigned it a VR. Banesto and SCF's Support 	
Ratings have been revised to '2' from '1', indicating a weakening of the ability	
of the parent to support its subsidiaries. However, they still indicate a high 	
probability of support, if needed.	
	
Fitch has also placed the Long and Short-term IDRs of Allfunds Bank, S.A. 	
(Allfunds) on RWN as it is assessing the effect of the downgrade of Santander's 	
Long-term IDR on these ratings. Allfunds is a small Spanish niche bank 	
specialising in the distribution of around 20,000 investment funds managed by 	
over 400 asset management houses. It is a 50:50 joint venture between Santander 	
and Intesa Sanpaolo ('A-'/Negative).	
	
San UK's IDRs continue to be driven by its standalone strength but are also now 	
at their SRF, which in turn is driven by its systemic importance to the UK 	
economy as the second-largest player in the mortgage and retail savings market. 	
The IDRs do not factor in any support from its parent. The IDRs and the VR 	
continue to reflect its strong franchise in the UK, its solid asset quality, 	
comfortable liquidity and relatively strong capital ratios but also factor in 	
negative pressures on profitability from the macroeconomic, operating and 	
regulatory environment. 	
	
San UK's net exposure to the Santander group is insignificant and is 	
collateralised. San UK's liquidity position benefited from the issuance of 	
GBP25bn of medium-term debt in 2011, which reduced the need for short-term 	
funding and more price-sensitive deposits. The core Tier 1 regulatory capital 	
ratio was a healthy 11.7% at end-March 2012. San UK is intentionally run as a 	
separately funded and capitalised bank within the Santander group. Fitch 	
believes that San UK's funding and capital positions are to a large degree 	
ring-fenced from the rest of the group due to strong regulatory oversight by the	
UK FSA.	
	
As San UK's SRF and VR are at the same level, a further downgrade would only 	
take place if the financial strength of the UK bank weakens and at the same time	
Fitch believes that the propensity of the UK government to support its 	
systemically important banks has reduced. This is not currently Fitch's base 	
case in the short to medium term.	
	
The impact on covered bonds issued by Santander, Banco Espanol de Credito and 	
Abbey National Treasury Services, plc, if any, will be covered in a separate 	
comment. The ratings of Santander's and BBVA's foreign subsidiaries will also be	
addressed in a separate comment. 	
	
The rating actions are as follows:	
	
Santander:	
Long-term IDR: downgraded to 'BBB+' from 'A'; Outlook Negative	
Short-term IDR: downgraded to 'F2' from 'F1'	
VR: downgraded to 'bbb+' from 'a'	
Support Rating: affirmed at '2'	
Support Rating Floor (SRF): revised to 'BBB' from 'BBB+'	
Senior unsecured debt long-term rating and certificates of deposit: downgraded 	
to 'BBB+' from 'A'	
Senior unsecured debt short-term rating, commercial paper and certificate of 	
deposits: downgraded to 'F2' from 'F1'	
Market-linked senior unsecured securities: downgraded to 'BBB+emr' from 'Aemr'	
Subordinated debt: downgraded to 'BBB' from 'A-'	
Preference shares: downgraded to 'BB-' from 'BB+'	
	
Santander Commercial Paper, S.A. Unipersonal	
Commercial paper: downgraded to 'F2' from 'F1'	
	
Santander Financial Issuance Ltd.	
Subordinated debt: downgraded to 'BBB' from 'A-'	
	
Santander International Debt, S.A. Unipersonal	
Senior unsecured debt long-term rating: downgraded to 'BBB+' from 'A'	
Senior unsecured debt short-term rating: downgraded to 'F2' from 'F1'	
	
Santander Finance Capital, S.A. Unipersonal	
Preference shares: downgraded to 'BB-' from 'BB+'	
	
Santander Finance Preferred, S.A. Unipersonal	
Preference shares: downgraded to 'BB-' from 'BB+'	
	
Santander International Preferred, S.A. Unipersonal	
Preference shares: downgraded to 'BB-' from 'BB+'	
	
Santander US Debt, S.A.U.	
Senior unsecured debt long-term rating: downgraded to 'BBB+' from 'A'	
	
Santander Perpetual, S.A. Unipersonal	
Upper Tier 2: Downgraded to 'BB+' from 'BBB'	
	
Banesto 	
Long-term IDR: downgraded to 'BBB+' from 'A', Outlook Negative	
Short-term IDR: downgraded to 'F2' from 'F1'	
VR: downgraded to 'bbb+' from 'a-', placed on Rating Watch Negative	
Support Rating: downgraded to '2' from '1'	
Senior unsecured debt long-term rating: downgraded to 'BBB+' from 'A'	
Senior unsecured debt short-term rating and commercial paper: downgraded to 'F2'	
from 'F1'	
Market-linked senior unsecured securities: downgraded to 'BBB+emr' from 'Aemr'	
Subordinated debt: downgraded to 'BBB' from 'A-'	
Preference shares: downgraded to 'BB-' from 'BB'	
	
Banesto Financial Products plc	
Senior unsecured debt long-term rating: downgraded to 'BBB+' from 'A'	
Senior unsecured debt short-term rating: downgraded to 'F2' from 'F1'	
	
Allfunds:	
Long-term IDR: 'BBB+' placed on RWN	
Short-term IDR:  'F2' placed on RWN	
VR: unaffected at 'bbb-'	
Support Rating: affirmed at '2'	
	
SCF:	
Long-term IDR: downgraded to 'BBB+' from 'A'; Outlook Negative	
Short-term IDR: downgraded to 'F2' from 'F1'	
Support Rating: downgraded to '2' from '1'	
Senior unsecured debt long-term rating: downgraded to 'BBB+' from 'A'	
Senior unsecured debt short-term rating and commercial paper: downgraded to 'F2'	
from 'F1'	
Subordinated debt: downgraded to 'BBB' from 'A-'	
	
San UK:	
Long-term IDR: downgraded to 'A' from 'A+'; Outlook Stable	
Short-term IDR: affirmed at F1	
VR: downgraded to 'a' from 'a+'	
Support Rating: affirmed at '1'	
	
SRF: affirmed at 'A'	
Senior unsecured debt long-term rating: downgraded to 'A' from 'A+'	
Senior unsecured debt short-term rating and commercial paper: affirmed at 'F1'	
Market-linked senior unsecured securities: downgraded to 'A' from 'A+'	
Subordinated debt: downgraded to 'A-' from 'A'	
Upper Tier 2 subordinated debt: downgraded to 'BBB' from 'BBB+'	
GBP300m Non cumulative, callable preference shares, XS0502105454: Downgraded to 	
'BB+' from 'BBB-'	
Other Preferred stock: Downgraded to 'BBB-' from' BBB'	
	
Abbey National Treasury Services plc	
Long-term IDR: downgraded to 'A' from 'A+'; Stable Outlook	
Short-term IDR: affirmed at 'F1'	
Guaranteed Debt Programme: affirmed at 'AAA'/'F1+' 	
Senior unsecured debt long-term rating: downgraded to 'A' from 'A+'	
Market-linked senior unsecured securities: downgraded to 'Aemr' from 'A+emr'	
	
BBVA:	
Long-term IDR: downgraded to 'BBB+' from 'A', Negative Outlook	
Short-term IDR: downgraded to 'F2' from 'F1'	
VR: downgraded to 'bbb+' from 'a'	
Support Rating: affirmed at '2'	
SRF: revised to 'BBB' from 'BBB+'	
Senior unsecured debt long-term rating: downgraded to 'BBB+' from 'A'	
Senior unsecured debt short-term rating and commercial paper: downgraded to 'F2 	
from 'F1'	
Market-linked senior unsecured securities: downgraded to 'BBB+emr' from 'Aemr'	
Subordinated debt: downgraded to 'BBB' from 'A-'	
Preference shares: downgraded to 'BB-' from 'BB+'	
	
BBVA Capital Finance, S.A. Unipersonal	
Preference shares: downgraded to 'BB-' from 'BB+'	
BBVA International Preferred, S.A. Unipersonal	
Preference shares: downgraded to 'BB-' from 'BB+'	
	
BBVA Senior Finance, S.A. Unipersonal	
Senior unsecured debt long-term rating: downgraded to 'BBB+' from 'A'	
Senior unsecured debt short-term rating: downgraded to 'F2' from 'F1'	
	
BBVA U.S. Senior, S.A. Unipersonal	
Senior unsecured debt long-term rating: downgraded to 'BBB+' from 'A'	
Senior unsecured debt short-term rating: downgraded to 'F2' from 'F1'
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