April 7, 2017 / 4:39 PM / 4 months ago

Fitch Affirms Abanca at 'BB+'; Stable Outlook

(The following statement was released by the rating agency) BARCELONA/LONDON, April 07 (Fitch) Fitch Ratings has affirmed ABANCA Corporacion Bancaria, S.A.'s (Abanca) Long-Term Issuer Default Rating (IDR) at 'BB+' and Viability Rating (VR) at 'bb+'. The Outlook on its Long-Term IDR is Stable. A full list of rating actions is at the end of this Rating Action Commentary. KEY RATING DRIVERS IDRS AND VR Abanca's main rating weakness is its weak core banking profitability. The ratings also reflect the bank's adequate capital position, progress in reducing problem assets, stable funding and liquidity profile, and sound franchise in its home region. While there has been some progress, Fitch considers that the bank is challenged to substantially improve its core income generation, due to a large, low-yielding legacy bond portfolio, low-yielding mortgage lending book suffering from the removal of interest rate floors in May 2013, and expensive fixed-rate mortgage covered bonds. In 2016, the cost/income ratio was weak at 80%, despite being boosted by some capital gains from the sale of available-for-sale securities. Abanca's Fitch Core Capital and fully loaded common equity Tier 1 ratios were 12.1% and 13.9%, respectively, at end-2016. Capital exposure to unreserved problem assets remained broadly stable in 2016 at about 50%. These ratios already take into account the interim dividend distribution (virtually 100% payout ratio). This dividend helps complete the remaining deferred payment relating to the acquisition of Abanca by its current owners and Fitch now expects dividend payment to normalise to industry practices. The bank's problem asset ratio, which includes non-performing loans (NPLs) and foreclosed assets, declined to just below 9% at end-2016 from 11.2% at end-2015, supported by a 20% reduction of NPLs. Fitch expects problem assets to decline further as the Spanish economy continues to recover and Abanca maintains adequate reserve coverage (50% of NPLs at end-2016). Abanca's funding is dominated by customer deposits, which continued to increase, and its loans/deposits ratio decreased to 94% at end-2016. Reliance on wholesale funding has been decreasing as retail banking activities have been generating liquidity and the bank's debt securities portfolio reducing, and is mainly secured. The bank has an ample liquid asset portfolio representing 15% of end-2016 total assets. SUPPORT RATING AND SUPPORT RATING FLOOR Abanca's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's belief that senior creditors can no longer rely on receiving full extraordinary support from the sovereign if Abanca becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that is likely to require senior creditors to participate in losses, instead of or ahead of a bank receiving sovereign support. RATING SENSITIVITIES IDRS AND VR Upward rating potential for Abanca's ratings would arise from a sustained improvement in its underlying core banking business profitability and the diversification of its income sources. Continued improvement of asset quality would also be rating positive. Downward rating pressure, although not anticipated, would mostly arise from loan quality and capital deterioration, and a significant increase in risk appetite from an expansion into higher-risk lending. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the Support Rating and upward revision of the Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support domestic banks. This is highly unlikely, in Fitch's view, although not impossible. The rating actions are as follows: Long-Term IDR affirmed at 'BB+'; Outlook Stable Short-Term IDR affirmed at 'B' Viability Rating of 'bb+' Support Rating Affirmed at '5' Support Rating Floor affirmed at 'No Floor' Contact: Primary Analyst Josu Fabo, CFA Director +34 93 494 3464 Fitch Ratings Espana, S.A.U. Avenida Diagonal 601 08028 Barcelona Secondary Analyst Arnau Autonell Associate Director +44 20 3530 1712 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 44 29 91 71 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com. 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