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Aug 5 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Andorra Banc Agricol Reig's (Andbank) Long-term and Short-term Issuer Default Ratings (IDR) at 'A-' and 'F2' respectively. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.
The rating action has been taken following Andbank's acquisition of Banco Inversis' private banking business in Spain, announced on 12 July 2013. Under the agreement, Andbank has paid EUR179.8m for EUR4.7bn in assets under management (AUM) as well as for a small amount of deposits, liquid assets and loans. The new AUM will increase Andbank's total AUM by 37% and boost the entity's on-shore private banking focus. The bank expects to integrate the acquired business into its Spanish banking subsidiary by end-2013, subject to all regulatory approvals being received. Andbank has also signed a service-level agreement (SLA) with Banco Inversis as part of the agreement, to secure the usage of its technology platform to service its customers for the next 10 years. The acquisition price includes EUR120m of goodwill.
The transaction will have a significant negative impact on Andbank's capital because of the goodwill included in the price of the acquisition. Furthermore, it will expose the bank to higher operational risk because of the need to integrate the two businesses. Fitch estimates that Andbank's Fitch Core Capital (FCC) ratio, which excludes any element of operational risk, will decline to about 16% as a result of the goodwill paid, from 22% at end-2012. Unlike banks in the EU, Andorran banks do not set aside any capital for operational risk.
This could in theory reduce capital ratios by a further 200bp under a simulated standardised method of calculating capital against operational risk.
While clearly resulting in a much weaker FCC ratio, Fitch views capitalisation to have remained adequate because of the bank's lower than average concentrations in its loan book. Furthermore, under the bank's plans, FCC would rise to over 20% by end-2014 through internal capital generation and lower dividend pay-outs, which is more commensurate for the rating.
The impact on Andbank's liquidity position from the acquisition is expected to be moderate as it represents a relatively low proportion of its balance sheet and the acquired private bank has a relatively liquid balance sheet.
The risk of AUM outflows from Banco Inversis following the transfer is likely to be limited as Andbank is acquiring the whole network of agents and will continue to offer its services through the same technology platform, thanks to the SLA.
The affirmation of the ratings is subject to the assumption that capital will be raised to a similar level as pre-acquisition in a relatively short period of time. The VR and IDRs therefore could be downgraded if the bank fails to bring core capital ratios back to pre-acquisition levels in a reasonably short period of time or if the acquisition leads to greater AUM outflows than envisaged under the plan. Another possible negative rating trigger is if the integration of the new businesses takes longer than anticipated.
More generally, Andbank's IDRs and VR are sensitive to continued international pressure over jurisdictions with banking secrecy laws, although the potential impact is reducing thanks to its international expansion.
The ratings are also sensitive to a possible further deterioration in asset quality resulting from the Andorran economy remaining in recession beyond 2013. In turn, this could result in a weakening of its currently solid profitability and cost efficiency and introduce more aggressive risk management policies and procedures. These strengths are supporting its current rating levels and deterioration in any of them may result in rating downgrades.
The rating actions are as follows:
Long-term IDR affirmed at 'A-'; Outlook Stable
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'a-'
Support Rating unaffected at '5'
Support Rating Floor unaffected at 'NF'