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Fitch Affirms Santander at 'A-'; Downgrades Popular's VR to 'f'
June 9, 2017 / 11:36 AM / in 4 months

Fitch Affirms Santander at 'A-'; Downgrades Popular's VR to 'f'

(The following statement was released by the rating agency) BARCELONA, June 09 (Fitch) Fitch Ratings has affirmed Spain-based Banco Santander, S.A.'s (Santander) Long-Term Issuer Default Rating (IDR) at 'A-' and its Viability Rating (VR) at 'a-'. The Outlook on the Long-Term IDR is Stable. At the same time, Fitch has upgraded Banco Popular Espanol, S.A.'s (Popular) Long-Term IDR to 'A-' from 'B' with a Stable Outlook. We have also downgraded Popular's VR to 'f' from 'b' following the European Central Bank's (ECB) decision to put Popular into resolution and subsequently withdrawn the VR as the bank can no longer be assessed on a standalone basis. A full list of rating actions is at the end of this rating action commentary. The rating actions follow the 7 June 2017 announcement that Santander has acquired 100% of the shares of Popular at the price consideration of EUR1 as part of a resolution organised by the Single Resolution Board (SRB). Prior to the sale, the preferred stock and perpetual Tier 1 convertible notes issued by Popular were fully written down and subordinated debt (lower tier 2) was converted into equity. Santander will raise EUR7 billion of capital to fund the acquisition. KEY RATING DRIVERS SANTANDER IDRS, VR, DCR AND SENIOR DEBT The affirmation of Santander's ratings reflects Fitch's view that the impact of this transaction on the group's financial profile is broadly neutral. This is because the write-off of Popular's share capital and the bail-in of tier 1 instruments and subordinated instruments prior to the acquisition have been used to increase the reserve coverage of its problem assets substantially. Additionally the impact from integrating Popular's assets and liabilities on Santander's fully loaded CET1 will be offset by the planned EUR7 billion capital increase for which the group already has underwriting commitments. As a result of the capital increase, Santander expects no material impact on its fully loaded CET1 ratio, which stood at 10.7% at end-March 2017. In our view, execution risks are manageable given Popular's relative size to Santander (around 11% of total assets at end-2016) and the track record of the latter's management team in acquiring and integrating banks. We believe the group's plan to turn around Popular's business is credible, especially taking into account the positive trajectory in Spain's economy. Asset quality at the combined bank will initially deteriorate somewhat due to Popular's large stock of problem assets. However, we believe that the increased reserve coverage on Popular's legacy real estate-related assets (65% for foreclosed real estate and 75% non-performing loans (NPLs) to real estate developers) will facilitate divestments. Santander targets to halve the acquired stock of problem assets within 18 months and divest the bulk of it by 2020. Popular's acquisition strengthens Santander's competitive position in Portugal and provides it with the largest banking franchise in Spain, with a leading market share in SME banking. We expect the initial impact of the transaction on Santander's domestic profitability to be mildly negative owing to the integration and restructuring costs entailed. However, profitability should be restored gradually due to the potential for cost synergies, which Santander quantifies at around EUR500 million savings annually from 2020. Also the substantial additional provisions made as part of the resolution to write-down problem assets should alleviate loan impairment charges going forward. We believe that the acquisition will not have a material impact on Santander's funding and liquidity profile despite Popular experiencing liquidity pressures from customer deposit outflows in the weeks before its resolution. The group expects that the additional cost of larger TLAC-eligible debt issuance needs will be offset by Popular's cost of funding converging with Santander's. SUPPORT RATING AND SUPPORT RATING FLOOR Santander's Support Ratings (SR) of '5' and Support Rating Floors (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the bank can no longer rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that is likely to require senior creditors participating in losses, instead of or ahead of a bank receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Santander are notched down from its VR, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated (lower Tier 2) debt is rated one notch below the bank's VR to reflect above- average loss severity of this type of debt (one notch). Upper Tier 2 debt is rated three notches below the bank's VR to reflect above-average loss severity of this type of debt (one notch) and high risk of non-performance (two notches) given the option to defer coupons if the issuer reports losses in the last audited accounts. Preferred shares are rated five notches below the bank's VR to reflect higher loss severity risk of these securities compared with average recoveries (two notches from the VR), as well as high risk of non-performance (an additional three notches) due to profit test for legacy issues and fully discretionary coupon payments for recent issues. POPULAR IDRS, SENIOR DEBT AND SUPPORT RATING Popular's IDRs, senior debt ratings and SR have been upgraded following Santander's acquisition. This reflects our view of an extremely high probability of support for Popular by Santander, if needed given the plan to fully integrate Popular with the parent bank. Popular is 100%-owned by Santander and an integral part of the group as it strengthens Santander's SME franchise in Spain and overall competitive position. In our assessment of support, we judge that management and corporate culture at Popular will be highly integrated with those of its parent in a short period of time following the appointment of Santander's CFO as the new Chairman of Popular. In addition, within regulatory restrictions, Santander's capital and liquidity are highly fungible within the group, at least in the eurozone. Popular's SRF has been affirmed and withdrawn because the primary source of support for the bank is now Santander, rather than Spain. VR The downgrade of Popular's VR to 'f' reflects the bank's failure in the form of resolution action taken by the SRB. Loss of confidence from investors and customers had triggered a liquidity shortfall that urged European authorities to resolve the institution. According to the ECB, Popular's supervisor, it was failing or likely to fail in accordance with Article 18 (1) of the SRM regulation. The ECB determined that the significant deterioration of Popular's liquidity position in the past few days would make the bank unable to pay its debts or other liabilities as they fell due in the near future. As a result, the SRB decided that the sale of business tool for transferring shares to a purchaser met the resolution objectives and ensured financial stability was maintained in Spain and Portugal. Fitch has also withdrawn Popular's VR because the bank can no longer be assessed as a standalone institution given the intention to fully integrate Popular with the parent bank in a short period of time. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The downgrade and withdrawal of Popular's subordinated debt (lower Tier 2) and preferred stock and perpetual Tier 1 convertible notes ratings reflects the effective write-down to zero of these debt instruments as part of the resolution. The SRB exercised its power of write-down and conversion of these capital instruments prior to the transfer, to address the shortfall in the value of the bank. RATING SENSITIVITIES SANTANDER IDRS, VR, DCR AND SENIOR DEBT The Stable Outlook reflects our expectation that the group's overall credit profile will remain stable in the foreseeable future despite the execution risks of integrating Popular and the immediate deterioration of asset quality caused by the acquisition. Santander's VR (and hence the bank's IDRs) are unlikely to be higher than their current one notch above Spain's sovereign rating. An upgrade of the VR would be contingent on an upgrade of Spain's sovereign rating. This would have to be accompanied by further improved capital metrics while the positive asset quality trend prior to the acquisition is maintained and potentially accelerated given the acquisition of a weaker bank. This implies a speedy reduction of the large stock of problem assets at Popular. Equally important will be the preservation of the group's earnings resilience by delivering the planned cost synergies from the integration of Popular and maintaining sound earnings performance at major international subsidiaries. A downgrade of Spain's sovereign rating would trigger a downgrade of the bank's VR and hence Long-Term IDR. Downward rating pressure could also arise from a slower improvement in asset quality than currently anticipated in the rating, a substantial weakening of earnings, which we view as unlikely, or unexpected execution and integration risks emerging from Popular's acquisition that could compromise the accomplishment of the group's financial targets for 2018. The rating of second-ranking senior notes is primarily sensitive to a change in the Long-Term IDR of Santander. For the preferred senior notes and the DCR to achieve a one-notch uplift, the buffer of qualifying junior debt and non-preferred senior debt would need to exceed our estimate of a 'recapitalisation amount'. This amount is likely to be around or above the bank's minimum pillar 1 total capital requirement. SUPPORT RATING AND SUPPORT RATING FLOOR Any upgrade of the SRs and upward revision of the SRFs would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Santander are primarily sensitive to a change in its VRs. Upper Tier 2 notes and preferred shares are also sensitive to Fitch changing its assessment of the probability of their non-performance relative to the risk captured in the bank's VR. POPULAR IDRs, SENIOR DEBT AND SUPPORT Popular's IDRs and debt ratings are sensitive to the same factors that might drive a change in Santander's IDRs. While it is not our base case, Popular's ratings would also be sensitive to a reduction in Santander's stake in Popular or if Popular does not become significantly integrated into the group in the short term, leading Fitch to conclude its strategic importance has reduced. The rating actions are as follows: Santander Long-Term IDR: affirmed at 'A-'; Outlook Stable Short-Term IDR: affirmed at 'F2' Viability Rating: affirmed at 'a-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: affirmed at 'A-(dcr)' Second ranking senior notes: affirmed at 'A-' Senior unsecured debt long-term rating and certificates of deposit: affirmed at 'A-' Senior unsecured debt short-term rating, commercial paper and certificate of deposits: affirmed at 'F2' Market-linked senior unsecured securities: affirmed at 'A-emr' Subordinated debt: affirmed at 'BBB+' Preference shares: affirmed at 'BB' Santander International Debt, S.A. Unipersonal Senior unsecured debt long-term rating: affirmed at 'A-' Senior unsecured debt short-term rating: affirmed at 'F2' Market-linked senior unsecured securities: affirmed at 'A-emr' Santander Issuances S.A. Subordinated debt long-term rating: affirmed at 'BBB+' Santander International Preferred, S.A. Unipersonal Preference shares: affirmed at 'BB' Santander Commercial Paper, S.A. Unipersonal Commercial paper: affirmed at 'F2' Santander Finance Capital, S.A. Unipersonal Preference shares: affirmed at 'BB' Santander Finance Preferred, S.A. Unipersonal Preference shares: affirmed at 'BB' Santander Perpetual, S.A. Unipersonal Upper Tier 2 debt: affirmed at 'BBB-' Emisora Santander Espana, S.A.U. Senior unsecured debt long-term rating programme: affirmed at 'A-' Senior unsecured debt short-term rating programme: affirmed at 'F2' Santander International Products PLC Senior unsecured debt long-term rating: affirmed at 'A-' Banco Popular Espanol S.A.: Long-Term IDR: upgraded to 'A-' from 'B', Stable Outlook Short-Term IDR: upgraded to 'F2' from 'B', removed from Rating Watch Negative (RWN) Viability Rating: downgraded to 'f' from 'b' and withdrawn Support Rating: upgraded to '1' from '5' Support Rating Floor: affirmed at 'No Floor' and withdrawn Long-term senior unsecured debt programme: upgraded to 'A-' from 'B'/'RR4', removed from RWN Short-term senior unsecured debt programme and commercial paper: upgraded to 'F2' from 'B', removed from RWN Subordinated lower Tier 2 debt: downgraded to 'C'/'RR6' from 'B-'/'RR5' and withdrawn Perpetual Tier 1 convertible notes: downgraded to 'C'/'RR6' from 'CC'/'RR6' and withdrawn BPE Financiaciones S.A.: Long-term senior unsecured debt and debt programme (guaranteed by Popular): upgraded to 'A-' from 'B'/'RR4', removed from RWN Short-term senior unsecured debt programme (guaranteed by Popular): upgraded to 'F2' from 'B', removed from RWN Popular Capital, S.A.: Preferred Stocks: downgraded to 'C'/'RR6' from 'CC'/'RR6' and withdrawn Contact: Primary Analysts Cristina Torrella (Santander) Senior Director +34 93 323 8405 Fitch Ratings Espana, S.A.U. Av. Diagonal, 601, 2nd Floor 08028 Barcelona Josu Fabo, CFA (Popular) Director +34 93 323 8405 Fitch Ratings Espana, S.A.U. Av. Diagonal, 601, 2nd Floor 08028 Barcelona Secondary Analysts Arnau Autonell (Popular) Associate Director +44 20 3530 1712 Josu Fabo, CFA (Santander) Director +34 93 323 8405 Committee Chairperson Bridget Gandy Managing Director +44 20 3530 1095 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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