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Fitch Places Spain's Banco Mare Nostrum on RWP on Potential Merger
April 7, 2017 / 4:54 PM / 5 months ago

Fitch Places Spain's Banco Mare Nostrum on RWP on Potential Merger

(The following statement was released by the rating agency) BARCELONA/LONDON, April 07 (Fitch) Fitch Ratings has placed Banco Mare Nostrum S.A.'s (BMN) Long-Term Issuer Default Rating (IDR) of 'BB' on Rating Watch Positive and affirmed its Viability Rating (VR) at 'bb'. This follows the decision by the FROB, known in English as the Fund for Orderly Bank Restructuring, to merge the bank with Bankia S.A. (BBB-/Stable/bbb-) to optimise the recovery of state aid given to both banks. A full list of rating actions is attached at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The RWP on BMN's IDRs and debt ratings reflects Fitch's belief that there is a high likelihood that the merger between the two banks will go ahead given that the FROB is the controlling shareholder of both entities. The merger is pending the agreement from both boards of directors, their general assemblies, as well as other administrative and regulatory approvals. BMN has already hired external advisors to assess the transaction and both banks have set up independent commissions, comprising independent board members, to protect minority interests. Fitch affirmed Bankia's ratings on 15 February 2017 (see "Fitch Affirms Bankia at 'BBB-'; Stable Outlook" on www.fitchratings.com). The agency considered that Bankia was likely to operate with a lower capital ratio in the future because excess capital could be subject to a variety of actions, including the acquisition of BMN. Fitch will reassess the financial impact of the merger once information is made available. BMN's ratings reflect the bank's capital levels maintained with moderate buffers, improving but still weak asset quality and low core profitability. The ratings also factor in the bank's sound regional franchise, and adequate funding and liquidity. The bank's Fitch Core Capital (FCC) ratio was 11% at end-2016 as lower risk-weighted assets from balance sheet de-risking offset the small loss in 2016. BMN's capital is still highly vulnerable to unreserved problem assets (which include non-performing loans and foreclosed assets) which represented about 1.3x end-2016 FCC. The bank's problem asset ratio declined to 14.9% at end-2016 (end-2015: 15.4%), supported by active management of recoveries and an improved economic environment. BMN's core income profitability remains undermined by low interest rates, which eroded its earning generation capacity. SUPPORT RATING AND SUPPORT RATING FLOOR BMN's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that BMN 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 participating in losses, instead of or ahead of a bank receiving sovereign support SUBORDINATED DEBT The bank's subordinated debt is notched down once from the bank's VR for loss severity because of lower recovery expectations relative to senior unsecured debt. These securities are subordinated to all senior unsecured creditors. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Fitch expects to resolve the RWP on BMN's ratings once the merger is completed, which we expect to take place in the second half of the year. At that time, Fitch will reassess the financial impact of the merger on both banks. Upside rating potential on BMN's VR is contingent on a material reduction in problem assets resulting in lower capital encumbrance from unreserved problem assets. Improving core earnings generation could also be rating positive. Conversely, the inability to improve asset-quality metrics or to sustain recurrent internal capital generation could put downward pressure on the VR. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support domestic banks. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT The RWP on the bank's subordinated debt reflects a potential upgrade for the instrument if the merger is completed as Fitch believes the acquirer would be forthcoming to neutralise the non-performance risk of the instruments, preventing the bank from hitting loss-absorption features. In case the merger is not successful, the issue ratings are primarily sensitive to any change in the VR of BMN. The rating actions are as follows: Banco Mare Nostrum S.A. Long-Term IDR of 'BB', placed on RWP Short-Term IDR of 'B', placed on RWP Viability Rating affirmed at 'bb' Support Rating Affirmed at '5' Support Rating Floor affirmed at 'No Floor' Senior unsecured debt Long-Term rating of 'BB', placed on RWP Senior unsecured debt Short-Term rating of 'B', placed on RWP Commercial paper of 'B', placed on RWP Subordinated debt of 'BB-', placed on RWP 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. 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