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Fitch Affirms Bankia at 'BBB-'; Stable Outlook
February 15, 2017 / 5:23 PM / 10 months ago

Fitch Affirms Bankia at 'BBB-'; Stable Outlook

(The following statement was released by the rating agency) BARCELONA, February 15 (Fitch) Fitch Ratings has affirmed Bankia, S.A.'s Long-Term Issuer Default Rating (IDR) at 'BBB-' and parent company, BFA, Tenedora de Acciones, S.A.U.'s (BFA) Long-Term IDR at 'BB+'. Their Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT Bankia The IDRs of Bankia are driven by its standalone strength as expressed by its Viability Rating (VR). The VR reflects the bank's turnaround since recapitalisation, led by experienced management, a large national retail franchise, average risk appetite, strengthened capitalisation and internal capital generation, as well as an improved funding and liquidity profile. The VR also reflects its weak, albeit improving, asset quality indicators and lower earnings diversification than peers. Bankia's problem assets (non-performing loans (NPLs) and foreclosed assets) declined 13% in 2016, due to lower NPL entries and asset sales, and the ratio of problem assets/loans and foreclosed assets improved to 11.5% at end-2016 from 12.5% a year ago. This ratio remains high for the rating, but our assessment of asset quality also considers the bank's adequate NPL reserve coverage (around 55%), a supportive domestic operating environment and the bank's commitment to actively manage down problem assets. Capitalisation has improved steadily in recent years, with Bankia reporting a fully loaded common equity tier 1 ratio of 13% at end-2016. In our assessment of capital, we believe that Bankia will likely operate with a somewhat lower CET1 capital ratio in future, and that excess capital could be used to acquire Banco Mare Nostrum or be returned to shareholders and replaced by hybrid capital instruments. We nevertheless believe that the bank's solvency will be maintained at a level commensurate with an investment-grade rating, including capital exposure to unreserved problem assets at below 100% of fully loaded CET1 (70% at end-2016). The bank's profitability is supported by good cost efficiency and much reduced loan impairment charges (LICs), partly mitigating revenue pressure from low interest rates and competition. Revenue generation is largely derived from net interest income, reflecting Bankia's retail nature, but this has a larger contribution from interest earned on securities than peers. The bank is gradually expanding its business in SMEs and consumer lending, increasing cross-selling and reducing deposit costs to support its banking earnings, but Fitch would look for further improvements to be accompanied by higher banking activity. Bankia's funding and liquidity profile continued to improve in 2016, benefiting from loan shrinkage and steady growth in deposits, which enhanced the bank's loan-to-deposit ratio to 111% at end-2016 from 121% at end-2015. Customer deposits are the bank's main funding source, representing about 60% of total funding. The rest is largely secured in the form of covered bonds, ECB's TLTRO or repos, which are used to fund a large stock of legacy debt securities. Liquidity reserves are adequate for scheduled debt repayments. BFA BFA is wholly owned by Spain's Fund for Orderly Bank Restructuring (FROB), and it retained a 65.9% controlling stake in Bankia at end-2016. BFA's IDRs and senior debt ratings are based on the institution's VR, which is in turn driven by the VR of Bankia as the latter is one of BFA's principal assets, representing about 36% of BFA's unconsolidated balance-sheet at end-1H16. The other large item on BFA's balance sheet is Spanish sovereign bond holdings. BFA's VR is notched down once from Bankia's to reflect Fitch's belief that BFA's strategy is to gradually reduce its majority ownership, although the timing is uncertain as there is no deadline set out in its restructuring plan. BFA's VR also reflects low double leverage of 86% at end-1H16 and manageable indebtedness given the institution's stock of unencumbered assets. As part of the group's restructuring process, BFA surrendered its banking license in early 2015, but remains the group's consolidating entity and is supervised by the banking authorities on a consolidated basis given its stake in Bankia. BFA's fully loaded CET1 ratio was 13.7% at end-1H16. SUPPORT RATING AND SUPPORT RATING FLOOR Bankia's and BFA'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 they become non-viable. For BFA, Fitch also takes into account its role as holding company. SUBORDINATED DEBT Bankia's subordinated (lower Tier 2) debt issue is rated one notch below its VR to reflect the below-average loss severity of this type of debt. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Bankia Upside could arise in the medium term from further improvement in asset quality, combined with further strengthening of profitability. These factors will ultimately support Bankia's capitalisation, either through internal capital generation or reduced capital at risk from unreserved problem assets. Downgrade pressure could come from loan quality and capital shocks as well as significant increase in risk appetite, for example through material acquisitions or expansion into higher- risk lending. BFA The parent holding company's IDR, VR and senior debt ratings remain sensitive to the same factors affecting the operating bank's VR. Its ratings would also suffer from an ownership dilution that results in a loss of control over its bank or changes in the regulatory supervision approach of the group. Downside could also arise from write-downs of assets or higher debt or double leverage. SUPPORT RATING AND SUPPORT RATING FLOOR (ALL BANKS) An upgrade of the SRs and upward revision of the SRFs 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 rating of Bankia's subordinated debt is primarily sensitive to a change in the bank's VR, which drive the ratings, but also to a change in Fitch's view of non-performance or loss severity risk relative to the bank's viability. Fitch has taken the following rating actions: Bankia: Long-Term IDR affirmed at 'BBB-'; Outlook Stable Short-Term IDR affirmed at 'F3' Viability Rating: affirmed at 'bbb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Long-term senior unsecured debt and debt programme: affirmed at 'BBB-' Short-term senior unsecured debt programme and commercial paper: affirmed at 'F3' Subordinated debt: affirmed at 'BB+' BFA: Long-Term IDR affirmed at 'BB+'; Outlook Stable Short-Term IDR affirmed at 'B' Viability Rating: affirmed at 'bb+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Long-term senior unsecured debt: affirmed at 'BB+' Contact: Primary Analyst Roger Turro Director +34 93 323 8406 Fitch Ratings Espana S.A.U. Avinguda Diagonal, 601 2nd Floor 08008 Barcelona Secondary Analyst Josu Fabo, CFA Director +34 93 494 3464 Committee Chairperson Bjorn Norrman Senior Director +44 20 3530 1330 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@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 _id=1019037 Solicitation Status here 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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