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Fitch Revises Caja Rural del Sur Outlook to Stable; Affirms at 'BBB'
October 17, 2017 / 1:43 PM / a month ago

Fitch Revises Caja Rural del Sur Outlook to Stable; Affirms at 'BBB'

(The following statement was released by the rating agency) LONDON, October 17 (Fitch) Fitch Ratings has revised the Outlook on Spain-based Caja Rural del Sur, Sociedad Cooperativa de Credito's (Caja Rural del Sur) Long-Term Issuer Default Rating (IDR) Long-Term IDR to Stable from Positive. It has also affirmed the Long-Term IDR at 'BBB', the Viability Rating (VR) at 'bbb' and the Short-Term IDR at 'F3'. A full list of rating actions is available at the end of this rating action commentary. The rating actions are part of a periodic review of Spanish credit cooperatives rated by Fitch. KEY RATING DRIVERS IDRS AND VR Caja Rural del Sur's ratings are driven by its moderate risk appetite, sound capitalisation and a stable funding and liquidity profile. They also take into account the bank's small size and regionally concentrated franchise, improving, though still weak, asset quality and modest profitability. The Outlook revision to Stable reflects Fitch's view that Caja Rural del Sur will need more time to further reduce problem assets than we had expected. Consequently, the capital vulnerability to unreserved problem assets remains higher than peers. Asset quality remains a rating weakness, despite continued improvements in 2016 and 1H17. At end June-2017, the problem asset ratio, which includes foreclosed assets, decreased to a still high 9.7%. The reserve coverage fell to 61% (end-June 2016: 76%) following accounting treatment changes in Spain. Part of the loan impairment reversals was booked under other provisions to cover the litigation risks related to the interest rate floor clauses case, which we believe are now properly covered. The bank's capitalisation is sound. At end-June 2017, the Fitch Core Capital ratio was high at 19.7%, but capital at risk from unreserved problem assets was stable at about a third, reflecting Caja Rural del Sur's vulnerability to unexpected asset-quality shocks. We also factor in the bank's small equity base in our assessment of capital. The bank has stable but modest earnings generation capacity. Profitability improved in 1H17, mainly from lower operating expenses and higher commission income, but any material improvement is unlikely in the low-interest-rate environment. Net interest income still benefits from a small part of the loan book with interest-rate floors that will gradually mature, but the effect of this should be mitigated in the medium term by lower loan impairment charges, modest growth in business volumes and further cost-cutting measures. Caja Rural del Sur has no structural reliance on wholesale markets to fund its loan book. The loans/deposits ratio has been steady at about 80% for the past few years. Liquidity is strong given its retail funding structure and the bank's high stock of unencumbered ECB-eligible assets. SUPPORT RATING AND SUPPORT RATING FLOOR Caja Rural del Sur'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 if it 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 Upside rating potential could arise if Caja Rural del Sur reduces significantly the stock of problem assets while maintaining sound capital ratios and loss-absorption buffers, thus reducing capital at risk from unreserved problem assets. Improvements in profitability would also be rating positive. Downgrade pressure could come from a setback in asset-quality improvements or a material weakening of profitability that puts pressure on capital, although this is not expected by Fitch. 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 its banks. While not impossible, this is highly unlikely, in Fitch's view. The rating actions are as follows: Long-Term IDR: affirmed at 'BBB', Outlook revised to Stable from Positive Short-Term IDR: affirmed at 'F3' Viability Rating: affirmed at 'bbb' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Contact: Primary Analyst Cristina Torrella Senior Director +34 93 323 8405 Fitch Ratings Espana, S.A.U. Av. Diagonal, 601, 2nd Floor 08028 Barcelona Secondary Analyst Fernando Sanchez Analyst +44 20 3530 1221 Committee Chairperson Bjorn Norrman Senior Director +44 20 3530 1330 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. 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. 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As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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