Rating actions follow rating actions at the parent-bank level
Madrid, November 03, 2011 -- Moody's Investors Service has today downgraded Dexia Sabadell, S.A.'s
(Dexia Sabadell) bank financial strength rating (BFSR) to E+ (mapping
to B2 on the long-term scale) from C- (Baa2), and
its long and short-term debt ratings to Ba3/Not-Prime from
Baa2/Prime-3. All of Dexia Sabadell's ratings remain
on review for downgrade.
The downgrade of Dexia Sabadell follows the negative rating actions at
the parent level, Dexia Credit Local (DCL, A3/P-1/E+,
review for downgrade) which is the controlling owner of Dexia Sabadell,
with a 60% stake in it. For further details, please
refer to Moody's press release on Dexia's main operating units published
on 14 October 2011 (http://www.moodys.com/research/Moodys-takes-actions-on-Dexia-Group-further-to-proposed-restructuring--PR_228337).
RATINGS RATIONALE
-- DOWNGRADE OF DEXIA SABADELL'S BFSR
The BFSR downgrade to E+ from C- primarily reflects Dexia
Sabadell's high dependence on DCL, which provides 77%
of its total funding at end-June 2011. Moody's believes
that Dexia Sabadell would not be able to meet its refinancing requirements
over the next 12 months without liquidity support from DCL. Dexia
Sabadell relies significantly on short-term funding and its funding
sources lack diversification. Moody's is concerned that in
view of DCL's very weak own funding position, it may become
more difficult for DCL to continue providing liquidity support to its
subsidiary.
The BFSR downgrade also reflects the risks stemming from Dexia Sabadell's
large borrower concentration, with the first group representing
15.6% of the loan book and the top ten exposures accounting
for 45.6% of the loan book as at June-end 2011.
Weighed against Dexia Sabadell's capital, several large concentrations
exceed the limits imposed by Bank of Spain, although excess amounts
are covered by DCL (guarantees totalled EUR7.8 billion as of June
2011). However, Moody's notes that DCL's fragile
credit profile has further heightened concerns about Dexia Sabadell's
concentration risk. As a result of these two key credit weaknesses
of Dexia Sabadell and its high relicance on its parent, Moody's
has therefore aligned the ratings of Dexia Sabadell with the standalone
rating of its parent at E+ (mapping to B2 on the long term scale).
Furthermore, in downgrading Dexia Sabadell's BFSR Moody's
has also taken into account the following factors that will continue to
challenge the bank's credit profile (i) weaker asset quality,
which will likely deteriorate, given its exposure to Spanish regions
and municipalities that have suffered a recent weakening of their credit
quality; (ii) pressures on Dexia Sabadell's solvency,
in light of the expected asset-quality deterioration and the high
leverage of its balance sheet, which benefits from the low regulatory
risk-weighting of many of its public-sector assets;
and (iii) the uncertainties arising from DCL's scheduled restructuring,
which may also affect the sustainability of Dexia Sabadell's business
model if parental support should weaken in the future.
-- DOWNGRADE OF DEXIA SABADELL'S DEBT RATINGS
The downgrade of the long and short-term deposit ratings was primarily
driven by the downgrade of Dexia Sabadell's BFSR. Its debt
ratings of Ba3 incorporate Moody's assessment of a high probability
of parental support in case of need, which resulted in a two notch
uplift from the B2 standalone rating for Dexia Sabadell.
Moody's said that Dexia Sabadell's likelihood of parental
support steams from its strong interlinks with its parent, DCL,
through its ongoing liquidity support and guarantees provided.
While the parent's capacity to continue providing support to its
subsidiary on a standalone basis is limited, as DCL's standalone
ratings is at the same level as that of its subsidiary; Moody's
expects that to some degree the government support incorporated on the
parent's debt ratings of A3 should be factored in the ratings of
the groups' foreign subsidiaries, including Dexia Sabadell,
as long as DCL is allowed to downstream some of that government support
to other group entities such as Dexia Sabadell.
FOCUS OF THE REVIEW
The review of Dexia Sabadell's ratings will focus on:
(i) The conclusion of the current rating review for DCL, since further
negative rating migration of DCL's standalone BFSR and debt and
deposit ratings will likely affect Dexia Sabadell's BFSR and deposit
ratings, respectively;
(ii) DCL's capacity to continue providing liquidity support to its
subsidiary in view of Dexia Sabadell's very weak funding profile;
(iii) Pressures on Dexia Sabadell's solvency, given our expectations
of deterioration in asset quality and its limited resources to recapitalise
due to DCL's fragile credit profile, and;
(iv) Potential erosion of Dexia Sabadell's franchise in the Spanish
public-finance sector, due to its lack of financing capacity
and the negative effect of the targeted restructuring of DCL.
POTENTIAL TRIGGERS FOR A DOWNGRADE/UPGRADE
Downward pressure would be exerted on Dexia Sabadell's standalone
credit strength because of (i) further deterioration of its weak liquidity
position; (ii) greater-than-expected deterioration
in asset quality, especially impairments on one of its large exposures;
(iii) a depletion of its capital levels; (iv) a higher risk profile,
which could stem from higher borrower concentration or increased exposure
to riskier segments; and/or (v) deterioration of the bank's franchise,
particularly in light of the actual group's restructuring process.
The bank's debt and deposit ratings are linked to the standalone BFSR,
and any change to the BFSR would likely also impact these ratings.
Additionally a downgrade on DCL's BFSR or debt ratings, or
signs of a lower probability of support from its parent bank could also
lead to a downgrade of Dexia Sabadell's debt ratings.
An upgrade of Dexia Sabadell's standalone rating is currently very
unlikely given the review for downgrade of the rating. An improvement
of the bank's BFSR could be driven by (i) an improvement of the bank's
capital adequacy ratios; (ii) improved liquidity position with normalized
access to wholesale funding and broader diversification of its funding
sources; and (iii) a reduction in its credit risk concentration by
borrower, with its top 20 borrowers representing less than 750%
of pre-provision income and 200% of Tier 1 capital.
PRINCIPAL METHODOLOGIES
The methodologies used in these ratings were Bank Financial Strength Ratings:
Global Methodology published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology published in March 2007. Please see the Credit Policy
page on www.moodys.com for a copy of these methodologies.
Headquartered in Madrid, Spain, Dexia Sabadell reported total
unaudited consolidated assets of EUR17.6 billion (30 June 2011).
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Maria Jose Mori
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
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Johannes Wassenberg
MD - Banking
Financial Institutions Group
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Releasing Office:
Moody's Investors Service Espana, S.A.
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Moody's downgrades Dexia Sabadell to Ba3/NP/E+ from Baa2/P-3/C-; all ratings remain on review for downgrade (Spain)
