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04 Jan 2011
Debt and deposit ratings remain on review for possible further downgrade following sovereign's rating review
Madrid, January 04, 2011 -- Moody's Investors Service has today downgraded the senior debt and
deposits ratings of Bilbao Bizkaia Kutxa (BBK) to Baa1 from A1,
and its Bank Financial Strength Rating (BFSR) to D+ from C+.
The D+ standalone BSFR maps to a Ba1 rating on the long-term
scale. At the same time, dated subordinated debt was downgraded
to Baa2 from A2, and the short-term rating to Prime-2
from Prime-1. All of BBK's debt ratings that benefit
from a rating uplift due to systemic support from the Spanish government
remain on review for possible downgrade, subsequent to Moody's
decision on 15 December 2010 to place the Kingdom of Spain's Aa1
bond rating on review for possible downgrade. The savings bank's
BFSR, which is not affected by the review, has a negative
These rating actions conclude Moody's rating review initiated on
21 July 2010 when BBK proposed the acquisition of Cajasur (not publicly
rated), the Cordoba-based Spanish savings bank which had
been put under the administration of Spain's fund for orderly bank
restructuring (the 'Fondo de Restructuración Ordenada Bancaria'
or FROB) in May 2010.
The integration is effective since 1 January 2011. All of the assets
and liabilities of Cajasur have been assumed by BBK Bank, a fully
consolidated subsidiary 100% owned by BBK. Cajasur has ceased
to exist following the completion of the integration on 1 January.
DOWNGRADE OF BBK'S BFSR
Moody's decision to downgrade BBK's standalone ratings,
the BFSR, by several notches from C+ to D+ is driven by
the rating agency's concern that the integration of Cajasur has
significantly weakened the combined entity's financial strength:
i) the capital levels of the combined group are significantly lower than
of BBK before the merger; ii) in return for winning the bidding process
for Cajasur, BBK has taken on the asset risk of Cajasur without
significant recapitalisation or indemnification by the Spanish government
against further asset quality deterioration at Cajasur, a strategy
which has notably raised the risk profile of BBK for the short to medium
term future; iii) the challenge for BBK's management to integrate
a failed, but nevertheless quite sizeable bank in the middle of
a very challenging operating environment.
BBK has only received EUR392 million capital injections from the Spanish
government fund "FROB" (Fund for the Orderly Restructuring
of the Banking System; and Moody's cautions that the funds
provided may not be sufficient to compensate for the incremental expected
losses in the combined entity's risk assets according to Moody's
own scenario analyses.
In addition, BBK has had to repay EUR800 million to the FROB late
in 2010, which had been initially provided by the FROB in the form
of preference shares to restore Cajasur's capital ratios at the
time of the FROB's intervention as these ratios were well below
the minimum regulatory thresholds.
Moody's acknowledges that BBK displayed strong financial fundamentals
prior to the integration of Cajasur, as reflected by BBK's
Tier 1 ratio of 15.6% as of June 2010 (one of the strongest
in the Spanish banking system) and sound asset quality indicators at end-September
2010 (a problem loan (PL) ratio of 2.6% well below the system's
average of 5.5%, as well as PL coverage by loan-loss
reserves exceeding 100% and above the 60% average for the
system). However, the relative size of Cajasur -- with
total assets of EUR17 billion in September 2010 compared with BBK at EUR29
billion -- together with its very weak financial fundamentals,
makes this quite a substantial acquisition that has significantly altered
the credit profile of BBK. The impact of the integration is reflected
by the significant decline in BBK's Tier 1 capital ratio,
which will fall to 9.5% from the above mentioned 15.6%.
Moody's notes that Cajasur's very weak financial fundamentals
are caused by: (i) Very weak capital levels, albeit favourably
impacted at the time of the bailout by the FROB's EUR800 million
capital injection (as a result the Tier 1 ratio increased to 7.3%
as of end-June 2010 from 3.7% at FY2009), which,
nonetheless, have been repaid by BBK at end 2010; (ii) reported
net losses of EUR950 million (as of September 2010), largely driven
by the almost EUR1 billion allocated to provisions; (iii) a very
high PL ratio of 17.4% as at September 2010; and (iv)
the loan portfolio's sizeable exposure to the real estate sector(27%
for Cajasur compared to 11% for BBK before the integration).
The new entity will benefit from cost savings that will arise from the
restructuring plan that has been approved by BBK, which includes
a reduction of Cajasur's workforce and a number of branch closures.
In addition, BBK will allocate further resources in addition to
the EUR392 million provided by the FROB in anticipation of the losses
that may arise from Cajasur's loan and securities portfolio.
Moody's also notes that the fiscal credits -- deriving from
the losses that Cajasur reported in 2009 and 2010 -- that will be
activated at integration, will help to mitigate the negative impact
that the integration will have on the risk absorption capacity of BBK.
Moody's assigned a negative outlook to BBK's BFSR, reflecting
the negative pressures on BBK's standalone creditworthiness stemming
from the execution risks associated with Cajasur's integration as
well as its vulnerability to further asset quality and earnings pressure
stemming from the operating environment.
DOWNGRADE OF BBK'S SENIOR DEBT AND DEPOSIT RATINGS, AND SUBORDINATED
The downgrade of BBK's senior debt and deposit ratings follows the
downgrade of the savings bank's standalone BFSR. BBK's
rating of Baa1/Prime-2 incorporates Moody's assumption of
ongoing exceptional systemic support. In this respect, Moody's
believes that the Spanish government is generally both willing and able
to support its banking system and the new entity in particular,
as and when required.
The downgrade of BBK's dated subordinated debt instruments is driven
by the same factors considered in Moody's downgrade of the senior
unsecured debt. These dated subordinated debt instruments continue
to be rated one notch lower than the senior debt instruments based on
subordination in the case of liquidation.
BBK's debt and deposit ratings and dated subordinated debt remain
on review for possible further downgrade, aligned with other 30
Spanish banks that were placed on review for possible downgrade on 20
December 2010 and subsequent to Moody's decision on 15 December
2010 to place the Kingdom of Spain's Aa1 bond rating on review for
possible downgrade. In this respect, debt ratings that benefit
from uplift due to systemic support may be negatively affected by either
a weakening in the sovereign's creditworthiness; or a potential
reduction in the likelihood that the Spanish government will support Spanish
banks in case of need, although Moody's believes that the
government maintains a strong incentive to continue to provide support
within its capacity.
POTENTIAL TRIGGERS FOR AN UPGRADE/DOWNGRADE
An upgrade of BBK's ratings is currently unlikely given the negative
outlook on its BFSR and the review for possible further downgrade of the
debt and deposit ratings. Any upward pressure on the BFSR would
depend on stronger capital adequacy levels, further offsetting estimated
credit losses under Moody's anticipated scenario and a lower transition
risk to a more severe scenario.
Downward pressure would be exerted on BBK's rating as a result of:
(i) greater-than-expected deterioration in the new entity's
risk absorption capacity, beyond the estimations assumed in Moody's
stress tests; and/or (ii) deterioration of the savings bank's
sound liquidity position.
The principal methodologies used in rating Bilbao Bizkaia Kutxa were "Bank
Financial Strength Ratings: Global Methodology", published
in February 2007, "Incorporation of Joint-Default Analysis
into Moody's Bank Ratings: A Refined Methodology",
published in March 2007, and "Moody's Guidelines for
Rating Bank Hybrid Securities and Subordinated Debt", published
in November 2009. Other methodologies and factors that may have
been considered in the process of rating this issuer can also be found
on Moody's website.
Headquartered in Bilbao, Spain, BBK reported total consolidated
assets of EUR29 billion as of 30 September 2010.
Headquartered in Cordoba, Spain, Cajasur reported total consolidated
assets of EUR17 billion as of 30 September 2010.
The combined entity will be headquartered in Bilbao and will have combined
assets of EUR46 billion.
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parties involved in the ratings, public information.
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Maria Jose Mori
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Espana, S.A.
Moody's downgrades BBK to Baa1 from A1 due to Cajasur acquisition
Barbara de Braganza, 2
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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