Madrid, July 04, 2013 -- Moody's Investors Service has today downgraded the debt and deposit ratings
of Banco Popular Español S.A. (Banco Popular) to
Ba3/Not Prime from Ba1/Not Prime, following the lowering of the
bank's baseline credit assessment (BCA) to b1 from ba2, which is
equivalent to a standalone bank financial strength rating (BFSR) at E+,
down from D. All of the bank's ratings now carry a negative
outlook.
The downgrade of Banco Popular's ratings reflects the bank's
weakened financial profile and the deterioration of asset-quality
metrics in most asset classes. In particular, the downgrade
reflects the bank's significant exposure to the non-real
estate-related corporate sector, the bank's key strategic
focus, for which Moody's expects further significant deterioration.
In its rating action, Moody's considered the benefits of the
EUR2.5 billion capital increase on Banco Popular's solvency
levels and other capital-strengthening measures carried out in
2012 against a backdrop of a recessionary operating environment,
which it believes will continue to pressure the bank's profitability
and already poor asset-quality indicators.
This rating action concludes the review for downgrade initiated on 24
October 2012 (please see "Moody's concludes rating reviews on majority
of Spanish banks after sovereign rating confirmation").
For additional insight about our broader view on the Spanish banking system,
please refer to http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_155899
"Credit profiles of many Spanish banks continue to deteriorate given weakness
of domestic economy".
RATINGS RATIONALE
--- LOWERING OF STANDALONE CREDIT ASSESMENT
The lowering of Banco Popular's standalone credit assessment by
two notches to E+/b1 from D/ba2, reflects the broad asset-quality
deterioration across the bank's asset classes as the economy has
continued contracting in the first half of 2013, with domestic demand
not showing any significant signs of recovery. Moody's therefore
anticipates a further decline in asset quality for the remainder of 2013
and during 2014.
Banco Popular's asset-quality deterioration was initially
primarily driven by the group's exposure to the real-estate
development and construction sectors. However, since 2012
and coinciding with the acquisition of Banco Pastor, the deterioration
has accelerated in other asset classes, namely residential mortgages
and corporate. At year-end 2012, gross non-performing
loans (NPLs) almost doubled numbers reported in 2011 --
almost 30% of which relates to the acquisition of Banco Pastor
-- to 11.7% of gross loans (up from 7.2%
at end of 2011), compared to the system average of 10.44%.
The 10.5% quarter-on-quarter increase in NPLs
in the first quarter of 2013 to 13% of gross loans --
versus a system average of 10.47% -- highlights
the persistent asset-quality challenges faced by the bank.
In addition to NPLs, Banco Popular has other problematic exposures
related to real-estate assets the bank acquired over the last few
years. If included, the NPL ratio rises to a very high 19.5%,
which exceeds its domestic peers. Furthermore, Moody's
notes the high percentage of refinanced loans at the bank (12%
of gross loans). The aggregation of refinanced loans (that are
not already captured in the non-performing loan ratio) to the overall
problem loan ratio (rising to 26.5%) indicates the magnitude
of the existing balance-sheet pressures the bank faces before considering
any possible further deterioration of the loan book.
Going forward, Moody's expects Popular's asset quality
to deteriorate further across asset classes, based on its view that
any signs of a modest economic recovery at this stage are only being generated
by the export sector, while still weak domestic demand is likely
to cause further contraction in domestic growth into 2014 as unemployment
remains at very high levels. Banco Popular is particularly exposed
to the non-real estate corporate sector, which represented
a high 46% of the bank's total loans (defined as unconsolidated
private sector domestic loans) at end-December 2012 versus one-third
for the system.
In lowering Banco Popular's standalone credit assessment,
Moody's has incorporated the benefits of the capital-strengthening
measures carried out in 2012 -- that resulted in an increase
of the coverage ratio (defined as loan loss reserves/NPLs) to 66%
at end of 2012 up from 35% in the previous year --
and that will continue in the current year, albeit to a more limited
extent, as well as Banco Popular's sound recurring earnings
power Banco Popular displays a level of recurrent profitability (measured
as recurrent pre-provision income over risk-weighted assets)
which at 2.06% at end of 2012 is higher than the 1.67%
average of rated Spanish banks.
Popular's standalone BFSR has a negative outlook to reflect (1)
the bank's vulnerability to a further weakening of its credit profile
in light of the anticipated modest recovery of the Spanish economy and
its higher than average exposure to corporate non-real estate,
and (2) the significant downside risks to Moody's macroeconomic
forecasts, which could exert further pressure on the ratings if
they were to materialise.
--- DOWNGRADE OF THE SENIOR DEBT AND DEPOSIT RATINGS
The two-notch downgrade of Banco Popular's senior debt and
deposit ratings reflects the two-notch lowering of the bank's
standalone credit assessment.
The negative outlook on the bank's debt and deposit ratings reflects
the currently negative outlook on the Spanish government's Baa3 bond rating
and the negative outlook on Banco Popular's standalone BFSR.
---DOWNGRADE OF SUBORDINATED DEBT AND HYBRID RATINGS
Moody's has today downgraded the senior subordinated debt ratings of Banco
Popular to B2 from Ba3, the junior subordinated ratings to B3(hyb)
from B1(hyb) and the preferred shares ratings to Caa1 (hyb) from B3 (hyb),
with a negative outlook, in line with the lowering of the bank's
BCA.
Banco Popular's preferred shares are now rated three-notches
below the bank's standalone BCA, down from the previous four
notches to reflect the changed conditions of these instruments approved
earlier this year. Under the new terms and conditions, the
trigger for dividend deferral has moved from a profit and loss trigger
to a balance sheet trigger which, in Moody's view, reduces
the probability of a trigger breach.
WHAT COULD MOVE THE RATING UP/DOWN
An upgrade of Banco Popular's standalone BFSR is currently unlikely,
given the negative outlook. An improvement of its standalone ratings
could be driven by the work out of its asset-quality challenges
together with a sustainable recovery in its recurring earnings.
Downward pressure would be exerted on the bank's standalone credit
strength if (1) operating conditions worsen beyond Moody's current expectations,
i.e., a broader economic recession beyond our current
GDP decline forecasts of -1.4% for 2013; (2)
the bank's liquidity position deteriorates significantly; and/or
(3) its franchise weakens.
The principal methodology used in these ratings was Global Banks published
in May 2013. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain 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 certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Maria?Cabanyes
Senior Vice President
Financial Institutions Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
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Johannes?Felix?Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
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Moody's downgrades Banco Popular to Ba3 from Ba1, negative outlook assigned