OREANDA-NEWS. Fitch Ratings has affirmed Liberbank, S.A.'s (Liberbank) Long-term Issuer Default Ratings (IDR) at 'BB', its Short-term IDR at 'B' and Viability Rating (VR) at 'bb'. The Outlook on its Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
Liberbank's Long-term IDR is driven by the bank's standalone creditworthiness, as captured by the VR. The ratings reflect the bank's sound regional franchise and comfortable funding and liquidity profile for its current risk profile. The ratings also factor in the bank's exposure to a legacy portfolio of problematic assets under an asset protection scheme (APS), which undermines its asset quality and capital at risk, and its modest core profitability.

Despite improvement in 2015, Liberbank's asset quality continues to be heavily affected by a legacy real estate portfolio acquired in 2010 that was not transferred to SAREB, Spain's bad bank. This exposure has an APS from the banks' Deposit Guarantee Fund that expires at end-2016. The APS provided reserve coverage of up to about a reasonable 53% as of end-2015. The bank's non-performing loans (NPL) ratio was a high 19.9% at end-2015 (25.4% if foreclosed assets are included). However, excluding the APS the bank's NPL ratio would be significantly better at 10.6% (11.4% including FAs) and in line with sector average, thanks to a large stock of good quality residential mortgages from home regions. NPL coverage levels not related to the APS remained stable at about 45%. Combined with the large portion of collateralised loans, this should provide some protection against housing price shocks.

Liberbank's Fitch core capital (FCC) ratio remained broadly stable in 2015 at an adequate 13.2%, while its fully-loaded CET1 ratio was 11.7%. However, capital at risk from unreserved problem assets remained very high and well above the sector average at about 218% of FCC, although this would fall dramatically to about 72% excluding the APS. We expect the capital impact from risk weighting APS assets once the APS expires will be manageable. Regular fair valuation assessments on APS assets' collateral by a third party since their acquisition also provides some comfort that coverage levels are adequate.

Liberbank's funding structure is well-balanced with customer deposits being the main funding source and broadly funding the bank's loan book. The bank's liquidity position is comfortable as debt maturities are manageable and well spread over time and are well covered by an ample stock of unencumbered assets.

Banco CLM, a 75%-owned bank subsidiary of Liberbank, is the spun-off banking business of the failed Caja de Ahorros de Castilla-La Mancha and is fully consolidated into the group's accounts. Banco CLM is highly-integrated into the group, strengthens the bank's franchise in Castilla-La Mancha and provides geographical diversification to the group. .

Fitch assesses the VRs of Liberbank and Banco CLM on a consolidated basis in view of the latter's relative size and role within the group. The common VR also reflects a high degree of integration, including capital and liquidity fungibility between the entities and the shared brand and jurisdiction. In addition, the group's management is centralised at Liberbank, underlining Fitch's view that individual credit profiles cannot be meaningfully disentangled.

SUPPORT RATING AND SUPPORT RATING FLOOR
Liberbank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the bank can no longer rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable.

The downgrade of Banco CLM's SR to '5' from '3' reflects the assignment of a common VR and the related shift from institutional support to sovereign support as per Fitch's criteria. In view of Banco CLM's relatively large size in the context of the overall group, Fitch believes that it would be difficult for Liberbank to provide support to its subsidiary.

Fitch views the EU's Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM) provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. BRRD has been effective in EU member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Full application of BRRD, including the bail-in tool, is required from 1 January 2016. BRRD was transposed into Spanish legislation on 18 June 2015.

RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
Liberbank's VR is primarily sensitive to developments in asset quality and capitalisation. In particular, Liberbank's asset quality will be negatively affected by the expiration of the APS. Hence, the ratings will be sensitive to the bank's ability to effectively manage down the APS portfolio and the pace in doing so. Liberbank's VR could be upgraded if the bank is successful in reducing materially the stock of problem loans (including APS loans) together with strengthening banking earnings. These factors will ultimately support Liberbank's capital, either through internal capital generation or reduced capital at risk from unreserved problem assets.

Conversely, downwards rating pressure could come from the bank's inability to manage down significantly the APS book, preventing material asset quality improvements, and hence capital relief from high unreserved problem assets. Similarly, a deterioration of the bank's funding and liquidity profile would put pressure on the ratings.

Banco CLM's ratings are sensitive to a change in its integration in the group, which Fitch does not currently expect.