OREANDA-NEWS. This announcement corrects the version published on 27 February 2014, which incorrectly stated Popular's Fitch core capital ratio and eligible capital ratio.

Fitch Ratings has affirmed Spain-based Banco Popular Espanol S.A.'s (Popular) Long-term Issuer Default Rating (IDR) at 'BB+' and Viability Rating (VR) at 'bb-'. The Outlook on its Long-term IDR is Negative. At the same time, the agency has affirmed Popular's Short-term IDR of 'B', Support Rating (SR) of '3' and Support Rating Floor (SRF) of 'BB+'. A full list of rating actions is below.

KEY RATING DRIVERS- IDRS, SR, SRF AND SENIOR DEBT RATINGS
Popular's IDRs and senior debt ratings are driven by the bank's SRF. Popular's SR of '3' and SRF of 'BB+' reflect Fitch's view so far that there is a moderate likelihood of support for the bank from the Spanish authorities, if needed. This is because of Popular's domestic importance with a nationwide market share of deposits of around 7%.

The Negative Outlook reflects Fitch's opinion that there is a clear intent to reduce implicit state support for financial institutions in the EU, as shown by a series of legislative, regulatory and policy initiatives, including the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM).

RATING SENSITIVITIES- IDRS, SR, SRF AND SENIOR DEBT RATINGS
Popular's IDRs and senior debt ratings are predominantly sensitive to the same factors that may drive a change in its SR and SRF.

The SR and SRF are sensitive to a weakening of the assumptions around Spain's ability and propensity to provide timely support to the bank. Of these, the greatest sensitivity is to progress made in implementing the BRRD and the SRM. Fitch expects to downgrade Popular's SR to '5' and revise its SRF to 'No Floor' by end-1H15. A downward revision of the SRF would result in the alignment of Popular's Long-term IDR and senior debt ratings with its VR.

KEY RATING DRIVERS - VIABILITY RATING
Popular's VR of 'bb-' factors in the bank's weak asset quality indicators, reflecting its large exposure to problematic real estate development assets. This in turn puts pressure on its internal capital generation capacity and leaves capital vulnerable to additional collateral valuation shocks. The VR also reflects Popular's strong SME banking franchise in Spain, which provides healthy recurrent revenues, and the bank's adequate funding and liquidity position.

The bank's exposure to loans for real estate development and foreclosed properties accounted for a high 16.5% of total end-2014 assets. Fitch calculates Popular's NPLs represent 19.5% of end-2014 gross loans (25.6% including foreclosures). In 2014, NPL volumes declined by 4%, helped by lower gross NPL entries, write-offs and foreclosures. The latter increased by 24% to EUR8.4bn, despite an acceleration of real estate asset sales to EUR1.5bn.

Popular's Fitch core capital ratio improved to an acceptable 10.6% at end-2014 from 8.4% at end-2013. The bank issued EUR750m additional Tier 1 securities in February 2015, which together with the existing eligible outstanding hybrid debt increases Fitch's eligible capital (FEC) ratio up to 12.7% on a proforma basis. However, the stock of unreserved problem assets exceeded 2x end-2014 FEC, reflecting that capital is still vulnerable to further asset quality stress.

In Fitch's view, Popular's strong SME franchise, with a market share of roughly 17% in Spain, provides it with some pricing power that translates into relatively wide client margins and resilient revenues. However, given the bank's weak asset quality and its SME focus, Fitch expects impairment charges to continue to partially erode bottom line earnings in the medium-term.

Popular's funding profile is adequate for its business profile. Fitch calculates that the bank had a loan-to-deposit ratio (adjusted for reserves, securitisation and mediation loans) of 116% and held a portfolio of unencumbered ECB-eligible assets accounting for 6.2% of total assets at end-2014.

RATING SENSITIVITIES - VIABILITY RATING
Fitch considers a potential upgrade of the VR in the next 12 to 18 months would be driven by an expected positive trend in asset quality and capital.

In particular, upside potential for Popular's VR is reliant upon the bank's ability to reduce its portfolio of real estate assets, both loans and foreclosed assets, which together with improving NPL trends should translate into better asset quality metrics. An increase in reserve coverage ratios for problem assets could also help to achieve this. A combination of improving asset quality and internal capital generation capacity should also help the bank to further strengthen its capital base. Downward pressure on the VR is limited but could arise if there is further deterioration in Popular's asset quality metrics.

KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by Popular and its funding vehicles are all notched down from its VR in accordance with Fitch's 'Assessing and Rating Bank Subordinated and Hybrid Securities' criteria. Their ratings are primarily sensitive to any change in Popular's VR.

Subordinated (lower Tier 2) debt is rated one notch below Popular's VR to reflect below average loss severity of this type of debt when compared with average recoveries.

The preference shares are rated three notches below Popular's VR to reflect higher loss severity risk of these securities when compared with average recoveries (two notches from the VR) as well as moderate risk of non-performance relative to its VR (an additional one notch). For the latter, coupons can be paid out of distributable reserves.

The rating actions are as follows:
Popular:
Long-term IDR: affirmed at 'BB+; Outlook Negative
Short-term IDR: affirmed at 'B'
VR: affirmed at 'bb-'
Support Rating: affirmed at '3'
SRF: affirmed at 'BB+'
Long-term senior unsecured debt programme: affirmed at 'BB+'
Short-term senior unsecured debt programme and commercial paper: affirmed at 'B'
Subordinated lower Tier 2 debt: affirmed at 'B+'

BPE Financiaciones S.A.:
Long-term senior unsecured debt and debt programme (guaranteed by Popular): affirmed at 'BB+'
Short-term senior unsecured debt programme (guaranteed by Popular): affirmed at 'B'

BPE Preference International Limited
Preference shares: affirmed at 'B-'

Popular Capital, S.A.
Preference shares: affirmed at 'B-'