OREANDA-NEWS. Fitch Ratings has downgraded Banca Privada d'Andorra's (BPA) Long-term Issuer Default Rating (IDR) to 'B+' from 'BB+' and Viability Rating (VR) to 'b+' from 'bb+' and placed them on Rating Watch Negative. This follows the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) naming of BPA as a foreign financial institution of primary money laundering concern.

KEY RATING DRIVERS - IDRs AND VR
The downgrade reflects the impact of the uncertainty caused by FinCEN's Notice of Finding and related Notice of Proposed Rulemaking on BPA's fundamental credit profile, in particular, its franchise and risks related to the bank's funding and liquidity profile. Most other factors that Fitch takes into consideration for assigning ratings to BPA are also negatively affected, leading BPA's profile to no longer be commensurate with the 'BB' category. The Rating Watch Negative reflects additional risks related to the potential outcome of the currently ongoing investigations and pressure on the bank's liquidity.

Fitch believes the reputation of BPA will be significantly damaged, negatively impacting its franchise and the robustness of its underlying business and financial profile. Even in case of a relatively favourable outcome of the currently ongoing investigations and abolition of FinCEN's proposed special measure, Fitch is of the view that BPA's company profile will weaken, impacting its competitiveness versus domestic and international peers.

BPA's liquidity position and access to funding sources is also under pressure, with deposits expected to suffer, likely outflows in assets under management, and access to alternative funding sources including the repo market likely to be restricted. This may trigger an increased reliance on its ability to access central bank funding, for example through its Spanish subsidiary Banco Madrid and Fitch will monitor its continued access to this funding source.

The FinCEN's notice has triggered substantial uncertainty and was followed by the intervention of the bank by the Institut Nacional Andorra de Finances, the Andorran financial system authority, and its subsidiaries in Spain by the Bank of Spain and Panama by the Superintendency of Banks and caused the board of directors and several senior managers to resign. In view of this uncertainty and the severity of the allegations, Fitch has also adjusted downward its assessment of several other factors, including corporate governance and BPA's ability to execute its business plan. Fitch has also adjusted downward its assessment of risk controls and earnings are expected to be eroded from lower business volumes and potentially increased funding costs, affecting its ability to generate capital.

RATING SENSITIVITIES - IDRs AND VR
BPA's IDRs and VR are primarily sensitive to the final outcome of FinCEN's decision and related investigations, but also the degree of volatility and developments in anticipation of the latter, including the evolution of BPA's liquidity position. In case proposed rulemaking by FinCEN is adopted, prohibiting covered U.S. institutions from opening or maintaining correspondent or payable-through accounts for BPA, and for other foreign banks being used to process transactions involving BPA, its ratings would likely be subject to a further, potentially multi-notch, downgrade. Should the outcome of the currently ongoing investigations be less negative for BPA, potentially resulting in the FinCEN's proposed rulemaking not being adopted as proposed, the impact on the rating is likely to be less material. However, Fitch does not see near-term upside rating potential absent the potential acquisition of BPA by a higher-rated financial institution, which is a scenario that is not currently contemplated in BPA's ratings.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that the probability of BPA receiving support in case of need is low.

Although Fitch does not publish a rating for Andorra, the banking system's large size relative to the Andorran economy means that while the authorities' propensity to provide support may be high, it cannot be relied upon given limited resources at their disposal.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
The SR is potentially sensitive to any change in assumptions around the propensity or ability of Andorran authorities to provide timely support to BPA. This might arise if there is a significant increase in resources available at authorities' disposal or if there is a change in ownership.

Fitch has taken the following rating actions on BPA:

Long-term IDR: downgraded to 'B+' from 'BB+', placed on Rating Watch Negative;
Short-term IDR: affirmed at 'B';
VR: downgraded to 'b+' from 'bb+', placed on Rating Watch Negative;
Support Rating: affirmed at '5';
SRF: affirmed at 'No Floor'.