Fitch Revises Abanca's Outlook to Stable; Affirms at 'BB+'
KEY RATING DRIVERS - IDRS AND VR
Abanca's IDRs are now driven by its VR and reflect the bank's still weak asset quality, despite the improvement shown in 2014, modest underlying profitability and still high unreserved impaired assets to capital. Its ratings also consider the bank's adequate funding and liquidity profile. The revision in Outlook reflects a stabilisation of the bank's credit profile following the improvements in its asset quality and capital.
The bank's non-performing loans (NPL) ratio improved to 13.5% at end-2014 from 18.2% at end-2013, due to recoveries, write-offs, and sale of impaired loans. Around 30% of the ratio corresponds to restructured loans that are performing but were restructured in the past, and carry loan impairment reserves. However, Fitch believes this ratio is still high despite the bank having transferred most of its real-estate assets to the Spanish bad bank (SAREB). Abanca's coverage ratio was reasonable at 53.5% at end-2014, supporting further recoveries.
Abanca's reported net income in 2014 of almost EUR1.2bn was supported by capital gains from the sale of its sovereign debt portfolio, and the activation of deferred tax assets (DTAs). This was due to a change in the initial restructuring terms agreed with the European Commission, and subsequent review of its strategic plan. Fitch views Abanca's underlying profitability as still modest, despite being supported by lower costs and falling impairment charges.
Abanca's exposure to unreserved problem assets measured against Fitch core capital improved on the back of better asset quality. The bank's Fitch Core Capital (FCC) ratio remained above 11% and its regulatory common equity Tier 1 capital improved to 15.2% on a phased-in basis and to 14.3% on a fully-loaded basis. In the short- to medium-term, Abanca's internal capital generation could be affected by compulsory deferred payments shareholders have to make to the Fund for Orderly Bank Restructuring (FROB) relating to the 2013 purchase of Abanca from the Spanish government.
Abanca's funding profile is adequate, with its loans-to-deposits ratio improving to 102% at end-2014 from 116% at end-2013. The bank finances its large portfolio of debt securities with wholesale funding. However, these are largely ECB-eligible funds. Its unencumbered ECB-eligible assets represented around 15% of total assets at end-2014.
RATING SENSITIVITIES - IDRS AND VR
Following the upgrade of Abanca's VR, upside rating potential is currently limited but could in the medium-term arise from further improvement in asset quality indicators together with strengthening underlying profitability. These will ultimately support the bank's capital, either through internal capital generation or decreasing exposure to unreserved problematic assets.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
Abanca's Support Rating Floor (SRF) reflects Fitch's expectation that there is a moderate likelihood of state support for the bank, if required. This is due to its regional systemic importance to Spain, particularly in the region of Galicia, with a market share of 41% of deposits and 30% of loans at end-2014.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
Abanca's SRs and SRFs are sensitive to a weakening of Fitch's assumptions around Spain's ability and propensity to provide support to banks. Of these, the greatest sensitivity is to progress made in the implementation of the BRRD and SRM, which is likely to trigger a downgrade of the SR to '5' and a revision of the SRF to 'No Floor' by end-1H15.
The rating actions are as follows:
Long-term IDR affirmed at 'BB+'; Outlook changed to Stable from Negative
Short-term IDR affirmed at 'B'
Viability Rating: upgraded to 'bb+' from 'bb-'
Support Rating affirmed at '3'
Support Rating Floor: affirmed at 'BB+'
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