OREANDA-NEWS. Fitch Ratings has affirmed Spain-based Liberbank S.A.'s (Liberbank) Long-term Issuer Default Rating (IDR) at 'BB+', with a Negative Outlook, and Short-term IDR at 'B'. The agency has also affirmed the bank's Viability Rating (VR) at 'bb'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS - IDRS AND SENIOR DEBT, SR AND SRF
Liberbank's IDRs are driven by its Support Rating Floor (SRF) and reflect Fitch's expectation that there is a moderate likelihood of state support, if required. This is due to the bank's regional importance within Spain, with deposit market shares exceeding 22% in all the core regions where it operates.

The Negative Outlook on Liberbank's Long-term IDR 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 AND SENIOR DEBT, SUPPORT RATING (SR) AND SRF
Liberbank's Long-term IDR is predominantly sensitive to those factors affecting its SR and SRF.

The SR and SRF are sensitive to a weakening of the agency's assumptions around Spain's ability and/or propensity to provide support to the bank. Of these, the greatest sensitivity is to progress made in implementing the BRRD and the SRM, which is likely to trigger a downgrade of Liberbank's SR to '5' and revision of its SRF to 'No Floor' in 2Q15. This negative rating action would result in the alignment of Liberbank's Long-term IDR with its VR.

KEY RATING DRIVERS -VR
Liberbank's 'bb' VR takes into account its sound regional franchise, improved capitalisation, adequate funding and liquidity, and progress made in its restructuring, resulting in some efficiency gains. At the same time, the VR considers the bank's exposure to a legacy portfolio of problematic assets under an asset protection scheme (APS), which undermines its asset quality, and the challenge of sustaining adequate core revenue generation amid a low interest-rate and business volume environment.

Liberbank was financially supported by the authorities in February 2013 and has to date met most restructuring commitments with the authorities ahead of plan. The restructuring included cost rationalisation, which has helped improve operational efficiency.

At end-2014, Liberbank's non-performing loan (NPL) ratio was a high 21.5% (25.5%, including foreclosed assets), but this is 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, which provides reserve coverage of up to a reasonable 52.8%. Excluding the APS portfolio, the bank's NPL ratio was 10.6%, below sector average, due to a large stock of good quality residential mortgages from home regions. Reserves for NPLs not related to the APS, at 44.5%, are adequate given the bank's large portion of mortgage collateral that should provide additional protection.

Liberbank's capitalisation improved in 2014 thanks to earnings retention, loan contraction, large unrealised gains on securities and deferred tax asset deduction relief following an amendment to the corporate tax legislation. In June 2014, Liberbank also raised EUR575m of fresh capital from private investors and in 4Q14 repaid EUR124m CoCos from Spain's Fund for Orderly Bank Restructuring (FROB). Liberbank's Fitch eligible capital (FEC) ratio was an adequate 14.7% at end-2014, but also at risk from residual APS exposures as these will be risk-weighted from 2017.

Liberbank's funding structure is well-balanced with customer deposits broadly funding the bank's loan book. The liquidity position also benefits from ample unencumbered assets relative to debt maturities.

RATING SENSITIVITIES -VR
Liberbank's VR is primarily sensitive to developments in asset quality and capitalisation. Spain's mild economic recovery may help to reduce volumes of problem assets. Liberbank's asset quality trends will depend on its ability to manage down the APS portfolio. Better property market dynamics could help achieve this. Liberbank's VR could be upgraded if asset quality improvements materialise earlier than anticipated thus supporting capital. The VR may also benefit from any improvement in core revenue generation, which could be achieved by a successful development of its SME franchise, while costs are contained.

Conversely, any unforeseen sharp deterioration in loan quality would add pressure on capital and thus the VRs could be downgraded. Fitch views the likelihood of this as limited.

SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS AND SENSITIVITIES
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 (CCM) and is fully consolidated into the group's accounts.

Banco CLM's IDRs and senior debt ratings are aligned with Liberbank's as Fitch views Banco CLM as an integral part of Liberbank's core business. Banco CLM strengthens the bank's franchise in Castilla-La Mancha and provides geographical diversification to the group. Banco CLM is also highly-integrated into the group.

Banco CLM's IDRs are sensitive to those of Liberbank and/or to any change in the level of relative importance of Banco CLM within the group, which Fitch sees as very unlikely.

The rating actions are as follows:

Liberbank:
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+'

Banco CLM:
Long-term IDR: affirmed at 'BB+'; Outlook Negative
Short-term IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Senior unsecured debt: affirmed at 'BB+'