OREANDA-NEWS. July 27, 2015.  Fitch Ratings has affirmed Ibercaja Banco S.A.'s Long-term Issuer Default Rating (IDR) at 'BB+', with a Positive Outlook, and Viability Rating (VR) at 'bb+'. At the same time, Fitch has affirmed the bank's Short-term IDR at 'B'. A full list of rating actions is available at the end of this rating action commentary.

The Outlook on the Long-term IDR is Positive, reflecting Fitch's view that Ibercaja Banco's IDRs and VR could be upgraded once capitalisation is strengthened to more robust levels. This process could also be supported by further asset quality improvements.

KEY RATING DRIVERS

IDRS AND VR
Ibercaja Banco's IDRs are driven by the bank's stand-alone credit profile, as captured in the VR. The VR reflects the bank's leading retail franchise in its home regions, which provides it with pricing power and a solid retail deposit funding base, and improving, albeit still weak, asset quality metrics. At the same time the VR factors in Ibercaja Banco's modest core banking earnings, some legacy real estate exposures, and weaker capitalisation than many peers'.

The bank has a leading retail franchise in the northern region of Aragon, where it has a strong deposit market share. Nationally, the bank's market share for deposits is, however, 3.2%. The bank's insurance and asset management franchises in Spain provide diversification and stability to the group's revenues and business model.

Ibercaja Banco still has some legacy real estate exposures in the form of loans to developers (9.1% of gross loans at end-1Q15) and foreclosed real estate properties (1.5% of total assets) that weaken its overall asset quality metrics. However, the bank's end-1Q15 NPL ratio of 10.4%, while high by international standards, was below the domestic average of 12.1%.

This improving asset quality trend should also provide some relief to reported net profits in the form of lower provisioning needs. We expect lower loan impairment charges, combined with some modest lending growth, to mitigate lower contribution from carry trade revenues and increased margin pressure caused by persistently low interest rates.

Ibercaja Banco's capitalisation is just acceptable for its risk profile and is vulnerable to shocks from unreserved problem assets (NPLs and foreclosed assets) as these still represented a high 116% of Fitch Core Capital (FCC) at end-1Q15. When calculating the FCC-to-risk weighted assets ratio, Fitch deducts the group's insurance subsidiaries' net asset value of the total equity rather than risk-weighting their assets. The EUR407m of state-owned cocos included in its regulatory CET1 ratio (11.5% at end-1Q15) will be repaid by end-2017.

SUPPORT RATING AND SUPPORT RATING FLOOR
Ibercaja Banco'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.

Fitch views the EU's Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM) are now sufficiently progressed to 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 the Spanish legislation on 18 June 2015, with full implementation from 1 January 2016.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The bank's newly issued subordinated debt (ISIN: ES0244251007) - rated 'BB' - is notched down one level from the bank's VR of 'bb+' for loss severity because of lower recovery expectations relative to senior unsecured debt. These securities are subordinated to all senior unsecured creditors.

RATING SENSITIVITIES

IDRS AND VR
Ibercaja Banco's IDRs are sensitive to changes to the bank's VR. The VR (and hence IDRs) could be upgraded if the bank continues to reduce the total volume of problem assets, while maintaining its earnings generation capacity, and thus providing relief to capital. Similarly, a material issuance of capital instruments could trigger an upgrade of the VR.

In contrast, the VR and the Long-term IDR of the bank could be downgraded if there is any unforeseen deterioration of asset quality and/or a material weakening of profitability.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade to the SR and upward revision to the SRF would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt ratings are sensitive to changes in Ibercaja Banco's VR and therefore to the same factors that would determine a change in the VR.

The rating actions are as follows:

Ibercaja Banco:
Long-term IDR: affirmed at 'BB+'; Outlook Positive
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Subordinated debt: assigned 'BB'