OREANDA-NEWS. July 27, 2015.  Fitch Ratings has affirmed Unicaja Banco, S.A.'s (Unicaja) Long-term Issuer Default Rating (IDR) at 'BBB-', Viability Rating (VR) at 'bbb-' and Short-term IDR at 'F3'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS AND VR
The bank's IDRs are driven by its standalone credit fundamentals, as expressed by its VR. The ratings reflect a group risk profile that was weakened by the acquisition of Banco CEISS in 2014. Unicaja's management is well placed to face the challenge of turning around the large and comparatively weaker bank. The integration of Banco CEISS, 60.7% owned, is progressing, and common risk management and monitoring policies and procedures, corporate governance and IT systems have mostly been completed.

Following the acquisition of Banco CEISS, the group's capital has been improving thanks to earnings retention and loan de-leveraging. The consolidated Fitch Core Capital (FCC) ratio was 9.6% at end-1Q15, higher than our estimates at end-1H14, and its phased-in common equity Tier 1 (CET1) ratio 11.3%. Unreserved problematic assets (NPL and foreclosed assets) were significant, representing almost 100% of FCC at end-1Q15, although we expect this ratio to continue declining. The parent bank's capital is stronger, with an FCC and CET1ratios of around 15% and unreserved problematic assets of below 60% of FCC.

Unicaja's asset quality indicators peaked at end-2014. Despite loan de-leveraging, the Fitch-calculated NPL ratio declined to 13.2% at end-1Q15 from 13.7% at end-2014 (or to 16% from 16.4% if foreclosed assets are included). Coverage levels were above the sector, at 63.5% of NPLs while foreclosed assets were 56% covered by reserves.

Unicaja's operating profitability has been supported by capital gains from the sale of government bonds in 2014 and 1Q15, which have been used to increase impairment reserves and provide against restructuring costs, but which we believe are non-recurrent revenue items. In our opinion, core profitability will gradually improve, as retail funding costs continue to decrease, and cost synergies should become more evident in 2016. The repayment of Banco CEISS's contingent convertible bonds to the FROB will contribute to the expected reduction in interest expenses. Improving asset quality will reduce loan impairment charges, which will also support profitability.

Unicaja's funding and liquidity are stable. The group is mostly funded by retail deposits, followed by a combination of mortgage covered bonds, repos and central bank funding. This funding structure reflects the bank's retail nature and large portfolios of mortgage bonds and sovereign debt. The gross loans/deposits ratio was a low 95% at end-1Q15 and available liquid assets a comfortable 22% of total assets.

The Stable Outlook reflects Unicaja's stabilised credit profile. It also reflects our expectations that although asset quality is still weak, improvements will continue and consolidate throughout 2015, supported by a better economic environment.

SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view that Unicaja's senior creditors 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 Spanish legislation in June 2015, with full implementation from 1 January 2016.

RATING SENSITIVITIES
IDRS AND VR
The bank's IDRs are sensitive to changes to the VR. The VR could be upgraded if the plans to improve, and operate with stronger, capital levels are successfully achieved, the integration with Banco CEISS is completed and asset quality indicators and recurrent earnings improve as we currently expect them to. The VR could be downgraded if there is a setback in the integration of Banco CEISS, mainly due to the inability to improve its weak profitability or a deterioration of the bank's regional franchise.

SUPPORT RATING AND SUPPORT RATING FLOOR
Any upgrade of the SR and upward revision of 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.

The rating actions are as follows:

Long-term IDR affirmed at 'BBB-'; Outlook Stable
Short-term IDR affirmed at 'F3'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'