Fitch Affirms Banco Cooperativo Espanol at 'BBB'; Outlook Stable
KEY RATING DRIVERS
IDRS AND VR
BCE's IDRs are driven by the bank's standalone credit profile, as captured by the VR. The VR reflects BCE's fairly low risk appetite, adequate risk management and comfortable liquidity position. The VR also considers BCE's strategic importance as a financial intermediary for the members of the Spanish rural credit cooperative association (Asociacion Espanola de Cajas Rurales; AECR). This provides BCE with a stable, albeit low margin, business. The VR also factors in BCE's relatively high leverage.
BCE's main function is to channel liquidity from/to AECR members. Therefore, the structure and size of its balance sheet are highly dependent on the liquidity and financing needs of AECR members. We expect BCE's role within the AECR group to remain strategic. At end-1H15, AECR consisted of 41 members, with aggregate equity of EUR4.6bn.
In our view, BCE's risk management systems and procedures are sound. The bank's liquidity, which is primarily invested in Spanish public debt and to a lesser extent in securities issued by financial institutions, is adequate and its profitability is acceptable, although it is set to gradually decline as maturing sovereign bonds are reinvested at lower yields.
Risk-weighted capital indicators are sound with a Fitch core capital ratio of 17.72% at end-1H15. However, due to its function as the main financial intermediary of credit cooperatives the bank is highly leveraged, with a very low tangible equity/tangible assets ratio of 1.9%. However, we estimate that excluding the activities carried out on behalf of AECR members, the ratio would be a more satisfactory 4.4%.
The Stable Outlook reflects our view that BCE's credit fundamentals and its importance to AECR members will remain broadly stable in the foreseeable future.
SUPPORT RATING AND SUPPORT RATING FLOOR
BCE'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 Spanish legislation on 18 June 2015, with full implementation from 1 January 2016.
RATING SENSITIVITIES
IDRS AND VR
BCE's IDRs are sensitive to changes in its VR. The VR (and hence IDRs) could be downgraded if BCE's importance within the AECR group is diluted or if the size of the group decreases materially. This could reduce business volumes and put into question BCE's role in the Spanish cooperative sector. At the same time, the VR could be downgraded if the bank's risk appetite increases materially, leading to higher risk exposures, or if it fails to contain leverage.
Upward rating potential, while limited, would arise from continued strong relationships with AECR banks, supporting earnings, and an improvement of the aggregate financial profile of AECR member banks. A reduction of the bank's balance sheet, particularly from activities not covered by the treasury agreement, while keeping own risks limited and resulting in reduced leverage may provide moderate upside potential.
SUPPORT RATING AND SUPPORT RATING FLOOR
An 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.
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