OREANDA-NEWS. November 03, 2015.  Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of Caja Laboral Popular Cooperativa de Credito (Laboral Kutxa) at 'BBB+', Caja Rural de Navarra, Sociedad Cooperativa de Credito (CRN) at 'BBB+', Caja Rural de Castilla La Mancha (CRCLM) at 'BBB', and Caja Rural del Sur, Sociedad Cooperativa de Credito (CRS) at 'BBB'. The Outlooks on the Long-term IDRs of Laboral Kutxa, CRN, and CRCLM are Stable. The Outlook on CRS is Positive. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS AND VRS
The Long-term IDRs of the four Spanish credit cooperatives are driven by their standalone creditworthiness as captured by their VRs. Their VRs are underpinned by their low risk appetites, reflected in their improved and better than sector average asset quality indicators, notably at CRN and CRCLM, and sound loss absorption buffers. The latter are supported by their solid capital and leverage ratios (Fitch Core Capital ratios ranging between 14% at CRCLM and 19% at CRS at end-1H15) combined with robust loan loss reserve coverages (ranging from 60% at Laboral Kutxa to 101% at CRN and CRCLM at end-1H15). The four credit cooperatives also benefit from relatively large deposit bases backed by their strong local roots (gross loan/deposits ratios were below 100%, except for CRN which reported a still healthy 106% at end-1H15) and ample liquidity buffers.

However, their VRs also factor in modest underlying profitability and pressures on it. The four cooperatives rely on interest income as their main revenue source and this remains under pressure from the low interest rate and business volume environment, removal of interest rate floors at some banks and lower revenue contribution from carry trade activity.

CRCLM's 'bbb' VR also reflects its more limited franchise compared to Laboral Kutxa and CRN as well as higher use of short-term wholesale funding to fund its securities portfolio to support earnings, which at the same time exposes the bank to market risk.

The Stable Outlooks on Laboral Kutxa, CRN, and CRCLM reflect Fitch's expectation that their credit profiles will remain stable in the medium term.

CRS's 'bbb' VR reflects a still higher than peers' NPL ratio at 9.8% (somewhat higher with foreclosed assets) at end-1H15, despite improvements over the past year, partly influenced by the weaker Andalusian economy where CRS is based. Positively, loan impairment reserve coverage remained broadly stable and ample at 73% at end-1H15. CRS's VR also factors in enhanced loss absorption buffers, with the proportion of Fitch Core Capital tied to unreserved problem assets reduced to 42% at end-1H15 from 50% at end-2013, and a sound funding and liquidity profile.

CRS's Positive Outlook reflects Fitch's expectation that asset quality indicators will continue to improve on the back of Spain's economic recovery and that loss absorption buffers will be maintained, ultimately benefiting its overall risk profile.

SUPPORT RATING AND SUPPORT RATING FLOOR
Laboral Kutxa's, CRN's, CRS's and CRCLM's Support Ratings (SR) of '5' and Support Rating Floors (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the banks 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 VRS
Upside rating potential is limited for Laboral Kutxa, and CRN. While at the same rating level than the sovereign, an upgrade of the latter would not automatically result in an upgrade of the banks' ratings. An upgrade of Laboral Kutxa's ratings would likely be contingent on a sovereign upgrade and significant improvements in asset quality, particularly in managing down problematic real estate assets, and boosting profitability. Likewise, an upgrade of CRN's ratings would be contingent on a sovereign upgrade accompanied by an improvement in core banking profitability and asset quality. Any upside rating potential would only materialise if the two banks' capitalisation and loss absorption buffers remained strong.

Fitch also views upward potential for CRCLM's VR as limited in the foreseeable future, although it could arise from improvements to core banking earnings and/or geographical diversification of its business franchise.

Upward rating potential for CRS would arise from a further step-up in asset quality improvements, evidence that risks from removing interest rate floors on part of its loan book do not materially affect the bank's earnings generation capacity as well as the maintenance of its high capital ratios and loss absorption buffers. If any of these factors are not achieved, the Outlook could be revised to Stable.

While currently not expected by Fitch, potential drivers for a downgrade of the four credit cooperatives' VRs would include a downgrade of Spain's sovereign rating and marked asset quality deterioration, which could put significant pressure on earnings and capital.

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.

The rating actions are as follows:

Laboral Kutxa
Long-term IDR: affirmed at 'BBB+', Outlook Stable
Short-term IDR: affirmed at 'F2'
Viability Rating: affirmed at 'bbb+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'

CRN
Long-term IDR: affirmed at 'BBB+', Outlook Stable
Short-term IDR: affirmed at 'F2'
Viability Rating: affirmed at 'bbb+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'

CRS
Long-term IDR: affirmed at 'BBB', Outlook Positive
Short-term IDR: affirmed at 'F3'
Viability Rating: affirmed at 'bbb'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'

CRCLM
Long-term IDR: affirmed at 'BBB'; Outlook Stable
Short-term IDR: affirmed at 'F3'
Viability Rating (VR): affirmed at 'bbb'
Support Rating (SR): affirmed at '5'
Support Rating Floor (SRF): affirmed at 'No Floor'