Fitch Downgrades Popular's IDR to 'B'; Puts on Rating Watch Negative
(The following statement was released by the rating agency) BARCELONA/LONDON, May 19 (Fitch) Fitch Ratings has downgraded Banco Popular Espanol S.A.'s (Popular) Long-Term Issuer Default Rating (IDR) to 'B' and Viability Rating (VR) to 'b' and placed them on Rating Watch Negative (RWN) following the deterioration of the bank's capital metrics in 1Q17. A full list of rating actions is at the end of this rating action commentary. The downgrade of Popular's ratings reflects its deteriorated capital position from already weak levels and Fitch's opinion that there is increased risk about the bank's ability to execute a material remedial action to restore its solvency and accelerate the reduction of problem assets. At end-March 2017 Popular's fully loaded common equity Tier 1 (CET1) ratio was a very low 7.3%, having deteriorated from the 8.2% reported at end-2016. The RWN reflects further downside risks in the absence of a remedial action in the short term, which would leave the bank with limited capital buffers over regulatory requirements, reduce its flexibility to divest problem assets without jeopardising solvency and impact investor and customer confidence, ultimately weakening its funding and liquidity profile. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT Popular's ratings are driven by very weak asset quality metrics undermined by the bank's large problematic exposure to real estate developers and thin capital buffers relative to peers. In addition, they reflect our view of the difficulties the new senior management team has encountered in executing material remedial actions soon after its appointment. Impairment charges remained high in 1Q17 and translated into a net loss of EUR137 million in the quarter. This contributed to the weakening of the capital ratios, also dented by the identified shortfalls in impairment reserves, adjustments required by the auditors and capital deductions related to the financing of shares, as announced by the bank on 3 April 2017. Capital encumbrance by unreserved problem assets increased to a high 4.2x fully loaded CET1. The bank currently meets its regulatory capital requirements, but we believe its solvency is highly vulnerable to further adverse events. Popular's asset quality is the weakest among Fitch-rated Spanish banks. The stock of problem assets (non-performing loans (NPLs) and net foreclosed assets) improved only modestly in 1Q17 and still accounted for a very high 27% of gross loans and foreclosures at end-March 2017. The reserve coverage for problem assets improved marginally but remains slightly below domestic peers at around 47%. We understand that the new senior management team has the mandate to restore the bank's capital position and implement a credible strategy to work out the bank's large problem assets in the short term. In April the bank publicly announced two possible actions: a capital increase or a corporate transaction. However, it is still uncertain which strategy the bank will execute and the timeframe for completion. In our view, delaying the decision or its execution increases the risk of a further deterioration in Popular's credit fundamentals. Popular's franchise and liquidity buffers are particularly sensitive to customer and investor sentiments. The bank's funding profile is underpinned by its retail deposit base, which proved stable during the first three months of 2017. At end-March 2017 available liquidity buffers were acceptable in light of upcoming wholesale debt maturities. The 'RR4' Recovery Rating reflects average recovery assumptions for senior debt. SUPPORT RATING AND SUPPORT RATING FLOOR Popular's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks 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. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Popular's subordinated (lower Tier 2) debt issues are rated one notch below the bank's VR to reflect the below-average loss severity of this type of debt compared with average recoveries. Popular's preferred stock and perpetual Tier 1 convertible notes are rated three notches below the bank's VR to reflect the higher loss severity risk of these securities (two notches) compared with average recoveries as well as moderate incremental risk of non-performance relative to its VR (one notch). RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Fitch expects to resolve the RWN on Popular's ratings upon the announcement of a firm strategy or within the next six months if the bank's credit fundamentals deteriorate further. We will downgrade Popular's ratings if the bank does not take the necessary steps to strengthen capitalisation and enable a faster reduction of problem assets. Fitch anticipates that in the absence of a decisive strategy to restore capital ratios in the short term, Popular will be highly vulnerable to even modest shocks on asset quality or further adjustments that could jeopardise its solvency. At the same time, the risk of customer sentiment deterioration could increase and ultimately erode Popular's franchise and destabilise its customer deposit base. Conversely, Fitch will remove the RWN and affirm the ratings if the bank takes remedial actions that result in a material improvement of capitalisation and asset quality. The ratings do not factor in the possibility of a corporate transaction including the acquisition of Popular by another financial institution. If such a transaction was to materialise Fitch would assess the rating implications for Popular. 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. This is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of the instruments are primarily sensitive to a change in the bank's VR, which drive the ratings, but also to a change in Fitch's assessment of the probability of their non-performance relative to the risk captured in the bank's VR. The rating actions are as follows: Banco Popular Espanol S.A.: Long-Term IDR: downgraded to 'B' from 'B+', placed on RWN Short-Term IDR: 'B', placed on RWN Viability Rating: downgraded to 'b' from 'b+', placed on RWN Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Long-term senior unsecured debt programme: downgraded to 'B'/RR4 from 'B+/RR4', placed on RWN Short-term senior unsecured debt programme and commercial paper: 'B', placed on RWN Subordinated lower Tier 2 debt: downgraded to 'B-'/RR5 from 'B'/RR5, placed on RWN Perpetual Tier 1 convertible notes: downgraded to 'CC'/RR6 from 'CCC'/RR6 BPE Financiaciones S.A.: Long-term senior unsecured debt and debt programme (guaranteed by Popular): downgraded to 'B'/RR4 from 'B+/RR4', placed on RWN Short-term senior unsecured debt programme (guaranteed by Popular): 'B', placed on RWN Popular Capital, S.A.: Preferred Stocks: downgraded to ''CC'/RR6 from CCC'/RR6