Fitch Affirms Spain's CaixaBank at IDR 'BBB'; Outlook Positive
The Outlook on the Long-term IDR is Positive despite CaixaBank's announcement on 17 February 2015 of its intent to launch a voluntary tender offer for the acquisition of the ordinary shares of Portugal's Banco BPI, S.A. (BPI; BB+/Rating Watch Evolving/bb) not owned by the bank. A full list of rating actions is available at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS, SENIOR DEBT RATINGS AND VR
CaixaBank's IDRs and senior debt ratings reflect the bank's credit fundamentals, as captured by its VR. The VR reflects the bank's sound capitalisation despite the recent acquisition of Barclays Spain, and improving asset quality, although its stock of problem assets is still large. Other factors supporting the bank's VR include modest but improving earnings and robust funding and liquidity, largely aided by a leading domestic franchise.
The Positive Outlook reflects a potential rating upgrade, although a successful completion of the BPI deal would likely delay an upgrade.
CaixaBank currently has a 44.1% stake in BPI, but its voting rights are capped at 20% as set out in BPI's by-laws. The completion of the BPI deal, which the bank expects by the end of 2Q15, is conditional on i) the removal of the voting cap, which requires the approval of at least 75% of the shares represented at BPI's next shareholder meeting, potentially being held by April 2015; and ii) acceptances of the tender offer exceeding 5.9% that, alongside those of CaixaBank, should result in majority shareholding.
CaixaBank estimates that the BPI transaction would negatively affect its CET1 ratio by between 80 bps and 140 bps, depending on the level of acceptances. This means an estimated CET1 ratio ranging between 10.3% and 10.9% (from a pro-forma 11.7% at end-2014 post Barclays Spain integration). However, Fitch notes CaixaBank's commitment to maintain a fully-loaded CET1 ratio of at least 11% after the potential acquisition of BPI. This target is, in Fitch's view, achievable even in the context of a successfully completed BPI deal, based on Caixabank's flexibility to generate capital.
Should the BPI deal fail to materialise, CaixaBank's Fitch core capital (FCC)/weighted risks ratio would remain sound at an estimated 11.7%, but still at risk from unreserved problem assets.
While the completion of the BPI transaction would increase CaixaBank's exposure to a fairly weak, albeit improving, Portuguese economy (BB+/Positive), Fitch expects any such impact on factors supporting CaixaBank's VR other than capital to be limited. This is because of the moderate size of BPI in relation to CaixaBank, at about 11% of pro-forma combined assets at end-2014, but also due to BPI's sound asset quality performance relative to peers. In addition, execution risks are mitigated by management's sound experience in integrating banks and achieving cost synergies as planned, as well as by the fact that the bank has been part of the shareholding of BPI since 1995.
Caixabank's asset quality and risk appetite should not be significantly affected by the potential acquisition of BPI, with pro-forma non-performing (NPL) and coverage ratios remaining broadly stable at 9.2% and 57%, respectively, at end-2014.
In Fitch's opinion, this transaction should not affect Caixabank's efforts in further reducing volumes of problem assets and its real estate exposure. The bank has been consistently cutting back its problem portfolio since mid-2013, aided by Spain's improving economy and the bank's efforts on recoveries. This supports our view that there remains upside rating potential irrespective of the BPI deal.
Caixabank's reported NPL ratio was 9.7% at end-2014 (13.2% including foreclosures) and reserves held for these assets were adequate at 55%. Real estate-related exposure, at about 14% of gross loans and foreclosed assets, has reduced by a quarter over the past two years. However, CaixaBank's asset quality ratio still compares unfavourably by international standards, weighing on its ratings.
CaixaBank's funding structure primarily comprises a large customer deposit base and covered bonds. Funding imbalances are minimal and debt repayments are low in light of ample reserves of liquid assets. The integration of Barclays Spain and the potential BPI deal will, in our view, have an immaterial impact on the bank's funding and liquidity position.
RATING SENSITIVITIES - IDRS, SENIOR DEBT RATINGS AND VR
CaixaBank's IDRs and senior debt ratings are sensitive to changes of its VR.
If the BPI deal goes ahead, Caixabank's ratings could be upgraded over time if capital levels remain sound, asset quality continues to improve and integration and execution risks prove manageable and within the targets set by the bank. Conversely, stronger-than-expected pressures on Caixabank's financial profile and/or execution risks could result in the affirmation of the bank's ratings.
The ratings are also sensitive to further acquisitions in Portugal, including for example, potentially, that of Novo Banco. Rating implications of such an acquisition would also depend on the price and structure of the deal, among other aspects.
Should the deal not go ahead, Fitch considers there to be upside rating potential if CaixaBank continues to improve its asset quality and risk appetite through further reductions in problem assets and real estate portfolios, while maintaining sound capitalisation and becoming less sensitive to unreserved problem assets. Sustained improvement in profitability would also contribute to a rating upgrade.
KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
CaixaBank's SR of '2' and SRF of 'BBB' reflect Fitch's expectation of a high probability of support from the state to the bank, if needed. This is because of CaixaBank's systemic importance in Spain, with a national deposit market share of about 15%.
CaixaBank's SRs would be downgraded if Fitch's assumptions weaken on Spain's ability and/or willingness to support banks in a timely manner. Of these, the greatest sensitivity would be progress made in the implementation of the Bank Recovery and Resolution Directive and Single Resolution Mechanism, which are likely to trigger a downgrade of the SR to '5' and a revision of the SRF to 'No Floor' by end-1H15. However, any downgrade of the SR will not affect CaixaBank's IDRs as they are driven by the VR.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt issued by CaixaBank is notched down from CaixaBank's VR, according to Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile. The ratings of these debt instruments have been affirmed in line with the affirmation of the bank's VR; and are primarily sensitive to a change in the bank's VR.
The rating actions are as follows:
Long-term IDR: affirmed at 'BBB'; Positive Outlook
Short-term IDR: affirmed at 'F2'
Viability Rating: affirmed at 'bbb'
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB'
Senior unsecured debt long-term rating: affirmed at 'BBB'
Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2'
State-guaranteed debt: affirmed at 'BBB+'
Lower tier 2 subordinated debt: affirmed at 'BBB-'
Upper tier 2 subordinated debt: affirmed at 'BB'