OREANDA-NEWS. Fitch Ratings has placed Andorra Banc Agricol Reig's (Andbank), Credit Andorra's and Mora Banc Grup, SA's Long- and Short-term Issuer Default Ratings (IDRs) of 'A-' and 'F2', respectively, and their Viability Ratings (VRs) of 'a-' on Rating Watch Negative (RWN). A full list of rating actions is available at the end of this commentary.

The RWN reflects Fitch's view that the operating environment and franchises of Andorra's domestic banks need to be reassessed in light of potential spill-over effects from the resolution of Banca Privada d'Andorra (BPA; 'Restricted Default').

KEY RATING DRIVERS - IDRs AND VR
The RWNs indicate likely rating downgrades from the 'A-' levels for all three Andorran banks. The extent of the downgrades will depend on our re-assessment in particular of aspects related to the operating environment (including the regulatory framework and the economic outlook), company profiles (business models and franchises) and funding and liquidity profiles. The extent of downgrades will also depend on developments in the coming weeks, especially with respect to deposit outflows and, potentially, how the resolution of BPA affects other banks.

While the U.S. Department of the Treasury's Financial Crimes Enforcement Network's (FinCEN) allegations are specific to BPA, the escalation of events at BPA has underlined more uncertainty around access to funding and liquidity than was previously factored into the Andorran banks' ratings, in particular in view of their relatively high dependence on non-residential customer deposits and the absence of a lender of last resort.

On 10 March 2015, the FinCEN named BPA as a foreign financial institution of primary money laundering concern and proposed the imposition of special measures. Subsequently, BPA and its subsidiaries were intervened by the relevant authorities, the Spanish subsidiary applied for insolvency proceedings and temporary precautionary measures were implemented by BPA's administrators, among other developments (see Fitch's rating actions on BPA in its commentaries dated 13 and 18 March 2015 and available on www.fitchratings.com).

All three Andorran banks' 'A-' ratings have so far reflected the development of their private banking franchises, sound management, healthy profitability, strong capitalisation and ample liquidity. The ratings also take into account the weak operating environment in Andorra, which has put pressure on asset quality indicators, and the banks' high single-name risk concentrations.

RATING SENSITIVITIES - IDRs AND VR
The operating environment is a constraining factor for these banks' ratings and Fitch's assessment is sensitive to a potential downward revision of domestic economic growth prospects and a possible recalibration of its view on aspects related to the effectiveness of the regulatory framework in Andorra.

Fitch's assessment of the banks' company profiles is primarily sensitive to the evolution of confidence in the Andorran banking system. Despite a swift and strong response to BPA's crisis by all parties involved, the reputation of the system and therefore the banks' franchises may be damaged, potentially affecting growth prospects and the stability of their businesses models.

Fitch will also review the stability of banks' deposits and funds under management, in particular in view of the high proportion of non-residential customers, which exposes them to flight risk. In this context the lack of a lender of last resort in Andorra is a disadvantage versus international peers.

Fitch will carry full reviews of IDRs and VRs of Credit Andorra, Andbank and MoraBanc in the coming weeks.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
The banks' Support Ratings (SRs) of '5' and Support Rating Floors (SRFs) of 'No Floor' reflect Fitch's view that the probability of Andorran banks receiving support in case of need is low. Although Fitch does not publish a rating for Andorra, the banking system's large size relative to the Andorran economy means that while the authorities' propensity to provide support may be high, it cannot be relied upon given limited resources at their disposal.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
A change to the SRs and SRFs is unlikely. It could only arise in the highly unlikely event of a material increase in resources available to the Andorran authorities to support the banks or if a bank was acquired by a strong, supportive institution.

KEY RATING DRIVERS AND SENSITIVITIES - CREDIT ANDORRA'S PREFERRED STOCK
Credit Andorra's preferred stock is rated five notches below its VR to reflect higher loss severity than the average for senior unsecured creditors and the higher-than-average risk of non-performance given that the payment of coupons is discretionary. It has been placed on RWN to mirror the placement of Credit Andorra's VR on RWN. Credit Andorra's preferred stock ratings are broadly sensitive to the same considerations that might affect its VR.

Fitch has taken the following rating actions:

Credit Andorra:
Long-term IDR: 'A-' placed on Rating Watch Negative
Short-term IDR: 'F2' placed on Rating Watch Negative
VR: 'a-' placed on Rating Watch Negative
Preference shares: 'BB' placed on Rating Watch Negative
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

Andbank:
Long-term IDR: 'A-' placed on Rating Watch Negative
Short-term IDR: 'F2' placed on Rating Watch Negative
VR: 'a-' placed on Rating Watch Negative
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'

MoraBanc:
Long-term IDR: 'A-' placed on Rating Watch Negative
Short-term IDR: 'F2' placed on Rating Watch Negative
VR: 'a-' placed on Rating Watch Negative
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'