OREANDA-NEWS. Fitch Ratings has revised the Outlook on Cecabank, S.A.'s Long-term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'BBB-'. Fitch has also affirmed the Short-term IDR at 'F3', Viability Rating (VR) at 'bbb-', Support Rating (SR) at '5' and Support Rating Floor (SRF) at 'No Floor'.

KEY RATING DRIVERS- VR AND IDR
Cecabank's IDR is driven by its standalone creditworthiness as reflected by its VR. The VR reflects the bank's niche franchise, moderate risk appetite as a provider of services to institutional clients and the fact that it has effectively transformed its business model during the past two years. This transformation has supported the franchise and resulted in more sustainable volumes and earnings. The VR also factors in the bank's sound liquidity and capitalisation in addition to its low profitability.

The revision of the Outlook to Stable reflects reduced execution risks from implementing its business transformation plan, with tangible results evidenced in 2015. These include an enhanced customer base, particularly large Spanish financial institutional clients that signed long-term depositary contracts, improved business volumes and earnings generation capacity while the bank has maintained a moderate risk appetite.

Cecabank has particularly expanded one of its three core activities, securities custody and depositary services in Spain, which is providing a resilient revenue base in the form of commissions. It continues to offer banking, repo, clearing and settlement services and payment and collection systems as well as IT outsourcing and consultancy. Cecabank does not compete with its bank clients for customers and we believe that this helps it to compete effectively with bigger suppliers of these services.

Cecabank's business model should allow it to maintain moderate risk exposure given it acts as an intermediary service provider and its activities are largely secured by collateral or hedged and/or short term. This exposes the bank to operational risk, but Fitch considers that the bank has an adequate framework in place to manage this risk. Despite increased business volumes in 2015, operational risks remained well controlled thanks to a highly automated process, the bank's long experience in providing these services, and effective operational controls to date.

Profitability is low due to Cecabanks' intermediary role and we expect this to remain unchanged in 2016 despite growing and more recurrent fee income from its increasing custody and depositary business. Increased interest-generating business in 1H15 did not prevent a narrowing net interest margin given low interest rates.

Fitch believes capital ratios are adequate for the bank's risk profile. The Fitch core capital/risk-weighted assets ratio was a comfortable 25% and its tangible common equity/tangible assets ratio reached 7% at end-1H15. Recent acquisitions of custody and depositary businesses have not impaired capitalisation so far.

SUPPORT RATING AND SUPPORT RATING FLOOR
Cecabank's SR of '5' and SRF of 'No Floor' reflect Fitch's belief that senior creditors of the bank cannot 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- VR AND IDR
Cecabank's IDRs are sensitive to changes in its VR. Given Cecabank's company profile, we currently see limited potential for an upgrade of the VR. Conversely, while also currently limited, downside risks would arise if its franchise is damaged, if its risk appetite increases significantly, leading to higher risk exposures or if capitalisation comes under pressure.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade to the SR and upward revision to 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.