OREANDA-NEWS. Fitch Ratings has affirmed Abanca Corporacion Bancaria, S.A.'s (Abanca) Long-term Issuer Default Rating (IDR) at 'BB+', Short-term IDR at 'B' and Viability Rating (VR) at 'bb+'. The Outlook on its Long-term IDR is Stable. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS AND VR
Abanca's Long-term IDR is driven by the bank's standalone creditworthiness, as captured by the VR. The ratings reflect the bank's adequate capitalisation and comfortable funding and liquidity profile for the rating but also weak core banking profitability and a high, albeit decreasing, stock of problem assets.

Abanca's profits have significantly relied on extraordinary items in the last couple of years. In 2015, the bank made capital gains from its government debt securities portfolio and from its equity stakes, which enabled it to increase provisions and offset a reduction in net interest income and increased non-recurring operating costs.

Pressure on the bank's core profitability reflects a large legacy bond portfolio, a low yielding mortgage book partly affected by the absence of interest rate floors since May 2013 and expensive fixed-rate mortgage covered bond issuance. Abanca will be challenged to substantially improve its profitability, but the maturing expensive wholesale debt, improving customer spreads, lower loan impairment charges and cost-cutting measures should support earnings.

Asset quality continued to improve in 2015, helped by write-offs and recoveries. Its problem asset (NPLs and foreclosed assets) ratio declined to 11.6% at end-2015 from 14.7% at end-2014, but this continues to compare unfavourably by international standards. Asset quality weaknesses are mitigated by sound NPL cover at 60%, which is at the higher end of the range for Spanish banks. Fitch expects problem assets to continue declining, helped by Spain's economic recovery.

Abanca's Fitch Core Capital (FCC) ratio remained broadly unchanged at 13.7% at end-2015 and its fully loaded CET1 ratio was 13.8%. In our assessment of capital, the FCC does not take into account any potential dividend distribution relating to the deferred payments to the Spanish Fund for Orderly Bank Restructuring (FROB) in connection with the 2013 acquisition of Abanca from the Spanish government. When taking dividends into account, the FCC would be 12.5%. Capital at risk from unreserved problem assets decreased to 48% of FCC at end-2015 (53% when adjusted for the potential distribution of dividends), from 67% at end-2014.

Abanca's funding structure is comfortable for the rating. The bank funds loans with retail deposits, as reflected by a gross loan/deposit ratio of 96% at end-2015. However, ECB funding remains comparatively higher than peers' as it is used to fund a large stock of legacy debt securities, including those related to the transfer of real estate assets to Spain's bad bank (SAREB). Liquidity reserves are ample in the context of scheduled debt repayments.

SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the bank 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) 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.

RATING SENSITIVITIES
IDRS AND VR
While upside is currently limited, the bank's IDRs and VR could be upgraded if Abanca sustainably improves its underlying profitability, principally by enhancing the profitability of its core banking business, diversifying income sources and reducing costs. Continued asset quality improvement leading to a decrease in loan impairments as well as capital at risk from unreserved problem assets, could also be rating-positive.

Downward rating pressure would arise from loan quality and capital deterioration, or a significant increase in appetite for profits that compromises its risk profile amid low loan growth prospects in the next two years. Similarly, a deterioration of the bank's funding and liquidity profile would put pressure on the ratings.

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:

Long-term IDR affirmed at 'BB+'; Outlook Stable
Short-term IDR affirmed at 'B'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'