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Madrid, October 19, 2011 — Moody’s Investors Service has today downgraded the long-term senior debt and deposit ratings of five Spanish banks by one notch. These rating actions follow yesterday’s downgrade of the Kingdom of Spain’s government bond rating to A1 from Aa2. All of the banks’ ratings carry a negative outlook. The affected banks are Banco Santander, BBVA, CaixaBank , La Caixa and Confederación Española de Cajas de Ahorros (CECA).
The banks’ standalone bank financial strength ratings (BFSRs) — which were not part of the review initiated on 29 July 2011 — have not been affected by the rating action on the Kingdom of Spain. However, over the coming weeks Moody’s will be assessing any possible implications of revised economic projections for the Spanish economy on the performance of Spanish banks’ assets and the potential negative impact on the ratings of the overall banking sector.
In addition, Moody’s has also downgraded (i) the senior subordinated debt of these entities; (ii) all rated government-backed debt issuances from Spanish banks; and (iii) the rated long-term debt of Instituto de Credito Oficial (ICO), the ratings of which are based on the unconditional and irrevocable guarantee from the Spanish Government.
A full list of all the affected ratings can be found at the end of the press release.
These rating actions conclude the reviews for downgrade initiated on 29 July 2011, which followed the review for possible downgrade of the Spanish government ratings on 17 June 2011.
Please find the press release on the sovereign rating action including the key rating rationale here:http://www.moodys.com/research/Moodys-downgrades-Spains-government-bond-ratings-to-A1-negative-outlook–PR_228099
RATIONALE FOR THE DOWNGRADE OF SENIOR DEBT RATINGS
Today’s rating action has been prompted by the downgrade of the Kingdom of Spain to A1 from Aa2. The downgrade of the Spanish government has only affected the debt and deposit ratings of those banks that have high standalone ratings and that Moody’s believes have a high probability of benefiting from systemic support. These banks are Banco Santander, BBVA, Caixabank (all of which have standalone ratings of B-/A1) and CECA (which has a standalone rating of C/A3). With the government rating now at A1, Moody’s believes that the benefit of potential support from the government is less pronounced relative to the standalone strength of these banks, which is reflected in standalone ratings that are at or close to the sovereign’s own rating at A1. Moody’s nevertheless continues to factor in one notch of systemic support for these banks to reflect the high likelihood that support would be forthcoming.
The debt ratings of La Caixa, Caixabank’s holding company, are notched off the long-term debt rating of Caixabank and have therefore also been downgraded by one notch to A2 from A1.
All banks’ debt ratings carry a negative outlook reflecting the current negative outlook of the Spanish government’s A1 bond rating and the negative outlook on the banks’ standalone BFSRs.
RATINGS RATIONALE FOR SENIOR SUBORDINATED DEBT
Moody’s has downgraded the senior subordinated debt ratings of four Spanish banks, in line with the downgrade of these banks’ senior unsecured debt ratings. This rating approach implies that if a bank’s senior debt rating benefits from an assumption of systemic support, its subordinated debt will benefit similarly. Moody’s will continue, however, to reassess its systemic support assumptions for subordinated debt in Spain, alongside parallel reassessments in other European countries, over the remainder of this year in the light of prospective European banking legislation. This reassessment has not affected today’s rating actions.
RATINGS RATIONALE FOR GOVERNMENT-GUARANTEED DEBT
As a direct consequence of the downgrade of the Spanish government’s bond rating to A1 from Aa2, Moody’s has also downgraded to A1 from Aa2 the backed senior debt of 18 institutions. The backed-A1 ratings assigned are based on the unconditional guarantee, which directly links them to the ratings of the Spanish government. (See "Moody’s to assign backed Aaa ratings to new euro-denominated long-term debt securities covered by Spanish government’s guarantee," published on 22 January 2009.)
RATINGS RATIONALE FOR THE DOWNGRADE OF ICO’s RATINGS
Moody’s has downgraded to A1 from Aa2 all the rated debt of Instituto de Credito Oficial (ICO). Since ICO’s liabilities are explicitly, irrevocably, directly and unconditionally guaranteed by the government of Spain, the rating action on ICO is triggered by the two-notch downgrade of the sovereign’s ratings.
WHAT COULD CHANGE THE RATINGS UP
An improvement in the banks’ standalone BFSRs could exert upward pressure on the banks’ debt and deposit ratings; please refer to www.moodys.com for a more detailed discussion of each individual bank’s key rating drivers. However, in the current difficult operating environment, the opportunity for this appears very limited. An upgrade of the Spanish government bond rating could also exert upward pressure on the banks’ debt and deposit ratings; however, this too is unlikely given the negative outlook on the ratings of the Spanish government.
WHAT COULD CHANGE THE RATINGS DOWN
The ratings of those banks that continue to benefit from systemic support remain somewhat linked both to the creditworthiness of the Spanish government and to any further reduction in Moody’s systemic support assumptions. Any further developments relating to the legislation governing the resolution powers regarding banks — i.e., developments that increase the likelihood of senior creditors incurring losses — could exert downward pressure on the deposit and debt ratings of those banks that currently benefit from systemic support. Any downgrades of the BFSRs on the individual banks could also lead to additional negative rating pressures. In the following weeks, Moody´s will be assessing the wider implications of its revised economic projections for the Spanish economy for the performance of Spanish banks’ assets and the potential impact on their ratings.
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
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