DBRS Downgrades Ratings of BPE to A (high); Ratings remain Under Review with Negative Implications

DBRS, Inc. (DBRS) has today downgraded the ratings of Banco Popular Español, S.A. (Popular or the Group), including its Senior Unsecured Long-Term Debt & Deposit rating, which has been lowered to A (high) from AA (low). At the same time, DBRS confirmed the Group’s Short-Term Debt & Deposit rating of R-1 (mid). These rating actions follow DBRS’s downgrade of the Kingdom of Spain to AA (low) from AA, with a Negative trend. DBRS has also lowered the Group’s Senior Notes, Guaranteed by the Kingdom of Spain to AA (low) with a Negative trend. The Group’s ratings, except the government guaranteed debt rating, remain Under Review with Negative Implications, where they were placed on 10 October 2011, following Popular’s announcement that it had made an offer to buy Banco Pastor, S.A. (Pastor).

Popular’s intrinsic assessment (IA) has been lowered to “A” from A (high). DBRS maintains its SA-2 support assessment for Popular, which indicates an expectation of timely systemic support in case of need. Accordingly, the final rating of A (high) is one notch above the Group’s IA of “A”.

DBRS views the stress in the domestic economy and disrupted financial markets, as significantly pressuring the Group’s earnings through higher funding costs, increased liquidity needs and elevated costs of credit. Popular, whose franchise is predominantly focused on Spain, has been impacted by the still challenging environment in its home market. While Popular has managed to cope with the prolonged crisis, it remains exposed to the elevated liquidity pressure in the Spanish financial system and the Euro zone generally, the sustained weakness in the economy and increasing stress on Spain’s sovereign position. DBRS views these challenges as appropriately reflected in the one notch downgrade.

Reflecting the Group’s IA of “A”, DBRS views Popular as demonstrating its ability to adjust in various ways to the adverse environment. In sustaining its profitability in this prolonged crisis, the Group has been fairly successful at maintaining its revenues, controlling expenses, building up liquid resources and bolstering capital. In coping with the extended crisis, the Group has used various resources, such as the sale/leaseback of branches and other opportunities for capital gains, which have bolstered its reserves and enabled it to absorb elevated credit impairments and asset write-downs. These actions, however, have utilised some of Popular’s contingency resources, leaving it with fewer alternatives to cope with a more sustained period of stress that is now more likely. Nevertheless, given that Popular has thus far coped reasonably well with the stressed environment, DBRS expects it to continue to demonstrate this adaptability in coping with the continued difficult environment.

DBRS notes that further negative action on the sovereign rating could negatively affect the A (high) rating of Popular and its IA, as such action would likely signal further deterioration in the domestic environment.

Popular’s ratings remain Under Review with Negative Implications, where they were placed following Popular’s announcement that it had made an offer to buy Pastor, a financial institution based in Galicia, Spain with EUR 30.4 billion in assets at 3Q11. DBRS views this relatively sizeable merger at a time of increased stress in the financial markets and weakness in the Spanish economy as warranting a ratings review. The review is focusing on the impact that this merger could have on the overall financial profile and credit worthiness of Popular, which had EUR 131.7 billion in assets at 3Q11.

Notes:
All figures in Euros (EUR) unless otherwise noted.

For further information related to DBRS’s rating action on the Kingdom of Spain, please see the related press release under Related Research.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the issuer, SNL Financial and the DBRS rating of the Kingdom of Spain. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU.

Lead Analyst: Roger Lister
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 21 September 2006
Most Recent Rating Update: 10 October 2011

For additional information on this rating, please refer to the linking document under Related Research.