DBRS Lowers BBVA to “A” After Downgrade of Spain to A (low), Trend Now Negative

DBRS, Inc. (DBRS) has today downgraded the ratings of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group) following DBRS’s downgrade of the Kingdom of Spain. DBRS has downgraded BBVA’s Issuer & Senior Debt rating to “A” from A (high) and Short-Term Instruments rating to R-1 (low) from R-1 (middle). The trend on all long-term ratings is now Negative; the trend on all short-term ratings is now Stable. The aforementioned ratings have been removed from Under Review with Negative Implications, where they were placed on 24 May 2012, following DBRS’s similar action on the Kingdom of Spain.

At the same time, BBVA’s intrinsic assessment (IA) has been lowered to “A” from AA (low). Additionally, DBRS maintains its SA-2 support assessment for BBVA, which indicates an expectation of timely systemic support in case of need. However, with the current rating for the Spanish sovereign below the “A” intrinsic assessment for BBVA, there is currently no uplift to the Group’s ratings.

These rating actions follow DBRS’s downgrade of the Kingdom of Spain’s long-term foreign and local currency debt ratings to A (low) from A (high). The sovereign ratings have been removed from Under Review with Negative Implications; the trend is now Negative. The sovereign rating action reflects DBRS’s assessment that there has been a severe deterioration in Spain’s credit profile warranting the two-notch downgrade. The Negative trend reflects considerable downside risks to the economic growth outlook. Five factors are behind the downgrade: (1) the outlook for Spain’s economic growth has worsened as private sector deleveraging continues and fiscal austerity measures intensify; (2) Spain’s public debt dynamics have deteriorated from the capitalisation needs of the banking system; (3) reducing fiscal imbalances is increasingly difficult due to the weak economic environment; (4) stressed economy wide financing conditions are increasing downside risks to the growth outlook and prospects for public debt stabilisation; and (5) persistent doubts over the effectiveness of the policy response at the Euro area level appear to be contributing to investor uncertainty.

The downgrade of BBVA reflects DBRS’s view that the higher systemic risks and challenging environment in Spain continue to pressure the ratings of the Group. The Spanish economy has deteriorated and the prospects of recovery have receded, which is likely to weaken credit performance and put pressure on revenues. Problems in the real estate sector are likely to be exacerbated by the deterioration in the economy and increased uncertainty about the prospects for the economy not only in Spain but more broadly in Europe. Uncertainties over Spain’s property values and its banking sector stability have contributed to ongoing financial weakness in Spain and significant distress in the savings bank sector. The ongoing crisis and disrupted financial markets are elevating the stresses facing universal banks, such as BBVA, particularly from a funding perspective. While BBVA’s subsidiaries have retained access to wholesale markets, the Parent bank’s access to market funding has been pressured as 2012 has progressed by heightened market concerns regarding the adequacy of liquidity and capitalisation of Spanish financial institutions, as well as the position of the Spanish sovereign.

Supporting BBVA’s “A” rating level is the Group’s strong international retail banking franchise and skillful management, which contributes to operational efficiency and resilient earnings, combined with bolstered levels of provisioning and capital. DBRS views the Group’s significant international scope, which contributed 70% of consolidated net operating income (excluding Corporate Activities) in 1H12, or income before provisions and taxes (IBPT), as demonstrating the diversity of BBVA’s franchise outside Spain. Despite elevated credit provisions that reflect both credit deterioration and regulatory requirements, BBVA continues to generate enough IBPT to absorb these provisions and strengthen capitalisation. DBRS notes that asset quality trends for the Group overall continue to display signs of stabilisation, with the NPA ratio of 4.0% having held largely flat since late-2010.

DBRS considers BBVA’s significant geographic diversification with its international franchises outside Spain as an important underpinning of the current rating level. By maintaining the Group’s rating at “A”, which is positioned one-notch above DBRS’s rating of the Spanish sovereign, DBRS reiterates its view that the Group benefits from the geographic diversification and resilient performances of its businesses. In terms of IBPT in 1H12, approximately 30% was generated in Spain, 28% from Mexico, 25% from South America and 11% from Eurasia, with a smaller contribution from the U.S. The Group benefits from regular dividends from each of its subsidiaries to the Parent, which offsets some of the liquidity pressures within Spain. BBVA generated consolidated net attributable profit of EUR 1.5 billion in 1H12, EUR 3.0 billion in 2011, and EUR 4.6 billion in 2010. DBRS notes that BBVA has remained profitable throughout the crisis.

DBRS also notes that BBVA continues to position itself to successfully weather the extended economic crisis. The Group has bolstered its levels of generic and specific provisions (EUR 10.8 billion at 2Q12) to cover expected future losses. BBVA’s subsidiaries continue to access the wholesale markets through debt issuance, such as in Mexico. The Group also continues to bolster its capital levels, reaching a 10.8% core capital ratio based on Basel II standards and exceeding the 9% core capital requirement of the EBA.

While the conditions in Spain remain difficult due to the elevated level of credit problems, the sustained weakness in the economy, increasing market concern about Spain’s sovereign position, and the continued difficulties in the Spanish banking sector, DBRS maintains its view that BBVA’s broad diversity in earnings should help it cope with this level of stress. Future rating actions could be driven by further deterioration in BBVA’s home market of Spain and the impact of sustained market stress within the Eurozone. Additionally, lower earnings prospects in its international subsidiaries would likely put negative pressure on BBVA’s ratings, as this would reduce the benefit of the Group’s international diversification.

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

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

The sources of information used for this rating include 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 rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Rating Committee Chair: Peter Burbank
Initial Rating Date: 23 November 2009
Most Recent Rating Update: 24 May 2012

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