DBRS Lowers Ratings of Banco Popular to A (low) After Sovereign Rating Action, Trend Now Negative

DBRS, Inc. (DBRS) has today downgraded the ratings of Banco Popular Español S.A. (Popular or the Group) following DBRS’s downgrade of the Kingdom of Spain. DBRS has downgraded Popular’s Senior Unsecured Long-Term Debt & Deposit rating to A (low) from A (high) and Short-Term Debt & Deposit 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, Popular’s intrinsic assessment (IA) has been lowered to A (low) from “A”. DBRS maintains its SA-2 support assessment for Popular, which indicates an expectation of timely systemic support in case of need. However, with the current rating for the Spanish sovereign at the same level as the IA for Popular, 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 Popular reflects DBRS’s view that the higher systemic risks and challenging environment in Spain continue to pressure the ratings of the Group. Popular, whose franchise is predominantly in Spain, has been impacted by the still challenging environment in its home market. 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’s stability have contributed to ongoing financial weakness in Spain and significant distress in the savings bank sector. DBRS notes that potential further negative rating action on the Spanish sovereign would likely impact the ratings of Popular.

Supporting Popular’s A (low) rating level is the Group’s strong retail banking franchise and skillful management, which contributes to operational efficiency and resilient earnings, combined with bolstered levels of provisioning and capital. Despite elevated credit provisions that reflect both credit deterioration and regulatory requirements, Popular continues to generate enough income before provisions and taxes (IBPT), along with various one-off capital gains, to absorb these provisions and strengthen capitalisation. Popular generated consolidated attributable profit of EUR 176 million in 1H12, EUR 480 million in 2011, and EUR 590 million in 2010. DBRS notes that Popular has remained profitable throughout the crisis.

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, pressuring the ratings of Popular. Future rating actions could be driven by further deterioration in Popular’s home market of Spain and the impact of sustained market stress within the Eurozone. Additionally, the inability to maintain earnings to absorb provisioning, as laid out in Popular’s business plan, would likely put negative pressure on the Group’s ratings.

Notes:
All figures are in Euros 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: 21 September 2006
Most Recent Rating Update: 24 May 2012

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