DBRS: BBVA’s “A” Rating Confirmed Following Announcement of Catalunya Banc Acquisition

DBRS, Inc. (DBRS) has today confirmed the ratings Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group), including its Issuer & Senior Debt rating of “A” and Short-Term Instruments rating of R-1 (low) following BBVA’s announced acquisition of Catalunya Banc, S.A. (Catalunya Banc). The trend on the long-term rating remains Negative; the trend on the short-term rating remains Stable.

Today’s rating action follows BBVA’s statement that its offer to buy Catalunya Banc, a financial institution based in Catalonia, Spain, was accepted by the Fondo de Reestructuración Ordenada Bancaria (FROB) as a part of its competitive auction of Catalunya Banc. The agreement signed among the FROB and BBVA allows for BBVA to acquire up to 100% of the shares of Catalunya Banc for the price of up to EUR 1.2 billion. Factored into the transaction and price paid, BBVA is considering the potential risk that it is taking on, particularly with regards to the exposures in Catalunya Banc’s corporate and SME segments. The agreement is subject to the evaluation of the sale conditions by the European Commission (EC) and is still pending on relevant regulatory approvals, including authorizations of the Bank of Spain and the EC Directorate-Generale Competition. In addition, the agreement is subject to the effective transfer of the EUR 6.4 billion mortgage loan portfolio from Catalunya Banc to an asset securitization fund owned by Blackstone Group LP announced on 17 July 2014.

In confirming BBVA’s ratings, DBRS considers that BBVA has the capacity and ability to absorb Catalunya Banc, given the relatively modest size of Catalunya Banc and BBVA’s ability to generate solid underlying earnings from its internationally diversified franchise. At the end of 2013, Catalunya Banc had total assets of EUR 63.5 billion as compared to total assets at BBVA of EUR 599 billion. BBVA is generating solid results with net attributable profit of EUR 2.2 billion in 2013 and EUR 624 million in 1Q14. Furthermore, BBVA has a proven track record with integrating acquisitions, most recently with the acquisition of Unnim, another Catalonian bank, initiated in March 2012 and finalized in May 2013. DBRS views the Catalunya Banc acquisition as offering BBVA a significant opportunity to further expand its market position in Catalonia, a relatively wealthy and industrialized region within Spain, by doubling its market share in the region in terms of customers.

DBRS acknowledges that there are execution risks associated with any acquisition, particularly when acquiring a bank, such as Catalunya Banc, that has received significant government support and has been awaiting the finalization of the auction process for the past two years. DBRS also notes that this extended auction process has allowed BBVA time for proper due diligence prior to this announcement. In the near term, BBVA’s capital levels will be negatively impacted at a time when bolstering capital remains a focus, particularly ahead of the European Central Bank (ECB) Asset Quality Review (AQR) and EBA EU-wide stress tests. The acquisition also increases BBVA’s exposure to Spain, which in 2013 contributed approximately 30% of gross income. While the environment in Spain is showing some signs of improvement, the recovery remains fragile, and bank earnings remain pressured by still elevated funding costs and high levels of provisioning. That being said, DBRS views the terms of the purchase as providing important protection for BBVA from the downside risk associated with the acquisition.

The transaction includes several guarantees granted by the FROB, including coverage of potential risks arising from the potential break-up of Catalunyna Banc’s insurance agreements, litigation risk arising from potential burden-sharing, and a EUR 267 million reduction of purchase price if permission from Spanish tax authorities to realize certain deferred tax assets (DTAs) is not received. These DTAs derive from losses recorded in Catalunya Banc’s 2013 results following the transfer of assets by Catalunya Banc to Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria (SAREB). The transaction does not include an Asset Protection Scheme (APS), as was the case with BBVA’s previous FROB-assisted acquisition of Unnim in 2012. Catalunya Banc transferred or sold a sizable amount of problematic assets prior to the announced acquisition by BBVA, including the transfer of EUR 16.5 billion in real estate exposure to SAREB, with its remaining loan portfolio comprised mainly of mortgages (54% of total), corporate loans (14% of total) and loans to small and medium-sized enterprises (SMEs) (11% of total) with minimal exposure to real estate developers (4% of total). Catalunya Banc’s non-performing loan (NPL) ratio remains elevated at 13.9%, despite the balance sheet clean-up, as compared to a non-performing asset (NPA) ratio of 6.6% at BBVA.

In considering BBVA’s ability to successfully absorb Catalunya Banc and benefit from the acquisition, DBRS recognises the resiliency of BBVA’s franchise, its sustained profitability throughout the crisis, its strong operational capabilities with a still low cost/income ratio, and its success in strengthening its liquidity and building up its capital. The Group has a powerful domestic franchise (total assets of EUR 313 billion in Spain) that continues to gain market share organically amidst the restructuring and consolidation of the financial system. The transaction will also further reinforce BBVA’s national market share of 13.5% in gross loans by approximately 260 bps. DBRS views BBVA’s single technology platform as a significant strength of the Group, as it should allow the Group to reach the targeted synergies in a relatively short period of time.

DBRS maintains a Negative trend on BBVA, despite the signs of recent economic improvement in the domestic economy, to reflect both the asset quality and earnings challenges that the Group still faces in Spain. While not viewed as likely, DBRS notes that negative ratings pressure for BBVA could also arise if there is notable weakening of the intrinsic strength of the Group, which might arise if credit losses significantly exceed BBVA’s expectations or if the costs and potential disruptions associated with the integration of Catalunya Banc are greater than anticipated.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company documents and SNL Financial. 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: Lisa Kwasnowski
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: April 19, 2011
Most Recent Rating Update: April 30, 2014

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