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Spanish banks hit by downgrades

by contributor Andrew Bulkeley | Published October 12, 2011 at 5:18 PM

Spain's two biggest banks late Tuesday suffered the same rating fate as their government as both Standard & Poor's and Fitch Ratings Inc. lowered their ratings on a swath of Spanish lenders, citing a weakening economy, depressed real estate markets and the ongoing European sovereign debt crisis.

Fitch slashed its ratings on the country's top two banks, cutting Banco Santander SA to AA- from AA and Banco Bilbao Vizcaya Argentaria SA to A+ from AA-. S&P cut both to AA- from AA.

"The deterioration in funding conditions for the Spanish sovereign as result of the euro-zone debt crisis has also contaminated funding costs and access for all Spanish banks. Funding pressures may take time to die down," Fitch said.

The downgrades complicate the fitful restructuring of the Spanish banking sector.

In January, Spain's central bank and government embarked on a plan to force the regional banks, or cajas, that were especially hard hit by the collapse of the Spanish real estate bubble and the wider economic downturn to either strengthen their balance sheets through mergers or go out of business.

Both the cajas and the bigger lenders have been further pressured by looming Basel III regulations, which require stronger capital cushions.

Fitch was careful to note that the size and international activities of both Banco Santander and BBVA made them less susceptible to domestic economic woes. Investors appeared to agree, shrugging off the ratings changes. Santander gained 1.4%, or €0.087, in afternoon Madrid trade to €6.38 ($8.79), while BBVA gained 4.3%, or €0.278, to €6.73.

Fitch also said it revised its ratings change on Santander following an appeal from the bank, though it didn't divulge its original downgrade.

S&P voiced concern that many banks may soon need to refinance debt that is maturing this year, just as interbank loans become scarce and expensive. The ratings agency projected that economic conditions leave little hope of improved bank earnings next year.

"We now expect problematic assets to continue accumulating during 2012 and potentially into the first months of early 2013. This will extend the adverse effect of the downturn on banks' asset quality," S&P said.

Santander's Banco Español de Crédito SA retail bank, which is known as Banesto, on Tuesday affirmed the views of the ratings agencies. Banesto said third-quarter pretax profit dropped nearly 35% to €389.4 million as customers moved away from fee-generating products to safer investments and the bank paid more to borrow money.

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Tags: Banco Santander | banking | banks | Spain

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Spanish banks hit by downgrades

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