S&P Places Caja Madrid, Spain's Fourth Largest Banking Group, On CreditWatch Negative
- We expect pronounced pressure on Spanish savings bank Caja Madrid's operating profitability this year and into 2011.
- We are placing our 'A/A-1' long- and short-term ratings on Caja Madrid, as well as all issue ratings (except those on covered bonds and state-guaranteed debt), on CreditWatch negative.
- The CreditWatch negative status reflects the possibility that we could lower the counterparty credit ratings on Caja Madrid, although we think any downgrade is unlikely to exceed one notch. We could, however, also lower our assessment of Caja Madrid's stand-alone credit profile by one or more notches.
- We could envisage a downgrade of one or more notches of the savings bank's hybrid securities.
On June 1, 2010, Standard & Poor's Ratings Services placed the 'A/A-1' long-and short-term counterparty credit ratings and all issue ratings (except those on covered bonds and state-guaranteed debt) on Spanish savings bank Caja de Ahorros y Monte de Piedad de Madrid on CreditWatch with negative implications.
The CreditWatch placement reflects the possibility that we could downgrade Caja Madrid, based on our view that its financial profile will likely continue to weaken in 2010 and 2011. Depending on the degree of deterioration, Caja Madrid's creditworthiness could cease to be consistent with our 'A/A-1' ratings on the savings bank.
In particular, we believe that Caja Madrid's operating profitability will likely come under heavy strain during the remainder of this year and 2011. This is because the repricing of the full loan book to the prevailing low interest rates will reduce Caja Madrid's earnings substantially, while at the same time, in our view, its loan loss provisions will remain elevated. In our view, the modest net operating profits that Caja Madrid will likely report might leave it with little room to maneuver if unexpected events arise. Furthermore, we think that by the end of 2011 Caja Madrid will probably have exhausted all its existing loan loss reserve cushions to cover the credit losses in its loan book.
Spain's fourth-largest banking group, Caja Madrid had total assets of €191 billion on March 30, 2010.
To resolve the CreditWatch placement within the coming weeks, we will evaluate the magnitude of the expected deterioration in Caja Madrid's financial profile over the next 18 months and the ensuing implications for the savings bank's stand-alone credit profile (SACP). We could lower our assessment of the SACP by one or more notches, depending on the extent of the weakening we foresee.
Lowering Caja Madrid's SACP, however, would not necessarily imply an automatic downgrade of Caja Madrid. Nor would we necessarily lower the ratings on Caja Madrid by the same number of notches as the SACP. This is because if we were
to lower Caja Madrid's SACP, we would also assess the possibility of incorporating extraordinary state support into the ratings on Caja Madrid, given the savings bank's high systemic importance in Spain's banking sector.
We could envisage, however, lowering our ratings on Caja Madrid's hybrid instruments by one or more notches.
As part of our resolution of the CreditWatch status, we will also analyze, based on information as it becomes available, the implications of Caja Madrid's recently reported talks on a potential merger with five Spanish savings banks.