S&P Warns It Could Cut Largest Spanish Deposit Bank Counterparty Credit Ratings

From S&P

Overview

• Caja Madrid announced yesterday that Bancaja will join the group of five banks discussing a potential merger with Caja Madrid.
• We are keeping the ratings on Caja Madrid (except those on covered bonds and state-guaranteed debt) on CreditWatch with negative implications. The negative implications reflect the possibility that we could lower the counterparty credit ratings.
• We could also lower our assessment of Caja Madrid's stand-alone credit profile by one or more notches.
• We could downgrade the savings bank's hybrid securities by one or more notches.

Rating Action

On June 11, 2010, Standard & Poor's Ratings Services said that the 'A/A-1' long- and short-term counterparty credit ratings on Caja de Ahorros y Monte de Piedad de Madrid (Caja Madrid) and all issue ratings (except those on covered bonds and state-guaranteed debt) remain on CreditWatch with negative implications.

Rationale

The rating action follows the announced addition of Caja de Ahorros de Valencia, Castellón y Alicante (Bancaja) to the group of five banks discussing a potential merger with Caja Madrid. Given the large size of Bancaja, in our view the business and financial implications of a potential merger with Caja Madrid, as well as the execution risks involved, could have a negative effect on both our ratings and our assessment of Caja Madrid's stand-alone credit profile (SACP).

Regardless of any integration plan, our CreditWatch on Caja Madrid's ratings 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.

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.

CreditWatch

We expect to resolve the CreditWatch placement in two steps. First, 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. As a result, we could lower our assessment of the SACP by one or more notches in the short term, 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.

The second step, based on information as it becomes available, will be to analyze the implications on Caja Madrid's creditworthiness of recent discussions about integrating with six Spanish savings banks (Bancaja, Caja Insular de Canarias, Caixa Laietana, Caja de Ávila, Caja Segovia and Caja Rioja). Given that this process could take longer than our re-evaluation of Caja Madrid's financial profile, our ratings and assessment of Caja Madrid's SACP could remain on CreditWatch with negative implications until this second phase is concluded.

Comments

[downwiththebanks]

I cut S&Ps rating.

[Hephasteus]

Twitter next week.

Standards and Poor: Bancaja has a small penis

Bancaja: I do not have a small penis. Your vagina is a bus parking spot.

Standards and Poor: Banacaja is really an unemployed grifter.

Bancaja: Screw you. I'm putting my balance sheet up on Hot or Not.

[AxiosAdv]

Doesn't seem to bother STD as it's up huge the last 2 days.

[ciao]

Here we go ... swap counterparties as a species .... gone!