Reuters: Mergers News: TEXT-S&P puts CaixaBank hybrids 'BB+' rating on watch negative

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TEXT-S&P puts CaixaBank hybrids 'BB+' rating on watch negative Mar 30th 2012, 16:38 Fri Mar 30, 2012 12:38pm EDT March 30 - Overview -- On March 26, 2012, Spain's CaixaBank S.A. announced it has reached a preliminary merger agreement with Spanish bank Banca Civica S.A. -- We are placing our 'BB+' issue ratings on CaixaBank's hybrid instruments on CreditWatch negative. -- The CreditWatch reflects the potentially negative effect of the merger with Banca Civica on our assessment of CaixaBank's capital and earnings, and consequently of its stand-alone credit profile (SACP). -- We are also affirming our 'BBB+/A-2' long- and short-term ratings on CaixaBank and our 'BBB-/A-3' long and short-term ratings on parent holding company Caja de Ahorros y Pensiones de Barcelona (la Caixa). The outlooks on the long-term ratings are stable. -- The stable outlooks reflect that our long- and short-term ratings on CaixaBank and la Caixa would remain unchanged at 'BBB+' and 'BBB-' respectively, all other things being equal, even if we lowered our assessment of CaixaBank's SACP to 'bbb'. Rating Action On March 30, 2012, Standard & Poor's Ratings Services placed its 'BB+' issue ratings on Spain-based CaixaBank S.A.'s (CaixaBank) hybrid instruments on CreditWatch with negative implications. At the same time, we affirmed our 'BBB+/A-2' long- and short-term counterparty credit ratings on CaixaBank and our 'BBB-/A-3' long- and short-term ratings on its parent company Caja de Ahorros y Pensiones de Barcelona (la Caixa). The outlooks are stable. Rationale The rating actions follow the announcement that the boards of directors of la Caixa and CaixaBank have reached a preliminary merger agreement with the boards of Banca Civica S.A. (BBB-/Watch Pos/A-3) and of each of the savings banks integrated in it (see also "Spain-Based Banca Civica 'BBB-/A-3' Put On Watch Positive Following Announced Potential Integration Into CaixaBank," published today on RatingsDirect on the Global Credit Portal). ). We understand that under the agreement terms, CaixaBank will absorb Banca Civica. The actions reflect our belief that if the transaction goes through and based on the preliminary agreement terms, it would likely have a negative impact on CaixaBank's consolidated capital position, and lead us to revise our assessment of its capital and earnings to "moderate" from "adequate" currently. This would lead us to revise our stand-alone credit profile (SACP) on CaixaBank to 'bbb' from 'bbb+' currently. We would also lower the ratings on CaixaBank's hybrids, which we rate by notching down from the SACP, in accordance with our criteria. At present, we believe that the other features of CaixaBank post merger would likely remain consistent with our current assessment of CaixaBank's financial and business positions. Under our methodology, even if we lowered CaixaBank's SACP by one notch to 'bbb' following the absorption of Banca Civica, the long-term rating on CaixaBank would remain unchanged at 'BBB+' because we would incorporate one notch of uplift for potential extraordinary government support. We analyze CaixaBank and its controlling holding company, la Caixa, on a consolidated basis, using la Caixa's consolidated financial information, in accordance with our criteria. We consider CaixaBank to be the group's core operating entity. We rate la Caixa two notches below CaixaBank's long-term rating to reflect the structural subordination of la Caixa's creditors to those of CaixaBank. Consequently, our affirmation of the ratings on la Caixa follows the same action on CaixaBank. In our opinion, the potential acquisition of Banca Civica would likely have a negative impact on CaixaBank's capital position and on the risk-adjusted capital (RAC) ratio we calculate to measure its capital. We believe that CaixaBank's pro forma consolidated RAC ratio as of year-end 2011, after integrating Banca Civica's Standard & Poor's estimated risk-weighted assets, would stand between 5.5% and 6%. Although we believe that CaixaBank's organic capital generation should enable it to progressively enhance its solvency over the rating horizon, we don't anticipate, at this stage, that this would be sufficient to restore its RAC ratio before diversification to an "adequate" level according to our criteria. Consequently, we project that the RAC ratio before diversification for the combined entity for 2012 would likely remain in the 5%-7% bucket, compared with the 7.1% we currently estimate for CaixaBank. The potentially lower RAC ratio would lead us to revise our assessment of Caixabank's capital and earnings to "moderate" from "adequate." Despite low business volumes and high funding costs in coming quarters, CaixaBank's earnings capacity should benefit, however, from the potential cost synergies that we think it can extract from the integration and that would enhance its operating profitability. We also believe that the potential impact of consolidating Banca Civica on CaixaBank's credit risk position would be manageable, although Banca Civica's asset quality has deteriorated more than that of CaixaBank. We expect that Banca Civica would accumulate a higher level of problematic assets. In our view, CaixaBank's consolidated loan portfolio post merger would continue outperforming the banking system in terms of delinquencies in each of the main credit segments, and consequently would still be consistent with our "strong" assessment of the risk position. This is due to the overall modest size of most of the problematic assets acquired from Banca Civica, relative to the overall size of those of CaixaBank. Moreover, we believe that the additional extraordinary provisions that CaixaBank would be taking on the acquired portfolio at the moment of the acquisition would provide it with a strong cushion to absorb potential credit losses. We would likely continue to assess CaixaBank's funding position post merger as "average" and its liquidity as "adequate," because retail customer deposits would represent the main source of financing. CaixaBank's loan-to-core-customer-deposits ratio after the merger, excluding wholesale instruments and repurchase agreements with retail customers, would be in the 130% to 140% range, which is better than the system average. CaixaBank typically maintains adequate liquidity cushions on its balance sheet in case of need. Finally, although the potential acquisition of Banca Civica would enable CaixaBank to enhance its overall domestic market position and to rank as the largest bank in the Spanish financial system, we have already factored into our current ratings on CaixaBank's assessment of a "strong" business position. This assessment takes into account that CaixaBank runs one of Spain's strongest domestic retail banking franchises. CreditWatch We aim to resolve the CreditWatch placement on CaixaBank's hybrid instruments after the merger closes, which is likely by the end of the third quarter of 2012. If, as a result of the acquisition of Banca Civica, we were to lower our SACP assessment on CaixaBank to 'bbb' from 'bbb+', we would lower our issue rating on the hybrid instruments by one notch to 'BB' from 'BB+'. Conversely, we would affirm the issue rating on the hybrids if CaixaBank managed to cushion the impact of acquired risk-weighted assets on its capital and we were to leave our SACP on the bank unchanged. Outlook The outlook on the long-term rating on CaixaBank is stable. All other things being equal, our long- and short-term ratings on CaixaBank would remain unchanged at 'BBB+', even if we lowered our assessment of CaixaBank's SACP to 'bbb'. This is because we would start factoring into the ratings one notch of uplift for potential extraordinary government support, in accordance with our criteria. Following a lowering of the SACP and a change in uplift for government support, and upon completion of the transaction, however, we would likely revise the outlooks to negative, mirroring the outlook on the Kingdom of Spain (A/Negative/A-1). We could then consider negative rating actions if we: -- Lowered the SACP to 'bbb-', contrary to our current base-case scenario. This could occur if, in addition to assessing CaixaBank's capital and earnings as "moderate," we believed that CaixaBank's asset quality performance were likely to deteriorate in line with the banking sector average, which we currently do not anticipate. Weakening asset quality along these lines would lead us to reassess CaixaBank's risk position as "adequate" under our criteria; or -- Downgraded Spain to 'A-', which would mean that we would not incorporate government support into CaixaBank's long-term rating under our criteria, given the lower long-term rating on the sovereign. In our view, a positive rating action is unlikely over the next 15 to 18 months. The stable outlook on La Caixa mirrors that on its operating company CaixaBank. Given our approach to rate la Caixa two notches down from CaixaBank's long-term rating, a downgrade of CaixaBank would likely lead to a downgrade of la Caixa. Ratings Score Snapshot Long-Term Issuer Credit Rating BBB+ Holding Company Rating BBB- SACP bbb+ Anchor bbb- Business Position Strong (+1) Capital and Earnings Adequate (0) Risk Position Strong (+1) Funding and Liquidity Average and Adequate (0) Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 Additional Factors 0 Related Criteria And Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Group Rating Methodology And Assumptions, Nov. 9, 2011 -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 -- Bank Capital Methodology And Assumptions, Dec. 6, 2010 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Spain-Based Banca Civica 'BBB-/A-3' Put On Watch Positive Following Announced Potential Integration Into CaixaBank, March 30, 2012 Ratings List Ratings Affirmed CaixaBank S.A. Counterparty Credit Rating BBB+/Stable/A-2 Senior Unsecured BBB+ Caja de Ahorros y Pensiones de Barcelona Counterparty Credit Rating BBB-/Stable/A-3 Certificate Of Deposit BBB- Subordinated BB+ Commercial Paper A-3 Ratings Affirmed; CreditWatch Action To From CaixaBank S.A. Caixa Preference Ltd. Preferred Stock BB+/Watch Neg BB+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Link this Share this Digg this Email Reprints

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