Bloomberg News

BBVA, Spain Banks Cut by Moody’s After Sovereign Downgrade

October 20, 2011

(Updates with shares, analyst comment from second paragraph.)

Oct. 20 (Bloomberg) -- Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and CaixaBank SA were downgraded by Moody’s Investors Service a day after the ratings company cut the nation’s grade for the third time in 13 months.

Long-term senior debt and deposit ratings for the banks were cut one level and given a negative outlook, Moody’s said yesterday in a statement. Shares in Santander fell as much as 1.8 percent in Madrid trading today and BBVA as much as 2.4 percent.

Spanish banks are under pressure as the country’s economy struggles to restore growth after a property crash triggered the worst recession in 60 years. Moody’s on Oct. 18 cut Spain’s credit rating two levels to A1, citing concerns about a “fragile” banking industry whose asset quality is being harmed by difficult funding and economic conditions.

“A few months ago some banks were starting to say they were seeing the light at the end of the tunnel, but they were wrong,” said Jose Ochoa, senior director in Spain at financial industry consulting firm Alvarez & Marsal Inc. “The outlook for Spain is getting worse every day and so logically the banks are suffering with these downgrades.”

Santander, BBVA and CaixaBank had their ratings cut to Aa3 from Aa2, Moody’s said. Moody’s also cut the debt ratings of savings bank group La Caixa, which controls CaixaBank, and the Spanish savings bank association, known as CECA.

Rising Loan Defaults

Credit demand has shrunk and defaults as a proportion of total lending rose in August to 7.15 percent, the highest since 1994, according to a Bank of Spain report. Deposits in Spain’s banking system fell for a second month in a row in August, declining 0.3 percent to 1.4 trillion euros ($1.9 billion).

“The downgrade of the Spanish government has only affected the debt and deposit ratings of those banks that have high stand-alone ratings and that Moody’s believes have a high probability of benefiting from systemic support,” Moody’s said, adding that the banks’ ratings are one notch higher based on government support.

Moody’s said it would be assessing over the coming weeks “any possible implications of revised economic projections for the Spanish economy on the performance of Spanish banks’ assets and the potential negative impact on the ratings of the overall banking sector.”

S&P Downgrade

Moody’s action follows an Oct. 11 decision by Standard & Poor’s to cut the ratings on Spanish lenders including Santander and BBVA, the nation’s biggest banks.

“We no longer see 2012 as a turnaround year for Spanish banks,” S&P said in a statement on Oct. 11, adding that the outlook for all the banks it covers in Spain is negative. “Their ratings prior to today’s downgrades had little room to accommodate another year of weak financial performance.”

Spanish bonds slumped after Moody’s downgraded the nation’s sovereign debt. The five-year bond yield increased 7 basis points to 4.74 percent today, climbing for the eighth day.

Santander Chief Executive Officer Alfredo Saenz last month said it may take three years for profit at Spain’s largest bank to “normalize.” The bank has relied on emerging markets such as Brazil to support earnings amid falling profit in Spain, which accounts for a third of its lending.

--With assistance from Jacob Greber in Sydney and Angeline Benoit in Madrid; Editors: Frank Connelly, Stephen Taylor

To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net Frank Connelly at fconnelly@bloomberg.net


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