Fitch Ratings downgraded 18 Spanish banks Tuesday, following its three-notch downgrade of Spain’s sovereign rating last week, and a proposed €100 billion bank bailout that was arranged over the weekend.
The rating agency said that rating actions on the banks reflect similar concerns to those that have affected the Spanish sovereign rating. In particular, it notes, Spain is expected to remain in recession through the remainder of this year and 2013, compared to the previous expectation that the economy would benefit from a mild recovery in 2013.
Fitch says that the weak Spanish economy will continue to affect business volumes that, together with low interest rates, will place pressure on revenues. The institutions affected by the rating actions are purely domestic banks, and so, their revenue generation capacity, risk profile, funding access and cost of funding are highly sensitive to the evolution of Spain’s economy and its housing market, it says.
The bank downgrades also factor in concerns about the potential for the loan portfolios of certain banks to deteriorate further, particularly for banks whose loan books are heavily exposed to the construction and real estate sectors, and those with low equity bases. It notes that banks are being challenged to further increase loan impairment coverage levels for real estate assets while complying with stringent capital requirements.
Fitch also says that it has not changed its view of Spanish government support for its banking sector following the announcement of a bailout facility of up to €100 billion from the European Financial Stability Fund/European Stability Mechanism. The downgrade of Spain’s sovereign ratings by three notches already factors in the likely fiscal cost of restructuring and recapitalising the Spanish banking sector, which Fitch has estimated to be between €50 billion to €60 billion under its base case, and as high as €100 billion under a stress scenario.