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Moody’s just cut the ratings of 16 Spanish banks, as the number of bad loans on their books increases, the domestic economy deteriorates, and the Spanish government faces more and more pressure from the markets.The agency also cut Santander U.K. All were cut by 1-3 notches.

While rumours about the mass downgrade have been circulating all day, the cut nonetheless bolsters investor sentiment that Spain is in trouble.

Moody’s said its downgrades were primarily motivated by banks’ individual fiscal positions. In five cases, however, it added that the Spanish government’s declining ability to support banks if its sovereign position deteriorates did factor into the cut.

It differentiated between banks of four distinct types:

  • Highly diversified banks BBVA and Santander, which have also sound earnings performance and balance sheets.
  • Banks with reasonably strong underlying earnings but with high exposure to the Spanish economy.
  • Banks with questionable fundamentals that already reflect the poor economic environment.
  • 9 banks with ratings still on review.

Here’s the release from Moody’s:

Rating Action: 

Moody’s downgrades Spanish banks; ratings carry negative outlooks or remain on review for downgrade
  Global Credit Research – 17 May 2012

Actions follow rating reviews announced on 15 February 2012 and other dates
Madrid, May 17, 2012 — Moody’s Investors Service has today downgraded by one to three notches the long-term debt and deposit ratings for 16 Spanish banks and Santander UK PLC, a UK-domiciled subsidiary of Banco Santander (Spain) SA. The rating downgrades primarily reflect the concurrent downgrades of most of these banks’ standalone credit assessments, and in five cases also Moody’s assessment that the Spanish government’s ability to provide support to the banks has reduced.

Moody’s Investors Service has today downgraded by one to three notches the long-term debt and deposit ratings for 16 Spanish banks and Santander UK PLC, a UK-domiciled subsidiary of Banco Santander (Spain) SA. The rating downgrades primarily reflect the concurrent downgrades of most of these banks’ standalone credit assessments, and in five cases also Moody’s assessment that the Spanish government’s ability to provide support to the banks has reduced.

The debt and deposit ratings declined by one notch for five banks, by two notches for three banks and by three notches for nine banks. The short-term ratings for 13 banks have also been downgraded between one and two notches, triggered by the long-term ratings changes.

The outlooks on the debt and deposit ratings for 10 of the 17 banks downgraded today are now negative. For the remaining seven banks affected by today’s actions, their ratings remain on review for further downgrade, for reasons specific to each bank (as discussed separately below).

Today’s actions reflect, to various extents across banks, four main drivers:

1.) Adverse operating conditions, characterised by the renewed recession, the ongoing real-estate crisis and persistent high levels of unemployment.

2.) Reduced creditworthiness of the Spanish sovereign, which weighs on banks’ standalone profiles and affects the ability of the government to support banks.

3.) Rapid asset-quality deterioration, with non-performing loans to real-estate companies rising rapidly, and Moody’s expecting other loan categories to deteriorate.

4.) Restricted market funding access, with the ongoing euro area debt crisis contributing to persistent investor concerns about Spanish banks and the sovereign.

Moody’s recognises several positive trends that have limited the extent and scope of today’s rating actions. These mitigants include (i) the strengthening risk-absorption capacity of banks, underpinned by stricter capital and provisioning requirements; (ii) liquidity support from the European Central Bank (ECB) and (iii) actual and prospective support from the Spanish government, within the constraints of the sovereign’s own reduced creditworthiness. However, Moody’s believes these positive factors are overwhelmed by mounting asset-quality challenges that weaken the earnings and threaten to erode the capital positions of many banks. 

Moody’s debt and deposit ratings for publicly-rated Spanish banks now range between A3 and Ba3, with an (unweighted) average between Baa2 and Baa3. This average is below most Western European banking systems, reflecting the severe impact of both the difficult domestic environment and the ongoing euro area debt crisis on Spanish banks.

Please click on this link for the list of Affected Credit Ratings. This list is an integral part of this press release and identifies each affected issuer. For additional information on bank ratings, please refer to the webpage containing Moody’s related announcements:

Moody’s has also published today a special comment titled “Key Drivers of Spanish Bank Rating Actions” ( with more detail on the rationale for today’s actions. 


The negative rating outlooks for nine Spanish banks affected by today’s actions reflect Moody’s expectation that banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness. In some cases, the outlooks additionally reflect the negative outlook on Spain’s A3 government bond rating, which incorporates downside risks to the government’s creditworthiness and therefore, to its ability to extend support to banks. The placement on review for further downgrade of the ratings for seven banks affected by today’s actions reflects drivers specific to each bank, including in some cases ongoing mergers


Following today’s actions, publicly-rated Spanish banks fall into four broad groups, based on their standalone creditworthiness:

– The first group consists of the two largest banks, Banco Santander (Spain) SA (deposits A3, BFSR C / BCA a3) and Banco Bilbao Vizcaya Argentaria SA (deposits A3, BFSR C / BCA a3). They retain the highest standalone credit assessments among Spanish banks, mainly because of the relatively stable earnings generated by their strong, geographically diversified franchises.

– The second group includes institutions with baa standalone credit assessments. The banks within this group have generally solid underlying earnings and franchises relative to Spanish peers, but are more exposed to the domestic economy and less resilient than the two largest banks.

– The third group comprises institutions with standalone credit assessments of ba1 and lower, reflecting elevated vulnerability to the current challenging conditions.

– The fourth group is made up of those banks whose ratings remain on review and can therefore not be allocated to the above groups. In addition to the seven banks downgraded today whose ratings remain on review, the ratings for nine other banks also remain on review.



The Spanish economy has fallen back into recession in first-quarter 2012, and Moody’s does not expect conditions to improve during 2012. Moreover, the real-estate crisis that began in 2008 is ongoing, and unemployment has risen to very high levels, with rising risks to white-collar employment (in addition to extremely-high youth unemployment) affecting the outlook for banks’ household lending. As a result, Moody’s expects bank asset quality to deteriorate further in coming quarters, causing persistently high loan-loss provisioning expenses that erode bank earnings and, in some cases, might erode capital levels.



Amidst the ongoing euro area debt crisis, the Spanish government’s rising budget deficit and the renewed recession, sovereign creditworthiness has declined. This decline is a driver of today’s bank rating actions, and it is reflected in the recent two-notch downgrade of the government bond rating to A3, with a negative outlook (see 13 February 2012 press release “Moody’s adjusts ratings of 9 European sovereigns to capture downside risks”:–PR_237716). Moody’s says that the standalone credit strength of many Spanish banks has weakened, as they are linked in multiple ways to the sovereign. These linkages include (i) the impact of the government’s financial position on the domestic economy; and (ii) the large exposures of most banks to their domestic government and to other counterparties who depend on the government.

Reduced government creditworthiness also affects the ability of the government to support banks, as discussed under “Ratings Rationale — Senior Debt and Deposit Ratings” below.



Another factor underpinning today’s rating actions is the sharp increase of problem loans already observed and Moody’s view that loan delinquencies will continue to rise in coming quarters. The rating agency bases this view partly on the very weak performance of loans to companies in the real-estate and construction sectors, which accounted for 23% of Spanish banks’ lending to the private sector at year-end 2011. Moreover, Moody’s expects the recession and very high unemployment to cause asset-quality deterioration also for loans to households and non-real-estate-related businesses. These loan categories have shown only moderate weakening to date.

Accelerating problem loans in the real-estate sector have already driven total domestic non-performing loans of the Spanish banking system to 8.2% of total loans at the end of February 2012, up from less than 1% at year-end 2007 (source: Bank of Spain). Moody’s notes that the amount of non-paying assets is even higher, if real estate acquired as payment-in-kind from troubled borrowers is included.



Contributing to today’s rating actions, Spanish banks are facing less cost-effective, volatile and at times restricted access to wholesale funding markets. Moody’s recognises that Spanish banks on average funded 46% of total assets with deposits at year-end 2011 (source: ECB), a high level compared with other Western European banking systems. Nonetheless, banks rely to varying degrees on market funds, leaving most susceptible to the persistent market tensions.

Partly due to market tensions, Spanish banks have increased their ECB borrowings by more than six times since June 2011, to the highest level in absolute terms among euro area banking systems as of April 2012. The availability of three-year funds from the ECB has mitigated near-term funding stress. However, significant central bank reliance raises the issue of how Spanish banks will be able to reduce their ECB funding reliance over time. Whilst Spanish banks have deleveraged in 2011 by not fully renewing maturing loans, the scope for further deleveraging is unclear.



For five banks, today’s downgrades of their debt and deposit ratings reflect not only reduced standalone credit profiles, but also Moody’s assessment that the ability of the Spanish government to provide future support to Spanish banks has declined. Moody’s recognises the Spanish government’s supportive actions to address banking sector challenges, most recently through stricter provisioning requirements and a plan for banks to transfer real-estate assets acquired from troubled borrowers to special-purpose vehicles. 

However, Moody’s believes the Spanish government’s ability to support its bank’s debt and deposit ratings is consistent with the level implied by the sovereign’s debt rating, currently A3. That is, the Spanish government is unlikely to choose to prioritise its available funds to provide capital for banks over paying its own sovereign debt investors. Moody’s had previously assumed that the government’s willingness and capacity to support banks in a crisis could exceed its capacity to service its own debt and thus lift a bank’s ratings up to one notch above the sovereign.

The downgrades of 13 banks’ short-term ratings followed the downgrades of their long-term ratings, consistent with Moody’s standard mapping of short-term to long-term ratings.



Following the two-notch downgrade on 13 February of the Spanish government’s bond rating to A3, Moody’s has today downgraded to A3 the government-guaranteed senior debt of five Spanish banks whose (unguaranteed) senior debt ratings were previously higher than the government rating. The A3 ratings assigned are based on the unconditional government guarantee, which directly links them to the ratings of the Spanish government.



Moody’s has today downgraded the subordinated debt and hybrid ratings of nine Spanish banks in line with the downgrades of their standalone credit assessments. Moody’s had previously removed government support assumptions from its ratings of subordinated debt and hybrid instruments of Spanish banks on 12 December 2011, see “Rating Action: Moody’s reviews Spanish banks’ ratings for downgrade; removes systemic support for subordinated debt” (–PR_232353).



Today’s rating actions follow Moody’s decision to review for downgrade the ratings for many European financial institutions, including Spanish banks, see “Moody’s reviews ratings for European Banks”, 15 February 2012 (–PR_237914). On 7 May 2012, Moody’s extended the review for Santander to its short-term ratings (see “Announcement: Moody’s extends Santander’s current ratings review to include its short-term ratings” (–PR_245143). Moody’s previously placed several Spanish bank ratings on review on 12 December 2011, see “Rating Action: Moody’s reviews Spanish banks’ ratings for downgrade; removes systemic support for subordinated debt” (–PR_232353); “Announcement: Moody’s reviews Banco Popular’s ratings for downgrade and ratings of Banco Pastor for upgrade (Spain)”, 10 October 2011 (–PR_227988); “Announcement: Moody’s reviews Unicaja’s ratings for downgrade and Caja España’s ratings for upgrade following merger agreement”, 27 September 2011 (ñas-ratings–PR_226509).



Moody’s believes that rating upgrades are unlikely in the near future for banks affected by today’s actions, for the reasons given above. Whilst the current rating levels and outlooks incorporate a degree of expected further deterioration, the rating agency is of the opinion that the banks’ ratings may decline further if (i) operating conditions worsen beyond Moody’s current expectations; (ii) the Spanish sovereign’s creditworthiness declines further; (iii) asset-quality deterioration exceeds Moody’s current expectations; and (iv) pressures from market-funding restrictions intensify.

However, Moody’s believes that a limited amount of upward rating momentum could develop if the banks substantially improve their credit profiles and resilience to the prevailing conditions. This may occur through increased standalone strength, for example as a result of bolstered capital and liquidity buffers, work-out of asset-quality challenges, improved earnings or improved funding conditions. Ratings could also benefit from increased external support.



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