Fitch Revises Ibercaja Banco's Outlook to Positive; Affirms IDR at 'BB+'

Fitch Ratings has revised Spain-based Ibercaja Banco, S.A.'s Outlook to Positive from Stable. The bank's Long-term Issuer Default Rating (IDR) has been affirmed at 'BB+', Viability Rating (VR) at 'bb+' and Short-term IDR at 'B'. The agency has also affirmed Ibercaja Banco's Support Rating (SR) of '3' and Support Rating Floor (SRF) of 'BB+'. A full list of rating actions is at the end of this rating action commentary.

The revision of the Outlook to Positive reflects Fitch's belief that Ibercaja Banco's IDRs and VR could be upgraded if asset quality improves and capital is further reinforced in the foreseeable future.

KEY RATING DRIVERS - IDRs AND VR

Ibercaja Banco's IDRs are driven by its standalone credit fundamentals as captured by its VR. The VR reflects Ibercaja Banco's well-established franchise in its core market of Aragon, and a fairly low risk business profile, focused largely on retail mortgage lending which represented around two-thirds of gross loans at end-3Q'14. Problem assets, which include non-performing loans (NPLs) and foreclosed assets, are still high but there is evidence that volumes have stabilised over the last three quarters. The group performed well in the ECB's comprehensive assessment and no capital shortfalls were identified. This also suggests adequate loan loss reserves, although unreserved problem assets remain high in relation to Fitch core capital (FCC).

The VR also factors in Ibercaja Banco's ample customer funding base and adequate liquidity. Its large regional presence was further reinforced by the acquisition in July 2013 of Banco Grupo Cajatres, S.A.U. (BCaja3). BCaja3 was legally and operationally integrated into the parent in October 2014 (see 'Fitch Affirms BCaja3 at 'BB+'; Withdraws Ratings' at www.fitchratings .com).

Ibercaja Banco's portfolio of problem assets peaked in year-end 2013 and has since stabilised. Fitch expects problem assets to trend downwards over the next few quarters as the economy slowly recovers.

At end-3Q'14, the bank's NPL ratio reached 10.9% (13%, including foreclosures), comparing well with domestic peers. The legacy exposure to real estate developers, which drove most of the past deterioration, still makes up 14% of gross loans and foreclosures and is reducing very slowly. The level of reserves against NPLs (55%) and foreclosed assets (50%) is, in Fitch's view, adequate as the majority of these assets are also backed by mortgage collateral.

Capitalisation benefited from large capital gains generated from the rotation of securities in the first half of 2014 (1H'14). In addition, capital was supported by lower deferred-tax asset deductions following the November 2013 amendment of Spanish corporate tax legislation. The FCC/weighted risks ratio, which is Fitch's primary measure of capitalisation, grew to 8.4% at end-3Q'14 from around 6.1% at end-2013. There are also EUR407m additional loss-absorbing buffers, in the form of contingent convertibles from the Fund for Orderly Bank Restructuring, but the bank plans to repay them by 2017. The bank's transitional Basel III common equity tier 1 ratio was a higher 10.7% at end-1H'14. As capital strengthening remains one of the bank's top priorities, Fitch foresees some additional reinforcement over the medium term. A public listing of the bank's shares could achieve this, although timing depends on market conditions.

Earnings generation is currently limited but may improve as economic prospects improve and synergies from the BCaja3 transaction feed through. Contributions from the insurance subsidiaries are also relatively stable.

Ibercaja Banco's funding mix largely comprises a stable customer deposit base that fully funds the loan book and covered bonds with a well-diversified repayment structure. The bank holds large reserves of unencumbered assets, largely including Spanish sovereigns.

RATING SENSITIVITIES - IDRs, VR AND SENIOR DEBT

Ibercaja Banco's IDRs are sensitive to changes in the VR. The Positive Outlook indicates upward potential for Ibercaja Banco's VR and, consequently IDRs.

The VR could be upgraded if there is a sustained material reduction in problem assets, combined with further reinforcement of capital. Improvements in recurrent earnings could also be ratings positive. Conversely, any negative rating action, which Fitch sees as unlikely in the short term, would arise from unforeseen deterioration of asset quality and/or due to a material weakening of earnings.

KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

The SR and SRF reflect Fitch's belief that there is a moderate likelihood of support for Ibercaja Banco from the Spanish authorities, if ever needed. This is because the bank's regional importance is considered strong.

Ibercaja Banco's SR and SRF are sensitive to any weakening of Fitch's assumptions regarding Spain's ability and propensity to provide timely support to the bank. The greatest sensitivity is to progress made in implementation of the Bank Recovery and Resolution Directive and Single Resolution Mechanism. Fitch expects to downgrade Ibercaja Banco's SR to '5' from '3' and revise its SRF to 'No Floor' from 'BB+' by end-1H'15. Timing depends on progress made on bank resolution legislation.

Fitch has taken the following rating actions on Ibercaja Banco:

Long-term IDR: affirmed at 'BB+'; Outlook revised to Positive from Stable

Short-term IDR: affirmed at 'B'

Viability Rating: affirmed at 'bb+'

Support Rating: affirmed at '3'

Support Rating Floor: affirmed at 'BB+'

Additional information is available on www.fitchratings.com

Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 31 January 2014 are available at www.fitchratings.com.

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=931115

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