OREANDA-NEWS. Fitch Ratings has affirmed Ibercaja Banco S.A.'s Long-term Issuer Default Rating (IDR) at 'BB+', Short-term IDR at 'B' and Viability Rating (VR) at 'bb+'. The Outlook is Positive. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS AND VR
Ibercaja Banco's IDRs are driven by the bank's standalone credit profile, as captured by the VR. The ratings reflect the bank's strong regional franchise, broader business diversification than peers, which supports earnings resilience, adequate funding and liquidity profile and improving, albeit still weak, asset quality metrics. At the same time the VR factors in Ibercaja Banco's challenge to improve capital to levels more in line with higher rated peers.

The Positive Outlook reflects potential ratings upside, based on Fitch's expectation that capital levels will be strengthened in the next 18 months in light of a planned IPO and capital raising plan. Fitch anticipates that part of the IPO proceeds will be used to pay back state-owned CoCos. We also expect further asset quality improvements, which should reduce the exposure of capital to unreserved problem assets.

Non-performing loans (NPL) declined by about 21% in 2015 helped by the sale of a large portfolio of real estate development loans, while foreclosed assets declined only slightly. As a result, Ibercaja Banco's NPL ratio declined to 9.1% at end-2015 (around 11.4% including foreclosed assets) which is better than the sector average, supported by the resilience of its large residential mortgage book. However, asset quality metrics continue to compare unfavourably to international standards. Coverage levels for problem assets are sound. We expect asset quality to continue improving on the back of Spain's economic recovery.

The Caja3 acquisition in 2013 and stricter real estate provisioning in 2012 affected loss-absorbing buffers and the bank has since focused on restoring capital via de-risking and earnings generation. Although there has been some progress in restoring capital, at end-2015, the Fitch core capital (FCC)/weighted risks ratio was relatively weak at 8.4% and vulnerable to shocks from unreserved problem assets (NPLs and foreclosed assets represented a high 1.2x of FCC, albeit trending down). The EUR407m of state-owned CoCos are excluded from the FCC and the fully loaded CET1 ratio (9.75% at end-2015) as they have to be repaid by end-2017.

The bank has announced plans to raise capital and launch an IPO. This should help repay the CoCos and be capital supportive. However, the size of the equity increase and timing of this remains uncertain and contingent on market conditions. The bank expects to successfully complete this process before the state-owned CoCos mature.

Ibercaja's focus on low-risk/low-margin retail lending means banking earnings are modest in the context of low interest rates and muted volumes. The bank also relies on carry-trade revenues to support margins, although this is set to progressively reduce. Positively, revenues from non-banking subsidiaries, particularly the insurance and asset management businesses, provide some diversification and stability for the group's earnings profile. Together with lower loan impairment charges, this should support operating profits.

The group is mostly funded by retail deposits and a combination of mortgage covered bonds, repos and central bank funding. This funding structure reflects the bank's retail nature and large portfolios of sovereign debt. The gross loans/deposits ratio was close to 100% at end-2015 and available liquid assets are comfortable in the context of debt maturities.

SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that Ibercaja's senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that they become non-viable.

Fitch views the EU's Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM) are now sufficiently progressed to provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. BRRD has been effective in EU member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Full application of BRRD, including the bail-in tool, is required from 1 January 2016. BRRD was transposed into Spanish legislation on 18 June 2015, with full implementation from 1 January 2016.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The bank's subordinated debt is notched down one level from the bank's VR for loss severity because of lower recovery expectations relative to senior unsecured debt. These securities are subordinated to all senior unsecured creditors.

RATING SENSITIVITIES
IDRS AND VR
Ibercaja Banco's ratings are sensitive to changes to its VR. The VR could be upgraded if the bank successfully raises capital while paying back state-owned CoCos, resulting in strengthened capital levels. Combined with a continued effective reduction of the total volume of problem assets, this should provide relief to capital from unreserved problem assets and be rating positive. Similarly, maintaining its earnings generation capacity would contribute to an upgrade.

Downward pressure on the VR could arise from the bank's failure to achieve capital improvement plans, a negative asset quality shock or weakening of profitability. Similarly, a deterioration of the bank's funding and liquidity profile would put pressure on the ratings.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support Ibercaja Banco. While not impossible, this is highly unlikely, in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt ratings are sensitive to changes in Ibercaja Banco's VR and therefore to the same factors that would determine a change in the VR.

The rating actions are as follows:

Long-term IDR: affirmed at 'BB+'; Outlook Positive
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Subordinated debt: affirmed at 'BB'