OREANDA-NEWS. Fitch Ratings has affirmed Grupo Cooperativo Cajamar's (GCC) Long-Term Issuer Default Rating (IDR) at 'BB-', Short-Term IDR at 'B' and Viability Rating (VR) at 'bb-'. The Outlook on its Long-Term IDR is Stable.

At the same time, Fitch has affirmed the IDRs of GCC's central bank, Banco de Credito Social Cooperativo, S.A. (BCC) and GCC's largest cooperative bank (Cajas Rurales Unidas, Sociedad Cooperativa de Credito). A full list of rating actions is attached at the end of this rating action commentary.

GCC comprises 19 credit cooperatives and BCC and is subject to a mutual support mechanism under which members mutualise 100% of profits and have a cross-support mechanism for capital and liquidity. On this basis, Fitch assigns the same IDRs to the member groups.

KEY RATING DRIVERS - IDR AND VR
GCC's Long-Term IDR is driven by the group's standalone credit profile as expressed by the VR. The bank's ratings reflect weak asset quality metrics, the vulnerability of its capital to unreserved problem assets and the challenge to improve its core banking profitability. The VR also takes into account its adequate funding and liquidity profile and good franchise along the Mediterranean coast and other rural regions in central Spain. The Stable Outlook on GCC's Long-Term IDR assumes that the bank will continue to focus on managing down its problem assets, a trend already visible since end-2013.

In 2015, GCC slightly reduced the stock of problem loans as recoveries, write-offs and foreclosures outpaced new non-performing loans (NPLs) entries while its NPL reserve coverage was little changed at 48% at end-2015. However, at slightly above 20% the problem asset ratio at end-2015 (which includes NPLs and foreclosed assets) was still very high by international standards and weighs heavily on the bank's ratings. Fitch expects asset quality metrics to continue improving on the back of healthy growth of the Spanish economy and the stabilisation of the property market.

At end-2015 GCC's Fitch Core Capital (FCC) and fully-loaded Common Equity Tier 1 ratios were acceptable at 10.5% and 10.6%, respectively. However, unreserved problem assets account for around 197% of FCC, highlighting the bank's vulnerability to unexpected shocks.

Profits have relied on extraordinary items in the last couple of years, mainly capital gains from the bank's government debt securities portfolio, which enabled it to increase provisions and offset a reduction in net interest income. The latter is pressured by a low-yielding mortgage book, partly affected by the absence of interest rate floors since May 2013. In 2015, GCC built a sovereign bond portfolio to continue to tap carry trade opportunities. This, together with a further reduction of retail funding costs, should help support the net interest margin. GCC will be challenged to improve its core banking profitability, but increased fee-income generation activities and, most notably, lower loan impairment charges should support earnings.

GCC's funding structure is adequate for the bank's business model, as loans are mainly funded with retail deposits. However, ECB funding remains comparatively higher than peers' and is entirely used to finance HTM government bonds.

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

In Fitch's view the EU's Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM) provides 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.

RATING SENSITIVITIES
IDRS AND VR
The VR could be upgraded if GCC substantially manages down the stock of problem assets and builds additional loss absorption buffers, resulting in a reduction of the bank capital's vulnerability to unreserved problem assets. Improved earnings from its banking business would also be rating-positive. Any reversal in the trend of these factors, currently not envisaged by Fitch, would be rating-negative.

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 its banks. While not impossible, this is highly unlikely, in Fitch's view.

The rating actions are as follows:

Grupo Cooperativo Cajamar:
Long-Term IDR affirmed at 'BB-'; Outlook Stable
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'bb-'
Support Rating Affirmed at '5'
Support Rating Floor affirmed at 'No Floor'

Banco de Credito Social Cooperativo, S.A.
Long-Term IDR affirmed at 'BB-'; Outlook Stable
Short-Term IDR affirmed at 'B'
Support Rating Affirmed at '5'
Support Rating Floor affirmed at 'No Floor'

Cajas Rurales Unidas, Sociedad Cooperativa de Credito
Long-Term IDR affirmed at 'BB-'; Outlook Stable
Short-Term IDR affirmed at 'B'
Commercial paper: affirmed at 'B'