OREANDA-NEWS. Fitch Ratings has affirmed Spain-based Banco Santander, S.A.'s (Santander) and Banco Bilbao Vizcaya Argentaria's (BBVA) Long-term Issuer Default Ratings (IDRs) at 'A-' and Viability Ratings (VRs) at 'a-'. The Outlooks on the Long-term IDRs are Stable. Fitch has also affirmed their Short-term IDRs at 'F2'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS, VRS AND SENIOR DEBT
The IDRs and senior debt ratings of Santander and BBVA reflect their diversified franchises, fairly modest risk appetites, adequate asset quality despite challenges in some geographies, resilient profit generation and satisfactory capitalisation. The ratings are one notch above the Spanish sovereign rating (BBB+/Stable), supported by diversification benefits from their solid retail franchises in a number of European and Latin American countries and the US.

Geographical diversification has proven key in supporting the resilience of earnings generation and loss absorption capacity during times of stress. This has enabled dividends to be up-streamed and offers financial flexibility from the potential disposal of stakes in subsidiaries if needed.

Despite Santander's and BBVA's international diversification, Fitch considers that the banks' risk profiles remain correlated with that of the Spanish sovereign. As part of its analysis, Fitch therefore also takes into account the standalone profile of the Spanish legal entity to which the ratings are assigned.

In Fitch's view, this correlation is, among other factors, reflected in the banks' domestic performance and asset quality, which have proven sensitive to the economic environment. Also, liquid assets at the parent banks are largely in the form of Spanish sovereign bonds. Funding access, stability and costs are also typically influenced by broad perceptions of sovereign risk, but Fitch notes the flight to quality from which both banks benefited during Spain's recent financial crisis and the improvement in funding costs since Spain began its recovery.

Santander and BBVA benefit from relatively stable earnings over the cycle helped by their geographical diversification and retail-banking focus. Fairly wide margins, supported by the emerging market operations and a cost control-oriented culture have supported pre-impairment operating profitability. This has enabled them to absorb higher impairment charges over the past years, especially from Spain, and yet maintain the capacity to internally generate capital.

While risks from a recessionary environment in Brazil for Santander and foreign currency headwinds pose challenges for the banks, Fitch expects profitability in 2016 to be resilient and have upside potential, benefiting from sound economic growth in most countries. This should bring a pickup in activity and lower impairments, especially in Spain as the economy recovers. In addition, integration synergies should be coming through in Spain for BBVA.

Asset quality indicators have improved at both banks, helped by Spain's economic recovery but also resilient asset quality in other jurisdictions, particularly in Brazil for Santander so far. The improvement in BBVA's non-performing loan (NPL) ratio is somewhat held back by its larger share of loans in Spain, particularly after the acquisition of Catalunya Banc. Reported group NPL ratios were 4.4% at Santander and 5.4% at BBVA at end-2015. Fitch views the levels of reserves held against these assets to be comfortable and above average by international standards.

Fitch currently views the two banks' capital levels at the lower end of the scale for international banks given the banks' exposures to emerging markets, although this is mitigated by their retail-banking oriented business models. At end-2015, Santander's Fitch core capital (FCC)/weighted risks ratio was 10.7%, and BBVA's was 10%. The banks' capitalisation also benefits from adequately capitalised subsidiaries. Regulatory leverage ratios, especially at BBVA, are higher than the average for international banks.

We view Santander's and BBVA's funding and liquidity profiles as adequate for their ratings. The two banks are largely funded by customer deposits in their core markets, with funding imbalances being fairly small and met through long-term debt instruments, mostly senior unsecured and covered bonds.

Funding also benefits from both banks' proven ready access to local and international wholesale markets, even in turbulent times. The banks hold ample unencumbered assets and scheduled repayments of borrowings are well spread. Fitch's assessment of the banks' funding and liquidity profiles is also supported by limited intercompany funding, with subsidiaries being locally funded without recourse to the parent banks.

The Stable Outlooks reflect Fitch's expectation that Santander's and BBVA's overall credit profiles are set to remain stable in the foreseeable future. They also mirror the Outlook on Spain's sovereign rating, which is an important driver of Fitch's assessment of the operating environment in the banks' home market.

SUPPORT RATINGS (SRs) AND SUPPORT RATING FLOORS (SRFs)
The SRs of '5' and SRFs of 'No Floor' for Santander and BBVA reflect Fitch's belief that senior creditors of these banks cannot rely on receiving full extraordinary support from the sovereign in the event that the banks become non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that is likely to require senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by Santander and BBVA are notched down from their VRs, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.

Subordinated (lower Tier 2) debt is rated one notch below the banks' VRs to reflect above average loss severity of this type of debt compared with average recoveries (one notch). Upper Tier 2 debt is rated three notches below the banks' VRs to reflect above average loss severity of this type of debt compared with average recoveries (one notch) and high risk of non-performance (two notches) as there is the option to defer coupons if the issue reported losses in the last audited accounts.

Preferred shares are rated five notches below the banks' VRs to reflect higher loss severity risk of these securities when compared with average recoveries (two notches from the VR) as well as high risk of non-performance (an additional three notches) due to profit test for legacy issues and fully discretionary coupon payments for recent issues.

STATE GUARANTEED DEBT (BBVA)
State-guaranteed debt issues are senior unsecured instruments that bear the full guarantee of Spain. These state-guaranteed debt ratings are aligned with the higher of BBVA's or Spain's IDRs.

RATING SENSITIVITIES
IDRS, VRS AND SENIOR DEBT
The banks' IDRs are primarily sensitive to changes to their VRs. Both banks' VRs could be upgraded if the operating environment improves, which would likely be reflected by an upgrade of the Spanish sovereign rating linked to better macro-economic conditions, while foreign markets remain resilient. We believe this would ultimately contribute to further improvements in profitability and asset quality of their parent banks.

In our view, there is more upside potential for Santander's ratings than BBVA's given the former's more pronounced diversification towards higher-rated sovereigns. Positive rating action on the Spanish sovereign would not automatically trigger an upgrade of the banks' VRs (and hence IDRs). For Santander, this would have to be combined with improved capital metrics, but also depend on asset quality improvements as well as international subsidiaries' performance. In the case of BBVA, a VR upgrade would also be subject to the economic conditions of the main emerging countries in which it operates and progress with the integration of recently acquired businesses.

While currently seen as unlikely by Fitch, both banks' ratings could be adversely affected by a weakening of the operating environment, possibly evidenced by a downgrade of Spain's sovereign rating or marked asset quality deterioration, for example due to unforeseen shocks in international subsidiaries that translate into significant pressures on local and/or group earnings and capital. Evidence of an inability to sustainably access either local or international wholesale markets would also put pressure on these banks' ratings.

SRS AND SRFS
Any upgrade of the SRs and upward revision of the SRFs 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.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by Santander and BBVA are primarily sensitive to any change in their VRs. Upper Tier 2 notes and preferred shares are also sensitive to Fitch changing its assessment of the probability of their non-performance relative to the risk captured in the banks' VRs.

STATE GUARANTEED DEBT (BBVA)
The state-guaranteed debt ratings of BBVA are sensitive to changes to the bank's and Spanish sovereign IDRs.

The rating actions are as follows:

Santander
Long-term IDR: affirmed at 'A-'; Outlook Stable
Short-term IDR: affirmed at 'F2'
VR: affirmed at 'a-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt long-term rating and certificates of deposit: affirmed at 'A-'
Senior unsecured debt short-term rating, commercial paper and certificate of deposits: affirmed at 'F2'
Market-linked senior unsecured securities: affirmed at 'A-emr'
Subordinated debt: affirmed at 'BBB+'
Preference shares: affirmed at 'BB'

Santander International Debt, S.A. Unipersonal
Senior unsecured debt long-term rating: affirmed at 'A-'
Senior unsecured debt short-term rating: affirmed at 'F2'
Market-linked senior unsecured securities: affirmed at 'A-emr'

Santander Issuances S.A.
Subordinated debt long-term rating: affirmed at 'BBB+'

Santander International Preferred, S.A. Unipersonal
Preference shares: affirmed at 'BB'

Santander Commercial Paper, S.A. Unipersonal
Commercial paper: affirmed at 'F2'

Santander Finance Capital, S.A. Unipersonal
Preference shares: affirmed at 'BB'

Santander Finance Preferred, S.A. Unipersonal
Preference shares: affirmed at 'BB'

Santander Financial Issuance Ltd.
Subordinated debt: affirmed at 'BBB+'

Santander Perpetual, S.A. Unipersonal
Upper Tier 2 debt: affirmed at 'BBB-'

Emisora Santander Espana, S.A.U.
Senior unsecured debt long-term rating programme: affirmed at 'A-'
Senior unsecured debt short-term rating programme: affirmed at 'F2'

Santander International Products PLC
Senior unsecured debt long-term rating: affirmed at 'A-'

BBVA
Long-term IDR: affirmed at 'A-'; Outlook Stable
Short-term IDR: affirmed at 'F2'
VR: affirmed at 'a-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt long-term rating: affirmed at 'A-'
Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2'
Subordinated debt: affirmed at 'BBB+'
Upper Tier 2 debt: affirmed at 'BBB-'
Preference shares: affirmed at 'BB'
State-guaranteed debt: affirmed at 'A-'

BBVA Capital Finance, S.A. Unipersonal
Preference shares: affirmed at 'BB'

BBVA International Preferred, S.A. Unipersonal
Preference shares: affirmed at 'BB'

BBVA Senior Finance, S.A. Unipersonal
Senior unsecured debt long-term rating: affirmed at 'A-'
Senior unsecured debt short-term rating and commercial paper: affirmed at 'F2'

BBVA U.S. Senior, S.A. Unipersonal
Commercial paper: affirmed at 'F2'

BBVA Subordinated Capital, S.A. Unipersonal
Subordinated debt: affirmed at 'BBB+'

Banco Bilbao Vizcaya Argentaria S.A. New York Branch
Certificate of deposits debt long-term: affirmed at 'A-'