News

Fitch Ratings has downgraded Caja Laboral Popular's (Caja Laboral) Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A' and Viability Rating (VR) to 'bbb+' from 'a'. Fitch has removed the Rating Watch Negative (RWN) on its Long-term IDR and the Outlook is Negative.

Fitch believes that it will become increasingly challenging for Caja Laboral to sustain profitability and asset quality metrics given the expected deterioration in Spain's economic outlook and the severely strained state of the country's real estate market.

Caja Laboral's focus on the relatively more resilient Basque Country and Navarra regions, a 12% Fitch core capital ratio(FCC)/weighted risks (end-Q311) and an exposure to real estate and construction lending (11% of total loans and foreclosures at end-Q311) that is below the sector average partly offsets these risks, but do not mitigate them fully.

Caja Laboral's exposure to land is high at 6% of total loans and foreclosures at end-Q311 and it was 25% covered by reserved, which in Fitch's view is under reserved. Fitch estimates that the recently announced tougher provisioning requirements of the Spanish Ministry of Finance should they have been taken through equity and profit and loss at end-Q311, would have resulted in a FCC ratio of around 10%,which still remains strong.

The bank's operating profit and its below-peer net interest margin, in part a reflection of there being no interest rate floors in its mortgage loans, will continued to be under pressure as economic conditions toughen and further asset quality deterioration continues. The bank's large residential mortgage portfolio (64% of total loans) has performed well to date, with non-performing loans of just 1.5% versus a 2.7% average for peers.

Caja Laboral's ratings also consider its solid franchise in the wealthy Basque Country and Navarra which has provided it with a large and relatively stable retail funding base. They also reflect Caja Laboral's adequate liquidity with no wholesale funding maturities in 2013, limited European Central Bank reliance to date and unencumbered assets pool of around 9% of total assets at end-Q311.

The Support Rating of '3' and Support Rating Floor of 'BB' reflect Fitch's belief that there is a moderate probability of support from the Spanish authorities if needed, in light of Caja Laboral's importance in the Basque Country.