Fitch downgrades Spanish bank that failed EU stress tests

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Ratings agency Fitch said Monday it had downgraded Caja Galicia, one of the five regional Spanish savings banks that failed EU stress tests on the health of the European financial system.

In a statement, it said it had lowered the bank's long-term default rating to BBB from BBB+ due to its "weakened financial profile and tight core capital.

"Caixa Galicia's asset quality and profitability have been negatively affected by Spain's weak economy and the rise in the number of defaulted real estate and construction companies," it added.

Caixa Galicia is in the process of merging with Caixanova, which is also based in the northwestern region of Galicia.

Fitch also lowered Caixanova's long-term default rating to BBB+ from A- citing the bank's exposure to both the Spanish property sector and equity investments, and tight core capital."

Last week, the ratings agency downgraded its long-term debt rating on Caja Espana -- another of the five regional Spanish savings banks that failed the stress tests carried out on 91 European banks.

Three other Spanish savings banks, or cajas, fell short in the EU-wide check-up of the sector -- Banca Civica, Diada and Cajasur -- as well as Greece's ATEBank and Germany's Hypo Real Estate.

Overall the stress tests found Spanish banks needed 16 billion euros (21 billion dollars) in extra capital, almost all of which the government had already agreed to inject before the results of the stress tests were published on July 23.

Spanish banks got off relatively lightly in the global credit crunch in 2008 as the country's strict rules meant they did not invest heavily in the high-risk US home loans that hurt financial institutions elsewhere.

But many regional savings banks have been heavily exposed to bad debt since the collapse of the property sector at the end of 2008.

The regional savings banks, many of them owned by regional politicians, account for about half of all lending in Spain.

© 2010 AFP

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