Fitch downgrades Spanish bank that failed stress test

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Ratings agency Fitch said Monday it had downgraded Caja Espana, one of the five regional Spanish savings banks that failed EU-wide stress tests to see how they would cope with worsened economic conditions.

In a statement, Fitch said it had lowered Caja Espana's long-term default rating to BBB- from BBB+ due to its "weakened financial and risk profile."

"Caja Espana's asset quality and profitability has been pressured by the weak Spanish economy and the downturn of the property sector, to which the caja has a high risk concentration (31 percent of total loans)," it said.

"Fitch believes that the operating environment will remain difficult, mainly due to limited economic growth prospects and the potential for a further deterioration in asset quality," it added.

Caja Espana is in the process of merging with Caja Duero to create a new savings bank called Espiga.

All major Spanish banks passed the stress tests but five of the 19 regional savings banks known as "cajas" that were analyzed were found to have core capital levels too weak to get them through another financial crisis.

Overall, seven of the 91 European banks that were subjected to the stress tests -- the five in Spain and one each in Germany and Greece -- failed the exercise.

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 which are owned by regional politicians, account for about half of all lending in Spain.

© 2010 AFP

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