Spanish banks get credit warning but hold ratings

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Standard & Poor's held steady the credit ratings of six top Spanish banks on Monday but warned of future downgrades as loans suffer amid the country's "uncertain economic environment."

The announcement followed market tension last week over rumours of strains within the Spanish banking system.

"We have reviewed all financial institutions we rate whose banking businesses are mostly concentrated in Spain" and "affirmed the counterparty credit ratings of six of the seven institutions reviewed," S&P said.

The agency confirmed its "A/A-1" ratings on Caja Madrid, Banco Popular, Banco de Sabadell, Ibercaja and Bankinter as well as its "A/A-1+" for La Caixa.

"This underscores our view that these institutions have enough financial strength through existing loan loss reserves and future operating profits to absorb the credit losses that we expect," S&P said.

"In our view, most of them will end the 2008-2011 downturn with some excess provisioning."

However it lowered the rating on a seventh bank, Kutxa, from "A+/A-1" to "A/A-1".

It excluded the country's two biggest banks from the assessment -- Banco Santander and BBVA -- "due to their multinational presence" and included only four of its more than 40 savings banks.

"However, most of our outlooks are negative, which reflects the possibility that loan and operating performance could be weaker than we currently expect in a prolonged unfavorable and uncertain economic environment," said Standard & Poor's credit analyst Jesus Martinez.

The agency said it took into consideration "our upward revision of our estimates for loan losses for 2009-2011 for the country's banking industry, and our forecasts for sluggish domestic economic growth over the period."

It also factored in "the restructuring of the savings bank segment and its potential implications for the system's competitive dynamics and fundamentals," as well as "the low levels of investor confidence and very high volatility in funding markets."

To calm market nerves about the strength of its financial institutions, the Bank of Spain announced last week that it will publish "stress tests" on the ability of its banks to withstand any sudden financial shocks.

EU leaders also agreed to release the results of similar tests.

Spanish banks got off relatively lightly from 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.

However, many regional savings banks have been badly exposed to bad debt following the collapse of the property sector at the end of 2008.

The government has encouraged their consolidation in order to maintain liquidity.

Spain plunged into its worst recession in decades at the end of 2008 following the collapse of a decade-long property boom and only returned to tepid growth this year.

© 2010 AFP

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