Moody’s keeps negative outlook on Spanish banking

The fundamental credit outlook for the Spanish banking system remains negative, reflecting the continuing rapid deterioration in asset quality indicators and ongoing liquidity constraints, Moody's Investors Service said in a new Special Comment.
With the Spanish economy now deep in recession (GDP contracted by 0.7% in Q4 2008) and expected to remain there throughout 2009, coupled with the continued abrupt adjustment in the real estate and construction sector, Moody's believes that asset quality will continue to deteriorate across all asset classes.
"This will trigger higher provisioning requirements and a reduction in banks' risk absorption capacity, in terms of weaker capital adequacy, lower generic loan loss reserves and depressed profits," said Maria Cabanyes, a Senior Vice President in Moody's Banking Group.
"Between June 2007 and February 2009, Moody's took negative rating actions on around 50% of the rated banks in Spain and if fundamental credit trends in the system continue to deteriorate, further rating downgrades may be required," Cabanyes cautioned.
Furthermore, Moody's notes that liquidity constraints persist, as the disruption in access to long-term wholesale funding puts pressure on banks' funding costs and liquidity profiles.
"While the Spanish government has proposed measures to help ensure financial stability and ease liquidity pressure, Moody's believes that unless more use is made of the government's ability to inject capital into the banks, these measures will not fully offset negative rating pressure on a bank's intrinsic credit profile arising from the weakening credit trends in the system," said Cabanyes.
Moody's believes that each bank's ability to withstand deterioration in its loan book and its capacity to generate capital through core stressed earnings and other capital growth initiatives will be a key rating driver going forward. As some banks will demonstrate a significant sensitivity to such scenarios, they may face further rating downgrades.