Fitch affirms 3 Andorran banks

Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of Credit Andorra, Andorra Banc Agricol Reig (Andbank) and Mora Banc Grup, SA (MoraBanc) at ‘BBB’, ‘BBB’ and ‘BBB-‘ respectively; the Outlooks are Stable on all of the IDRs. A full list of rating actions can be found at the end of this rating action commentary, reports Fitch.

The ratings reflect the banks’ domestic operating environment, which is characterised by moderate economic stability and a developing regulatory framework. They also factor in the banks’ good earnings generation, adequate capitalisation and relatively weak loan quality ratios. The effects of the intervention and recent resolution of Banca Privada d’Andorra (BPA) have been limited, with Credit Andorra, Andbank and MoraBanc experiencing some outflows of assets under management (including deposits), while maintaining liquidity at fairly stable levels.

The Andorran banks focus mainly on private banking/wealth management, and maintain domestic retail-banking activities. In recent years, Andbank and Credit Andorra in particular have pushed ahead with international expansion, through a combination of organic and inorganic growth. MoraBanc has a more limited international presence, but it also intends to increase diversification through expansion. In Fitch’s view, this international expansion will likely erode margins, as international markets are more competitive than domestic ones.

Fitch’s assessment of the banks’ asset quality takes into account their relatively weak loan quality (including foreclosed assets), following six years of economic contraction from 2008-2013; however, they have been increasing reserve coverage levels and a large proportion of lending has tangible collateral. Moreover, the banks’ interbank exposures are with sound counterparties, and debt securities are mostly with highly rated sovereigns.

The limited development of the financial markets in Andorra, among other aspects, is reflected in the lack of a lender of last resort. Central bank access can only be achieved through the banks’ international subsidiaries, which we view as less reliable and a shortcoming compared to international peers. This limits the banks’ funding and liquidity scores, and is reflected in the banks having the lower of two possible Short-Term IDRs for banks with a Long-Term IDR of ‘BBB’.

The Andorran regulatory framework is strengthening. The authorities took swift measures to manage the fallout from BPA, and are in the process of harmonising bank regulation with that of the EU. The resolution of BPA included the creation of a new bank, Vall Banc, to which BPA’s legitimate assets and liabilities have been transferred. Vall Banc has been capitalised with EUR30m of funds, provided by the Andorran banks to the resolution fund. Taking this into account, the banks’ capitalisation remains adequate.

Credit Andorra’s ratings also take into account good earnings generation, adequate and steady strengthening of capital, a balanced approach towards international expansion and a proportionally larger exposure to the domestic economy than its peers.

Andbank’s ratings consider a greater focus on international private banking and wealth management, its progress in restoring capital to historical levels, and a resilient recurrent earnings generation capacity. Its ratings further take into account risks related to the rapid expansion of the bank’s activities, which could be a strain on the risk control framework.

MoraBanc’s ratings reflect good capitalisation and earnings generation capacity. Its strategic vision has been revised following its failure to complete its first major international acquisition last year; the new approach includes enhanced corporate governance and a reduction of balance sheet risks relating to alternative and equity investments.

The Stable Outlook on the banks’ ratings reflects our expectations that the overall credit profiles of the three banks are set to remain stable in the foreseeable future.

SUPPORT RATING AND SUPPORT RATING FLOOR
The banks’ Support Ratings (SRs) of ‘5’ and Support Rating Floors (SRFs) of ‘No Floor’ reflect the low probability of the Andorran banks receiving support if needed; this reflects last year’s implementation of a framework for resolving banks, in accordance with the EU’s BRRD.

CREDIT ANDORRA’S PREFERRED STOCK
Credit Andorra’s preferred stock is rated five notches below the bank’s Viability Rating (VR), reflecting higher-than-average loss severities for senior unsecured creditors and a higher-than-average risk of non-performance, given discretionary coupon payments.

RATING SENSITIVITIES
IDRs AND VRs
The banks’ IDRs and VRs are sensitive to a change in Fitch’s assessment of the Andorran operating environment in the medium term, which may benefit from the further alignment of the Andorran financial markets and regulatory framework with other European countries. The ratings also assume continued sound capital ratios, supported by an ability to generate capital internally through earnings, and a stabilisation of asset quality indicators, supported by expected moderate economic growth. A weakening of capital ratios or asset quality indicators could therefore put pressure on the ratings.

Andbank’s ratings are also sensitive to the bank’s ability to continue enhancing core capital and the execution of its growth strategy.

MoraBanc’s ratings are sensitive to the successful diversification of business volumes, via the expansion of its international franchise and the execution of its risk reduction plan.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade to the SR and upward revision to the SRF of these banks would be contingent on a positive change in the sovereign’s propensity to support its banks. While not impossible, this is highly unlikely in Fitch’s view.

CREDIT ANDORRA’S PREFERRED STOCK
Credit Andorra’s preferred stock ratings are broadly sensitive to the same considerations that might affect its VR.

The rating actions are as follows:

Credit Andorra:
Long-Term IDR: affirmed at ‘BBB’, Outlook Stable
Short-Term IDR: affirmed at ‘F3’
VR: affirmed at ‘bbb’
Preference shares: affirmed at ‘B+’
Support Rating: affirmed at ‘5’
Support Rating Floor: affirmed at ‘No Floor’

Andbank:
Long-Term IDR: affirmed at ‘BBB’, Outlook Stable
Short-Term IDR: affirmed at ‘F3’
VR: affirmed at ‘bbb’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘No Floor’

MoraBanc:
Long-Term IDR: affirmed at ‘BBB-‘, Outlook Stable
Short-Term IDR: affirmed at ‘F3’
VR: affirmed at ‘bbb-‘
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘No Floor’

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