Fitch Downgrades Spanish Banks

Fitch Ratings downgraded two Spanish banks, Banco Santander S.A. (STD, SAN.MC) and Banco Bilbao Vizcaya Argentaria S.A. (BBVA, BBVA.MC), by two notches, saying the rating actions reflected last week's downgrade of Spain and the expectation that the country will remain in recession through 2013.

The downgrades came just after the Spanish government agreed over the weekend to a European Union bailout of as much as EUR100 billion ($125 billion) for its banks, hoping the funds will help shore up an ailing financial industry strained by a massive housing bust. Spain became the fourth euro-zone country to request a bailout, after Greece, Portugal and Ireland.

Both Spanish financial institutions were downgraded to triple-B-plus from A, placing them three levels above junk territory. The outlook on both banks is negative.

Furthermore, Santander's U.K. arm, Santander U.K. PLC, had its rating downgraded one notch to A from A-plus. Its outlook is stable. Several more of the banks' subsidiaries and issuing vehicles were also downgraded. The rating firm last month also lowered its rating on Banco Popular Espanol S.A. (POP.MC) to triple-B from triple-B-plus, as Fitch cited the Spanish bank's continued deterioration in asset quality and profitability despite its relatively small size.

Spain's rating is currently triple-B, two notches above junk territory, and its outlook is negative. Fitch cut the country's rating by three notches last week, saying European policy missteps had aggravated the country's economic and financial challenges.

The two banks' downgrades reflect similar problems affecting Spain's sovereign-debt rating, mainly that the country is expected to remain in recession through the rest of 2012 and 2013, compared to previous views that the economy would recover somewhat in 2013, Fitch said.

The two banks are also vulnerable to further downgrades taken on Spain's sovereign debt rating, Fitch said.

European policy mistakes have left Spain vulnerable to capital flight, and undercut its access to affordable fiscal funding, Fitch has said. Its vulnerability has been exacerbated by high foreign indebtedness and fragile confidence in the country's ability to implement fiscal consolidation and timely bank restructuring, the rating firm has said.

Moody's Investors Service downgraded 16 Spanish banks and Santander U.K. PLC last month.

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