Moody's on June 8 upgraded Banco Popular Español SA's ratings and placed them on review for further upgrade following a deal that will see Banco Santander SA take over the lender.
The agency upgraded Banco Popular's long-term deposit rating to Ba1 from Ba2, with the outlook revised to ratings under review from negative; its long- and short-term counterparty risk assessment to Baa3(cr)/Prime-3(cr) from Ba3(cr)/Not Prime(cr); and its adjusted baseline credit assessment to "b1" from "caa1". The ratings were placed on review for further upgrade along with the bank's Not Prime short-term deposit rating.
Banco Popular's baseline credit assessment, meanwhile, was downgraded to "ca" from "caa1" following its resolution which, according to the agency's definitions, constitutes an event of default.
Concurrently, Moody's affirmed all of Santander's ratings, including its A3(cr)/P-2(cr) long- and short-term counterparty risk assessment; A3 long-term deposit and issuer ratings with stable outlooks; P-2 short-term bank deposit rating; and its "baa1" baseline and adjusted baseline credit assessments. The agency also affirmed all the ratings of the bank's supported entities.
The agency said the deal will negatively impact Santander's asset risk metrics, with nonperforming loans ratio to total gross loans rising to 5.9% for the combined group from 4.2% for Santander at March-end and the level of nonperforming assets increasing to 9.4% from 6.1%. Moody's noted, however, that the level of provisions for Banco Popular's NPAs have significantly increased by €7.9 billion, boosting the coverage ratio to 67% from 45% prior to the acquisition. Santander also intends to dispose the totality of Banco Popular's NPAs by 2022, 50% of which is targeted for disposal in 18 months.
Moody's added that the cost of restructuring, estimated at €1.3 billion, will negatively impact the combined group's profitability, although no decision has been taken yet on when the restructuring would take place. Santander is targeting €500 million of pretax efficiency gains by 2020, representing one-third of Banco Popular's existing cost base and around 10% of that of the combined entity, the agency noted.
The deal will help Santander significantly boost its market positioning in the more lucrative small and medium-sized enterprise market in Spain, and will make it the country's leading domestic bank by loans and customer funds, according to Moody's.
After the merger takes effect, Banco Popular's debt and deposit ratings will be aligned with those of Santander, the agency noted.