Moody’s yesterday (Tuesday) cut NCG Banco and Bankia and placed on review for downgrade the ratings of fellow Spanish issuer Catalunya Banc.

Moody’s cut Bankia’s rating from Baa2 to Baa3 following the downgrade of the BFSR from D+ to D-, which it cut because of the bank’s weak risk absorption capacity in the event of varying levels of further real estate quality deterioration.

It said the magnitude of a capital shortfall (benchmarked against the required regulatory 8% minimum core tier one ratio) that Bankia would experience, after incorporating its ability to generate capital, is more consistent with a standalone rating in the low end of the D category.

Moody’s has broadened the uplift from its standalone ratings to three notches (from two), to reflect its assessment of very high likelihood of systemic support.

The downgrade of Bankia also reflects sizeable debt maturities (Eu20bn) for 2012, against a backdrop of restricted access to capital markets for most Spanish banks, said Moody’s.

A downgrade of NCG Banco from Baa3 to Ba1 follows the downgrade of the bank’s standalone bank financial strength rating (BFSR) from D+ to E+, and reflects the “considerably higher risk for creditors stemming from the bank’s weaker standalone financial strength profile and the likelihood of needing external support”, according to Moody’s.

Moody’s noted that the downgrade of the bank is not as pronounced as the downgrade of its standalone rating, reflecting the rating agency’s expectation that some support by the Fund for Orderly Bank Restructuring (FROB) is expected, which, if substantial enough, could lead to the ratings being confirmed at the prevailing level.

However, the rating agency kept the bank’s debt and deposit ratings on review for downgrade to reflect the risk that NCG Banco’s debt rating could be aligned with its standalone BFSR and therefore could be downgraded by several more notches in case the government would be unwilling to provide the extensive support that is expected to be forthcoming for the bank in case of need.

Catalunya Banc, rated Ba1, is on review for downgrade following the downgrade of its BFSR from D to E+. The review for downgrade of the issuer rating reflects the risk that Catalunya Banc’s debt rating could be aligned with its standalone BFSR and therefore cut by several notches in case the bank will not be acquired by a stronger peer and/or supported by the government in such a way that benefits all senior creditors.

Catalunya Banc’s BFSR was downgraded because of the expected impact on the bank’s profitability and capitalisation levels that Moody’s believes will stem from the Spanish government’s recently announced higher provisioning requirements for most real estate exposures, as well as increasing challenges in the operating environment, with the economy in recession and very high unemployment levels, which is likely to put further pressure on asset quality.