Fitch downgraded Banco Popular Español from BBB- to BB+ on Friday, and lowered the rating of the Spanish bank’s Portuguese subsidiary, Banco Popular Portugal, from BB+ to BB.

Banco Popular’s Viability Rating (VR) was lowered from bbb- to bb+, reflecting increased concerns about its profitability and capital positions, said Fitch.

“This is due to the prolonged recession in Spain, the ongoing real estate crisis, and the need for Popular to recognise large real estate-related provisions,” said the rating agency. “Popular has high exposure to the troubled Spanish real estate sector, which is concentrated by name.”

Fitch noted that Popular plans to increase capital and generate substantial capital gains through, for example, asset sales to absorb its provisioning needs, but said that this will be challenging in the current environment. The rating agency also cited Popular’s reliance on wholesale funding at a time when market conditions are difficult.

“Popular’s stock of unencumbered liquid assets sufficiently cover short term wholesale unsecured funding maturities, but provide a relatively tight buffer against unexpected liquidity shocks,” it said.

“However,” Fitch added, “Popular’s VR also reflects a solid franchise, in particular in SMEs, which has supported sound pre-provision earnings generation over the years; as well as a track record of good cost efficiency.”

The downgrade of Popular’s IDR was driven by the fall in its VR and a cut in its Support Rating Floor (SRF) from BBB- to BB+.

“The latter reflect Fitch’s opinion that the propensity for timely support being available to Popular has declined from high to moderate,” said Fitch. “This comes against the background of the significant restructuring process taking place in the Spanish banking sector.

“In Fitch’s opinion, Popular’s size and systemic importance place it outside the top tier of systemically important Spanish banks with SRFs in the BBB range.”

The outlook on the ratings of Popular and Banco Popular Portugal are stable.

Popular Portugal’s rating was cut because of the lowering of its parent’s rating, which is the primary driver of the subsidiary’s rating, although Fitch said that Popular Portugal’s rating is also linked to Portuguese sovereign and banking sector risks.