Standard & Poor’s cut Banco Popular Español (BPE) from BB- to B+ yesterday (Wednesday), with analysts at ING Bank noting that this is expected to lead to a downgrade of the Spanish bank’s mortgage-backed covered bonds.

Banco Popular corporate head office

S&P said the downgrade of BPE was a reflection of its view that the issuer’s financial profile had deteriorated more than anticipated in the fourth quarter of 2013.

“The magnitude of problem assets that BPE has accumulated, and must therefore work out, as well as the ongoing pace of asset quality deterioration, have negative implications for its business stability,” said the rating agency.

S&P has maintained a negative outlook on BPE’s long term rating, with the rating agency stating that it could cut BPE’s rating again if it anticipates “further meaningful asset quality deterioration beyond current expectations”.

BPE’s mortgage covered bonds are rated BBB+ by S&P, on negative outlook. Maureen Schuller, head of covered bond strategy at ING Bank, expects the cédulas to be downgraded as a consequence of the issuer rating action.

She noted that they are assessed as having “moderate” asset-liability mismatch (ALMM) risk under S&P’s criteria, according to fourth quarter figures from the rating agency, and are classified as a Category 2 programme, which caps the uplift above the issuer rating at five notches. This would indicate a maximum rating of BBB for the cédulas following the bank downgrade.