Fitch upgraded Santander cédulas hipotecarias from A to AA- and placed them on Rating Watch Positive yesterday (Wednesday), the first upgrade linked to its new criteria reflecting the BRRD, while S&P upgraded three cédulas issuers as part of a range of rating actions on Spanish banks.

Juan David Garcia, senior director at Fitch, told The Covered Bond Report that the rating action on the Santander cédulas is the first covered bond upgrade linked to Fitch implementing its new covered bond methodology, which introduced Issuer Default Rating (IDR) uplifts to reflect the asset class’s exemption from bail-in.

Fitch’s upgrade of the Banco Santander mortgage covered bonds follows an upgrade of the issuer from BBB+ to A- last week, and reflects an IDR uplift of two notches. The rating agency had already assigned the IDR uplift in April and placed the Santander cédulas on positive outlook. It later said that this and other programmes it placed on positive outlook as a result of its criteria update could be upgraded once the Bank Recovery & Resolution Directive (BRRD) is signed, which happened mid-May.

“As indicated in Fitch’s prior communication with respect to Spanish covered bonds, the rating of Santander CHs could be upgraded once the BRRD was sanctioned and provided the over-collateralisation that Fitch relies upon in its analysis is commensurate with the breakeven level for the new ratings,” said Fitch.

The two notch IDR uplift for Santander’s cédulas hipotecarias is based on Fitch’s opinion that Spain is a covered bond intensive jurisdiction and that resolution rather than liquidation methods would be used in the case of Santander defaulting on its senior unsecured debt. It also reflects Fitch’s view of Santander as a systemically important financial institution.

The Rating Watch Positive indicates the potential for further upgrade and will be resolved after Fitch receives updated cover pool data from Banco Santander, said the rating agency.

“The Rating Watch Positive reflects the potential for an upgrade to AA as long as the cover pool is sufficient to support an outstanding recovery expectation greater than 91%, which would be commensurate with a two notch recovery uplift from the uplifted IDR,” said Fitch. “If the updated cover pool balance and composition is broadly similar to the one reported by Santander over the past quarters, Fitch considers the AA rating would be achievable.”

Florian Eichert, senior covered bond analyst at Crédit Agricole, noted that a AA rating would be the highest Spanish covered bond rating in the market.

According to Bernd Volk, head of covered bond research at Deutsche Bank, the upgrade to AA- (watch positive) means the Santander cédulas could become eligible for LCR Level 1 status, if the category is confirmed when the European Commission makes its final decision on Liquidity Coverage Ratios.

Garcia at Fitch said: “The covered bond rating now is not identical to pre-crisis, but it is an improving situation.”

Standard & Poor’s ups Spanish issuers

Standard & Poor’s upgraded three Spanish covered bond issuers yesterday as part of rating actions on several Spanish financial institutions. It upgraded Banco Santander from BBB to BBB+, BBVA from BBB- to BBB, and Bankinter from BB to BB+.

Under S&P’s methodology, the issuer ratings of Banco Santander and Banco Bilbao Vizcaya Argentaria (BBVA) are constrained by the sovereign rating, and as such their upgrade is solely the result of an upgrade of the Spanish sovereign from BBB- to BBB on 23 May. This was taken to reflect S&P’s belief that the Spanish economy will experience stronger growth and as such reduce the economic risks for Spanish banks.

“Furthermore, our positive view of economic risks faced by banks in Spain remains supported by our belief that Spanish banks have absorbed most of the credit losses associated with the correction in the real estate market and the double-dip recession, and our expectation that the real estate market correction will likely bottom-out this year,” said S&P.

As a result of this, it expects banks’ credit provisions to continue to decline through 2014 and 2015, reaching “more-normalised” levels in 2016.

The rating agency said that the revised assessment of economic risk in Spain could result in an upward revision from BB+ to BBB- of the anchor point for Spanish financial institutions.

The rating action taken on the sovereign also led S&P to revise its outlook for five Spanish financial institutions. The outlook on CaixaBank, Bankia, Banco Financeiro y de Ahorros, and Banco de Sabadell ratings was changed to positive, and that on Kutxabank’s to stable.

In a separate rating action, S&P downgraded Barclays Bank SAU from BBB- to BB because it believes the subsidiary of Barclays Bank is of lower strategic importance for its UK parent.