Fitch cuts ratings on 18 Spanish banks

A man sits on the steps of the stock exchange to make a phone call after trading finished for the day in Madrid, Tuesday, June 12, 2012. Spain's benchmark borrowing rate hit its highest level Tuesday since the country adopted the euro currency, after ratings agency Fitch downgraded 18 banks on Tuesday and investors continued to find more questions than answers in the country's decision to seek help for its ailing bank sector by tapping a €100 billion ($125 billion) eurozone bailout fund. AP PHOTO/PAUL WHITE

MADRID—Fitch Ratings downgraded 18 Spanish banks on Tuesday, twisting the knife on a country being pummeled on the financial markets despite a massive banking bailout.

Fitch, which slashed Spain’s sovereign debt rating by three notches last week to BBB and downgraded the two biggest banks Santander and BBVA on Monday, warned that some banks’ loan books could weaken.

“This is particularly true for those banks whose loan books are heavily exposed to the construction and real estate sectors, and those with low equity bases,” it warned.

The agency said it examined the banks’ ability to repay debts in the light of a possible further deterioration in real estate assets, the need for banking support in the past year, and the eurozone crisis.

“The crisis has contributed to heightened market risk aversion over Spanish debt, affecting funding access and costs for all Spanish banks,” the credit rating group said.

Spain’s 10-year government bond yield spiked to 6.834 percent Tuesday, the highest since the creation of the euro. It is a funding cost widely regarded as unsustainable for the state over the longer term.

On Saturday, eurozone finance ministers agreed to loan Spain up to 100 billion euros ($125 billion) to rescue its banks, heavily exposed to a real estate sector that collapsed in 2008.

Investors worried about the loan’s impact on Spain’s mushrooming debt; the risk that Spain would need more money both for the banks’ and the state’s finances; and the possibility that official creditors would take priority over private investors in case of a default, analysts said.

Fitch said the agreement on a bailout loan for Spain’s banks did not change its assessment.

“The recent downgrade of Spain’s sovereign ratings by three notches already factors in the likely fiscal cost of restructuring and recapitalising the Spanish banking sector,” it said.

The credit assessor has estimated the banking sector’s needs at 50-60 billion euros under a base case and up to 100 billion euros in a scenario of high financial stress.

Among the 18 banks was CaixaBank, the third-biggest Spanish bank in terms of market capitalization, which was downgraded two notches to BBB.

Bankia, which is to receive 23.5 billion euros in public aid, was cut one notch and is now also at BBB.

Fitch singled out two worrisome banks. “Fitch is concerned about the relatively high real estate risk exposures and tight capital ratios at Banco Mare Nostrum and Liberbank,” it said.

Both banks’ ratings were trimmed to BBB-minus – one notch above junk bond status – and left on review for a possible downgrade “in the short term”, the agency said.

On Monday, Fitch said it had downgraded Santander and BBVA to BBB-plus from A, placing them just three levels above junk territory but one notch above Spain itself.