Bond Analysis

S&P Global Ratings said today that  its ratings and outlooks on all Spanish banks, including CaixaBank S.A. and  Banco de Sabadell S.A., remain unchanged following the escalation of political  risks and social unrest in Catalonia in the wake of the independence  referendum held last Sunday....

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Given that tensions may heighten further if there is a unilateral declaration  of independence by the regional government of Catalonia, attention has  inevitably turned to Spanish banks, with a particular focus on banks with  close links to Catalonia.

The fact that our ratings and outlooks are unchanged reflects our base-case  scenario that Catalonia will remain part of Spain and our view that the banks  will be able to deal with the immediate challenges arising from this  heightened political risk.

Potential risks that we currently foresee are:

An erosion of confidence, particularly in Catalonia, in response to  increased tensions, potentially leading to liquidity outflows;

A weakening of business franchises in and outside Catalonia; and

The possibility of facing an uncertain regulatory, legal, and monetary  environment in Catalonia if there is a unilateral declaration of  independence.

In an environment of increased uncertainty, households and corporates' natural  reaction is to protect their savings. But we think that banks are generally  well equipped to temper clients' potential concerns or offer potential  business solutions to ensure business stability and retain customers, for  example, rebooking business outside of Catalonia. Therefore, at this stage, we  do not anticipate that banks will have to deal with major liquidity outflows.  However, if this did become the case, we take comfort in the fact that the  banks currently have ample liquidity cushions. 

Equally important for banks, particularly those with close links to Catalonia,  would be seeking mitigating measures to protect their business franchises both  in Catalonia and the rest of Spain. In our view, management teams are  conscious of the risks and are actively managing customer relationships.

Finally, a potential unilateral declaration of independence in Catalonia could  lead to regulatory, legal, and monetary uncertainty in the region which, in  our view, explains the decision taken yesterday by Banco de Sabadell's board  of directors to move its registered offices to Alicante from Catalonia. This  has also been the case for a few nonfinancial corporates. CaixaBank's board of  directors is expected to meet today and may decide to follow suit. By moving  their domiciles outside of Catalonia, banks may be aiming to continue to have  their operations regulated and supervised by the European Central Bank (ECB)  and benefit from funding support from the ECB if needed. While the businesses  booked in Catalonia by all Spanish banks could still remain vulnerable to  regulatory, legal, and monetary uncertainties if independence is unilaterally  declared, moving their domiciles outside of Catalonia contains the risk to  only a share of the business. For the largest Spanish banks, business booked  in Catalonia accounts for about 20%-25% of total domestic business.

Given that the political situation is very fluid, we will continue to closely  monitor how events evolve and inform of potential changes in view.



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