Moodys increased Santander’s long-term credit from Baa1 to Baa2 on Tuesday, which means to climb a notch in the rating agency’s range. In the same time, it maintained the entity’s outlook stable. As reported by Moodys, that Spain’s and euro zone biggest bank rating improvement grounds on the previosu rise of the country’s sovereign debt ( just two weeks ago, the agency increased it also in one notch from Baa3 to Baa2). Furthermore, Moodys’s valuation includes other reasons such as the geographical diversification of sovereign risk and the resilience to operating risks in Spain. Specifically, the agency mentions a total bad debt ratios of 72%.
Regarding expectations on Santander’s bottom line profitability, it will start taking advantage of lower credit reorganising. Lastly, Moodys underlines the Spanish bank capacity to reinforce their capital ratios. As for this specific point, hours after Moodys decision, Santander has announced it is preparing a €1.5 billion issue in so-called Cocos to strengthen its capital. This kind of issues including preference shares with option to become are intended to reinforce solvency, namely its Tier 1 capital (capital plus reserves, which in the case of Santander of 10.45% for the entire financial group and 12.26% for the bank.
Having in mind that risks of past financial crisis are not totally over, Santander’s rating rise by Moodys means “the risks of Spanish economy’s will not be anymore the main and almost only variable limiting Santander’s rating softening,” experts at BEKA Finance in Madrid say. However, “year 2014 will be a period of low results generation for Santander”, they add.