Fitch Raises Santander (SAN), BBVA (BBVA) LT IDR to 'A-'; VR to 'a-'

This Rating Action Commentary replaces the version published on May 29, 2014. It corrects the Support Rating of Santander Consumer Finance (SCF), which was upgraded to '1' from '2'.

Fitch Ratings has upgraded Banco Santander, S.A.'s (NYSE: SAN) and Banco Bilbao Vizcaya Argentaria's (NYSE: BBVA) Long-term Issuer Default Rating (IDR) to 'A-' from 'BBB+' and Viability Rating (VR) to 'a-' from 'bbb+'.

At the same time, the agency has affirmed the two banks' Short-term IDRs at 'F2', Support Ratings (SR) at '2' and Support Rating Floor (SRF) at 'BBB'. The Outlook on their Long-term IDR is Stable. A full list of rating actions is available at the end of this rating action commentary.

The banks' IDRs are one notch above the Spanish sovereign rating in line with Fitch's criteria "Rating Financial Institutions above the Sovereign". Fitch upgraded Spain's sovereign rating on 25 April 2014 (see 'Fitch Upgrades Spain to 'BBB+'; Outlook Stable" published April 25, 2014 on www.fitchratings.com), and the two banks' upgrade reflect Fitch's view of their standalone credit profiles.

KEY RATING DRIVERS - IDRS, VRS AND SENIOR DEBT RATINGS
The IDRs and senior debt ratings of Santander and BBVA are driven by their stand-alone creditworthiness, as expressed by their VRs. The upgrade of their VRs primarily reflects the upgrade of Spain's sovereign rating and related signs of macro-economic improvements in the domestic market. Continued diversification benefits, especially for Santander, support these banks' ratings at one notch above the sovereign rating.

In particular these two banks' ratings benefit from solid retail franchises in a number of European and Latin American countries and in the US. Santander and BBVA generated 14% and 30%, respectively, of their ordinary attributable profits from Spain (excluding their run-off real estate units) in 1Q14 while Spanish loans accounted for 23% and 52% of the total, respectively.

Their diversified footprints spread risks and have proven key in supporting the resilience of earnings generation and loss absorption capacity at times of stress. Fitch also considers the two banks' continued capacity to access wholesale markets across different jurisdictions, which together with their self-funded bank subsidiary approach, has protected their funding and liquidity. Benefits of international diversification include, but are not limited to, the ability of subsidiaries to upstream dividends, financial flexibility resulting from potential disposal or listing of stakes in subsidiaries and, in some cases, fungibility of liquidity and capital.

Despite Santander's and BBVA's international diversification Fitch considers that the banks' risk profiles remain significantly correlated with that of the sovereign and as part of its analysis Fitch also takes into account the standalone financial profile of the Spanish legal entity to which the ratings are assigned. In Fitch's view, this correlation is, among other factors, reflected in the banks' domestic performance and asset quality, which have proven sensitive to the economic environment. Funding access, stability and costs are also typically influenced by broad perceptions of sovereign risk.

The upgrade also reflects Fitch's view that Santander's and BBVA's Spanish business and risk profiles should benefit from Spain's improved creditworthiness, economic outlook and financing conditions given their leading domestic retail franchises. Earnings at the unconsolidated bank level should also continue to benefit from regular and substantial dividend contributions from performing foreign bank subsidiaries.

Santander's and BBVA's retail banking company profile is reflected by the fact that more than 60% of their revenues is derived from this business line, which despite the crisis has proven fairly resilient, supported by their critical mass in the core markets in which they operate. This, together with their cost control-oriented corporate culture, has enabled both banks to absorb high impairment charges in the last three years, notably in Spain, without reporting consolidated operating losses. Fitch expects profitability in 2014 to benefit from generally better GDP growth prospects in many of the countries where they operate, including Spain.

Asset quality deterioration in Spain has driven up impaired loans (NPL) ratios, particularly at BBVA given its larger share of loans in Spain relative to Santander, which nevertheless continue to compare fairly well with their international peer group. Fitch- adjusted NPL ratio was 5.9% at Santander and 7.6% at BBVA at end-2013. Lower NPL inflows since 4Q13 and stabilising loan volumes should help ease asset quality pressure in Spain. NPL reserve coverage has consistently remained around 60%, which Fitch views as adequate for their risk profiles.

In Fitch's opinion, BBVA's Fitch core capital (FCC)/weighted risks ratio is sound, amounting to 10.4% at end-2013. At 9.2%, Fitch views Santander's capitalisation at the lower end of the international peer group range, largely held back by goodwill from acquisitions.

Capitalisation and leverage have a high influence on Santander's VR, and our assessment of capitalisation takes into account the bank's high flexibility to generate capital through retained earnings and its fairly sound balance sheet leverage. The transitional Basel III CET 1 ratio stood at 10.6% for Santander and 10.8% for BBVA at end-1Q14. Santander's and BBVA's capital is also supported by their well-capitalised main subsidiaries and by their fairly low-risk retail focus.

Santander and BBVA are primarily funded by deposits in their core markets. The net loans/deposits ratio stood at 116% at Santander and 117% at BBVA at end-2013. Loan deleveraging in mature markets and a proven ability to access capital market funding in turbulent times have protected the banks' sound funding and adequate liquidity profiles. While the banks hold ample unencumbered assets at the consolidated level, liquidity buffers at the unconsolidated bank level are weaker, particularly at Santander. However, refinancing risks are limited in view of well- distributed debt maturities. Santander's and BBVA's funding profiles are also supported by subsidiaries being locally funded.

RATING SENSITIVITIES - IDRS, VRS AND SENIOR DEBT RATINGS
The Stable Outlook reflects Fitch's expectation that Santander's and BBVA's overall financial and credit profile will remain stable.

Upside rating potential for both banks may be supported by a potential further upgrade of the Spanish sovereign rating as long as this is driven by further improvements in macroeconomic indicators, which should eventually benefit the unconsolidated banks' profitability and credit risk profiles. This factor is somewhat more relevant for Santander than for BBVA given the former's higher exposure to highly rated sovereigns.

It should be noted that a sovereign upgrade alone would not automatically result in an upgrade of these banks' ratings. An upgrade of Santander's ratings would likely be contingent on further improvements in capitalisation at the consolidated level. An upgrade of BBVA's ratings would be contingent on a sovereign upgrade accompanied by an improved operating environment in the main countries in which it operates as well as by improved asset quality.

While currently not expected by Fitch, potential drivers for a downgrade may include a downgrade of Spain's sovereign rating; marked deterioration of group asset quality that could put significant pressure on earnings and capital and a reduced capacity to upstream dividends. A prolonged inability to competitively access wholesale markets or a marked deterioration of credit risk and capitalisation at the respective unconsolidated banks would also put pressure on ratings.

KEY RATING DRIVERS AND SENSITIVITES -SUPPORT RATING AND SUPPORT RATING FLOOR
The 'BBB' SRFs of Santander and BBVA reflect Fitch's opinion that the Spanish authorities show a high propensity to support the country's largest banks given their domestic systemic importance.

The SR and SRF are sensitive to a weakening of the assumptions around Spain's ability and propensity to provide timely support to the group. Of these, the greatest sensitivity is to progress made in implementing bank resolution legislation, which is likely to result in the downgrade of the two banks' SRs to '5' and the revision of their SRFs to 'No Floor', most likely in late 2014 or 1H15.

KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital instruments issued by Santander, BBVA and their issuing vehicles are all notched down from their VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.

Their ratings are primarily sensitive to any change in the VRs of Santander and BBVA.

KEY RATING DRIVERS AND SENSITIVITIES - SUBSIDIARIES
Santander Consumer Finance (SCF) is 100% owned by Santander and benefits from being an integral part of the group as it manages most of the group's consumer finance operations. Fitch regards SCF as a core subsidiary and, as such, aligns its Long- and Short-term IDRs with Santander's. SCF's IDRs and debt ratings are sensitive to the same factors that might drive a change in Santander's IDRs.

The rating actions are as follows:

Santander
Long-term IDR upgraded to 'A-' from 'BBB+'; Outlook Stable
Short-term IDR affirmed at 'F2'
VR upgraded to 'a-' from 'bbb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB'
Senior unsecured debt long-term rating and certificates of deposit upgraded to 'A-' from 'BBB+'
Senior unsecured debt short-term rating, commercial paper and certificate of deposits affirmed at 'F2'
Market-linked senior unsecured securities: affirmed at 'BBB+emr'
Subordinated debt upgraded to 'BBB+' from 'BBB'
Preference shares upgraded to 'BB' from 'BB-'

Santander International Debt, S.A. Unipersonal
Senior unsecured debt long-term rating upgraded to 'A-' from 'BBB+'
Senior unsecured debt short-term rating affirmed at 'F2'
Market-linked senior unsecured securities upgraded to 'A-emr' from 'BBB+emr'

Santander International Preferred, S.A. Unipersonal
Preference shares upgraded to 'BB' from 'BB-'

Santander Commercial Paper, S.A. Unipersonal
Commercial paper affirmed at 'F2'

Santander Finance Capital, S.A. Unipersonal
Preference shares upgraded to 'BB' from 'BB-'

Santander Finance Preferred, S.A. Unipersonal
Preference shares upgraded to 'BB' from 'BB-'

Santander Financial Issuance Ltd.
Subordinated debt upgraded to 'BBB+' from 'BBB'

Santander Perpetual, S.A. Unipersonal
Upper Tier 2 upgraded to 'BBB-' from 'BB+'

Santander US Debt, S.A.U.
Senior unsecured debt long-term rating upgraded to 'A-' from 'BBB+'

Emisora Santander Espana, S.A.U.
Senior unsecured debt long-term rating programme assigned at 'A-'
Senior unsecured debt short-term rating programme assigned at 'F2'

Santander International Products PLC
Senior unsecured debt long-term rating upgraded to 'A-' from 'BBB+'

SCF
Long-term IDR upgraded to 'A-' from 'BBB+'; Outlook Stable
Short-term IDR affirmed at 'F2'
Support Rating upgraded to '1' from '2'
Senior unsecured debt long-term rating upgraded to 'A-' from 'BBB+'
Senior unsecured debt short-term rating and commercial paper affirmed at 'F2'
Subordinated debt upgraded to 'BBB+' from 'BBB'

BBVA
Long-term IDR upgraded to 'A-' from 'BBB+'; Outlook Stable
Short-term IDR affirmed at 'F2'
VR upgraded to 'a-' from 'bbb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB'
Senior unsecured debt long-term rating upgraded to 'A-' from 'BBB+'
Senior unsecured debt short-term rating and commercial paper affirmed at 'F2'
Market-linked senior unsecured securities upgraded to 'A-emr' from 'BBB+emr'
Subordinated debt upgraded to 'BBB+' from 'BBB'
Preference shares upgraded to 'BB' from 'BB-'

BBVA Capital Finance, S.A. Unipersonal
Preference shares upgraded to 'BB' from 'BB-'

BBVA International Preferred, S.A. Unipersonal
Preference shares upgraded to 'BB' from 'BB-'

BBVA Senior Finance, S.A. Unipersonal
Senior unsecured debt long-term rating upgraded to 'A-' from 'BBB+'
Senior unsecured debt short-term rating and commercial paper affirmed at 'F2'

BBVA U.S. Senior, S.A. Unipersonal
Senior unsecured debt long-term rating upgraded to 'A-' from 'BBB+'
Senior unsecured debt short-term rating and commercial paper affirmed at 'F2'

BBVA Subordinated Capital, S.A. Unipersonal
Subordinated debt upgraded to 'BBB+' from 'BBB'

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