Abanca Corporacion Bancaria S.A

The stable outlook on Abanca indicates that, while we expect some asset quality deterioration and above-normal provisions in the next 12-18 months, we think the bank's solid capitalization is sufficient to cope with a the delayed effects of the pandemic on asset quality, which are yet to arise. We also anticipate Abanca will focus on further extracting commercial value from its various recent acquisitions, while our expectation of an ultra-low interest rate environment and elevated credit losses will pose challenges to Abanca's underlying profitability and efficiency, which we expect will remain comparatively weaker than those of highly rated peers. We could lower the ratings if Abanca's asset quality deteriorates much more than what we expect; if it engages in additional

...Abanca's limited scale compared with larger domestic players and weaker underlying profitability constrain its business competitiveness relative to higher-rated peers. Despite its sound franchise in its home market of Galicia--where it holds about 41% of its loans--and management's demonstrated ability to integrate smaller entities over the past few years, ultra-low interest rates, high competition amid increased domestic concentration, and the continued need to accelerate digital transformation will continue to pressure its efficiency and earnings capacity. The bank's risk profile improved meaningfully in recent years and we anticipate that it will prove resilient to the expected credit quality deterioration. Nonperforming assets (NPAs) represented 3.8% of gross loans (compared with 6.2% system average) at end-2020, thanks to its revamped risk frameworks and accelerated sales. While credit provisions will remain elevated in 2021 at around 50-55 bps, gradually declining to about 40 bps...

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