By Simon Miller

Fitch Ratings has downgraded 18 Spanish banks following the downgrading of the country’s sovereign debt and the potential for further deterioration of their loan-books.

The rating agency downgrade the long-term issuer default ratings (IDR) and viability ratings (VR) of 15 banks while placing the long-term and short-term IDRs of three banks on rating watch negative (RWN) and maintained five banks on RWN. The Support Rating Floors (SRF) assigned to four banks have also been revised.

In the ratings note, Fitch said that it had “factored into its rating actions concerns about the potential for the loan portfolios of certain banks to deteriorate further”.

It added: “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.”

The agency said that its stress test had been revised to factor in in Spain's worsening macro-economic conditions, further asset quality deterioration (mainly in the real estate sector), the need for substantial support for a number of Spanish banks since July 2011, and the ongoing eurozone crisis. The crisis has contributed to heightened market risk aversion over Spanish debt, affecting funding access and costs for all Spanish banks.

It continued: “The downgrades of the Long-term IDRs reflect similar concerns to those that have affected the Spanish sovereign rating. In particular, Spain is expected to remain in recession through the remainder of this year and 2013 compared to the previous expectation that the economy would benefit from a mild recovery in 2013.

“The institutions affected by today's rating actions are purely domestic banks. Thus, their revenue generation capacity, risk profile, funding access and cost of funding are highly sensitive to the evolution of Spain's economy and its housing market. The sovereign rating acts as a cap for the Long-term IDRs of these domestic financial institutions.”

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