Ratings agencies Fitch lowered its ratings on four big Spanish banks while Standard & Poor's cut its rating for the industry as a whole on Monday following recent sovereign downgrades and on concerns of funding difficulties and a weak economy.
S&P's revised its Banking Industry Country Assessment (BICRA) to group 5 from group 4, warning it expects the system's profitability to remain below average for the medium term due to unfavorable economic and financial environment.
We believe investor confidence remains fragile and anticipate further episodes of illiquidity and volatility in the funding markets over the medium term, the agency said in an investors note.
In our opinion, the Spanish banking system is vulnerable to turbulent capital markets because it relies to a degree on foreign funding.
The system was benefitting from support from Spanish and European authorities, specifically the European Central Bank's liquidity program, the agency said.
S&P downgraded Spain's credit rating Jan 13.
Spain's banks have been under intense focus on concerns their exposure to a collapsed property sector has left them with billions of euros of bad loans on their books and no access to international markets as the euro zone debt crisis drags on.
Spain is widely thought to have already entered its second recession since the end of 2010 and unemployment is more than double the EU average while a virtual credit freeze by banks, ordered to raise capital, further hobbles the economy.
Meanwhile, Fitch cut the euro zone's largest bank Santander
The downgrade of Spain indicates a weakening of its ability to support its largest banks. However, Fitch expects the Spanish authorities to continue to show a high propensity to support these institutions, Fitch said.
Spain's new government has told the banking sector it must recognize and deal with an additional 50 billion euros in asset losses in an effort to clean lenders' balance sheets.
(Reporting By Paul Day; Editing by Tim Dobbyn)