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Announcement:

Moody's: Spanish bank sector restructuring delays may weigh on debt/deposit ratings if financials fail to strengthen as expected

11 Mar 2010

Madrid, March 11, 2010 -- Delays in consolidation and restructuring in the Spanish financial sector, combined with the low amount of public funds that have flowed into the sector, are threatening earlier expectations of a material improvement in the financial strength of the country's banks, Moody's Investors Service says in a new Special Comment. Persistent delays and uncertainties in this respect could exert pressure on the debt and deposit ratings of certain institutions, chiefly those with weaker standalone financial strength, if they fail to improve their credit profiles, Moody's cautions.

Moody's stated view since mid-2009 has been that Spanish banks' debt and deposit ratings should prove relatively stable as future credit losses -- especially for those institutions with lower bank financial strength ratings (BFSRs) -- would be mitigated not only by state-backed capital injections but also by the expected benefits of upcoming consolidation in the form of mergers and other integrations. The rating agency has anticipated that these developments would put these institutions on a sounder, more competitive footing again -- a view that was further reinforced after the creation of the Fund for Orderly Bank Restructuring in late June 2009.

"To date, the pace of consolidation and restructuring has been much slower than we had anticipated, as has been the flow of public funds into Spain's financial sector. We are concerned that -- so far -- no significant progress in this respect has been made," observes Maria Jose Mori, a Moody's Assistant Vice-President--Analyst and author of the report.

The Bank of Spain's stated intention to conclude the system's restructuring by the end of the first half of 2010 provides some comfort, but Moody's retains a cautious view with regard to the prospects for an effective strengthening of the system's financial fundamentals in the coming months. This view reflects in particular the role played by political powers in approving any merger or integration project between savings banks, which is a key factor behind the sluggish consolidation in this segment, while the very weak operating environment in Spain continues to put pressure on the sector's financial fundamentals.

Moody's concerns focus in particular on those institutions with a BFSR below investment grade (i.e. from D+, mapping to a baseline credit assessment of Ba1, and below). "Such banks present a weak financial position and a need for restructuring that, in a large number of cases, should be accompanied by a public capital injection. If banks with weak BFSRs are unable to restore their credit fundamentals in the medium term as we had anticipated, without undertaking major restructuring or receiving public support, there could be downward pressure on their debt and deposit ratings as it is very likely that these ratings will be more closely aligned to their standalone credit profile (as expressed by their BFSR)," Ms Mori cautions.

The principal methodologies used in rating Spanish banks are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology," which are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

The report, entitled "Spanish Banks: Restructuring Delays May Weigh on Debt/Deposit Ratings If Financial Fundamentals Fail to Strengthen As Expected", is available at www.moodys.com.

*****

NOTE TO JOURNALISTS ONLY: For more information please contact EMEA Press Information in London +44-20-7772-5456; New York Press Information +1-212-553-0376; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1076; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7 495 228 60 60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Leon Classen in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Madrid
Maria Jose Mori
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: Spanish bank sector restructuring delays may weigh on debt/deposit ratings if financials fail to strengthen as expected
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