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Rating Action:

Moody's affirms Caja Rural de Navarra's Baa3 rating; outlook negative

23 Jul 2013

Madrid, July 23, 2013 --

Moody's Investors Service has today affirmed Caja Rural de Navarra's deposit ratings at Baa3/Prime-3, and its standalone bank financial strength rating (BFSR) at D+ (equivalent to a baa3 baseline credit assessment or BCA). All ratings have a negative outlook.

The affirmation of the ratings reflects Moody's view of Caja Rural de Navarra's capacity to maintain an adequate risk absorption capacity despite ongoing negative asset-quality trends arising from the weak operating environment and very low interest rates, both of which will continue to put pressure on the bank's recurring earnings power.

For additional insight about Moody's broader view on the Spanish banking system, please refer to http://www.moodys.com/research/Credit-profiles-of-many-Spanish-banks-continue-to-deteriorate-given--PBC_155899 "Credit profiles of many Spanish banks continue to deteriorate given weakness of domestic economy".

RATINGS RATIONALE

--- STANDALONE BFSR AND BCA

Today's rating affirmation of Caja Rural de Navarra's standalone ratings has been driven by (1) the stabilising trend in the non-performing loan (NPL) ratio over the past two years -- in contrast to the significant deteriorating trend in NPLs for all Spanish banks. As a result, Caja Rural de Navarra's overall asset-quality indicators are significantly better than the average of the Spanish banking system; (2) Caja Rural de Navarra's adequate capitalisation levels and risk absorption capacity in Moody's stressed scenarios; and (3) the entity's sound funding profile, driven by its strong deposit base and low reliance on wholesale funding at a time when access to market funding remains exposed to macroeconomic and political developments in Spain and the wider euro area.

Caja Rural de Navarra's NPL ratio stood at 4.4% at end-December 2012 (against the system average of 10.4%). This better-than-average asset quality indicator is underpinned by the entity's prudent risk management and low exposure to the real-estate segment, together with its activities being limited to its regional territories. In addition, Moody's notes that Caja Rural de Navarra mainly operates in the region of Navarra, one of the wealthiest regions in Spain. Moody's also views favourably the bank's sizeable provisioning effort made in 2012 following the Spanish government's more stringent provisioning standards for real-estate-related assets that resulted in a coverage ratio (defined as loan loss reserves/NPL) of 107% at end-December 2012, which is well above the system average of 74%. Moody's will continue to monitor the bank's asset-quality performance closely over the coming months.

Moody's also notes that, in addition to the NPLs, Caja Rural de Navarra had gross real-estate assets of EUR90 million at year-end 2012 that were acquired during the crisis through repossessions and negotiations with troubled borrowers, which, if included, increase the NPL ratio to 5.6% (Moody's-estimated system average: 17%). Furthermore, Moody's notes the percentage of refinanced loans at the bank is also low (1.8% of gross loans). The aggregation of refinanced loans (that are not already captured in the NPL ratio) increases the overall problem loan ratio to a 7.0%, compared to Moody's estimated system average of close to 26%. In this context, the rating agency emphasises that the ability of the bank to continue its track record of better asset quality performance in relation to the system average in Spain will be a vital indication that the risk profile of its assets have been correctly assessed. Any indication that Caja Rural de Navarra's asset-quality trend is less resilient than expected would exert downward pressure on the ratings.

Caja Rural de Navarra's loan book profile has a lower share of real-estate loans and a higher share of residential mortgages than the system average. Moody's notes the resilience of its book of residential mortgages, which continues to outperform the system average and displays an NPL ratio considerably below Moody's loss estimates. Caja Rural de Navarra also displays lower NPL ratios than the system average for all other asset classes, namely real-estate, corporate non- real-estate and retail loans ex-residential mortgages.

Moody's expects asset quality to deteriorate further across asset classes, based on the rating agency's view that any signs of a modest economic recovery are currently being generated by the export sector, while still weak domestic demand is likely to cause further contraction in domestic growth into 2014 as the unemployment rate remains at very high levels. Any signs that Caja Rural de Navarra's asset quality deterioration is more in line with the rest of the Spanish banking system would exert significant downward rating pressure.

--- DEBT AND DEPOSIT RATINGS

Caja Rural de Navarra's long- and short-term deposit ratings were affirmed at Baa3/Prime-3 following the affirmation of the bank's D+ standalone BFSR.

Caja Rural de Navarra's deposit ratings benefit from a low probability of systemic support, which results in no uplift from its standalone credit strength of D+/baa3.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook that Moody's has assigned to Caja Rural de Navarra's BFSR and deposit ratings incorporates the challenges faced by the bank. Those challenges include the continuing weak operating environment in Spain, which is characterised by the recessionary domestic economy and overall low growth expectations for the remainder of 2013 and 2014, the ongoing real-estate crisis, the very high unemployment rate and the broader euro area sovereign and banking crisis. These conditions will likely lead to further asset-quality deterioration across the banking system and pose risks to the already fragile confidence of funding providers.

WHAT COULD MOVE THE RATING UP/DOWN

There is currently no visible upward pressure on the ratings given the current negative outlook of Caja Rural de Navarra's rating.

Downward pressure could be exerted on Caja Rural de Navarra's standalone BFSR as a result of (1) an acceleration in the trend of formation of NPLs, both on an absolute level and in relation to the system average; (2) weakening of the bank's internal capital generation and risk absorption capacity; and/or (3) any worsening in operating conditions beyond Moody's current expectations, (i.e., a broader economic recession beyond the rating agency's current GDP forecast of a 1.4% contraction for 2013 and a GDP growth forecast between 0% and 1% for 2014).

Negative pressure on the bank's long- and short-term deposit ratings could result from a downgrade of its standalone BFSR.

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria?Vinuela
Analyst
Financial Institutions Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Johannes?Felix?Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Caja Rural de Navarra's Baa3 rating; outlook negative
No Related Data.
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