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Rating Action:

Moody's affirms Kutxabank's ratings; changes outlook to positive

15 Mar 2017

Madrid, March 15, 2017 -- Moody's Investors Service has today affirmed Kutxabank, S.A.'s long-term deposit and senior debt ratings at Ba1 and changed the outlook on these ratings to positive from stable. The rating agency has also affirmed the bank's Baseline Credit Assessment (BCA) and adjusted BCA at ba1 and its short-term deposit ratings at Not-Prime. The Counterparty Risk Assessment was also affirmed at Baa2(cr)/Prime-2(cr).

Today's rating action reflects the positive pressure that could develop on Kutxabank's ratings if the improving trend observed on the bank's credit fundamentals -- namely asset risk and capital -- continues over the next 12-18 months.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

---RATIONALE FOR THE AFFIRMATION OF KUTXABANK'S RATINGS

The affirmation of Kutxabank's BCA at ba1 reflects the progressive strengthening of the bank's fundamentals in recent years, namely its asset risk and capital metrics, as well as the resilience of its recurrent profitability metrics and a sound liquidity profile.

Since 2013, Kutxabank has displayed a constant improvement in its asset risk indicators, with its non-performing loan (NPL) ratio declining to 6.8% at end-December 2016 versus a Moody's calculated system average of 8.6%. Moody's notes positively that the bank managed to reduce its NPL ratio by around 200 basis points for the second consecutive year without executing any portfolio disposals.

At the same time, Kutxabank benefits from strong capital buffers, with a fully loaded Common Equity Tier 1 ratio of 14.8% and a regulatory fully loaded leverage ratio of 8.0% as of end-December 2016, which stand among the strongest of European peers. Moody's capital assessment for Kutxabank also incorporates a portion of the reserve fund that its major shareholder (BBK Banking Foundation, unrated) is constituting to abide with the Bank of Spain's new regulation, and that is exclusively available to support the bank if its solvency looked set to fall short of regulatory thresholds.

Kutxabank's BCA also reflects its modest, albeit resilient, profitability, with the net income over tangible assets standing at 0.4% at end-December 2016. During 2016, Kutxabank was able to maintain a stable profit generation capacity despite continued pressures on operating income and one-off provisions related to the court ruling that forced Spanish banks to remove interest rate floor clauses they applied to mortgage loans. These headwinds were offset by increased trading gains from government bond sales and significantly lower loan loss provisions.

Kutxabank's ba1 BCA is underpinned by its sound liquidity profile, with customer deposits representing a large 80% of total funding at end-December 2016 and adequate liquidity buffers with the liquidity coverage ratio (LCR) ratio standing at 156% as of the same date.

The affirmation of Kutxabank's deposit and senior debt ratings at Ba1 also reflects: (1) the affirmation of the bank's BCA and adjusted BCA at ba1; (2) the result from the rating agency's Advanced Loss-Given Failure (LGF) analysis, which remains unchanged when incorporating the most recent data with no uplift for the deposit and senior debt ratings; and (3) Moody's assessment of a low probability of government support for Kutxabank, which results in no uplift for the deposit and the senior debt ratings.

---RATIONALE FOR THE POSITIVE OUTLOOK

The change of outlook on Kutxabank's long-term deposit and senior debt ratings to positive from stable primarily reflects Moody's expectations that Kutxabank will be able to maintain current positive trends on its financial fundamentals. The rating agency expects a further improvement of the bank's asset risk and capital over the outlook period of 12-18 months, which combined with resilient profit generation capacity could result in upward pressure on Kutxabank's ratings. The good performance of the Spanish economy, as well as the bank's strong focus on reducing problematic assets and expectation of increased contribution of fee and commission oriented businesses should continue to support the bank's currently-observed positive credit trends.

In particular, a stronger assessment of Kutxabank's credit profile could materialize if: (1) the NPL ratio declines below 6% over the outlook period while the stock of foreclosed real estate assets continues to gradually decline; (2) Moody's key capital metric -- tangible common equity (TCE) to risk-weighted assets ratio -- stands at around 13% (from 12.2% at end-December 2016); and (3) profitability remains resilient and bottom line profits continue to grow at the current pace.

---RATIONALE FOR THE AFFIRMATION OF THE CR ASSESSMENT

As part of today's rating action, Moody's has also affirmed at Baa2(cr)/Prime-2(cr), the CR Assessment of Kutxabank, two notches above the adjusted BCA of ba1 and reflecting the cushion provided by the volume of bail-in-able debt and deposits (8.5% of tangible banking assets at end-December 2016), which would likely support operating obligations in resolution.

---WHAT COULD CHANGE THE RATING - UP

Upward pressure on Kutxabank's BCA could arise from: (1) further improvement of asset risk indicators, namely a material reduction of the stock of problematic assets; (2) stronger TCE levels; and (3) a sustained recovery of recurrent profitability levels, with lower dependence on volatile revenue streams.

Kutxabank's deposit and senior debt ratings could also experience upward pressure from movements in the loss-given-failure faced by these securities. Along these lines, upward pressure on ratings could develop only upon the issuance of sizable volumes of senior or subordinated instruments.

---WHAT COULD CHANGE THE RATING - DOWN

Given the positive outlook, Kutxabank's ratings show limited downward pressures. However, the bank's BCA could be downgraded as a result of: (1) the reversal in current asset risk trends, with a substantial increase in the stock of NPLs and/or other problematic exposures; and (2) significant deterioration of profitability levels, which would negatively affect Kutxabank's internal capital-generation and risk-absorption capacity.

A downward movement in Kutxabank's BCA would likely result in downgrades of all other rating classes. At the same time, based on the current liability structure, there is certain downward pressure on debt and deposit ratings in case of a reduction in the volume of total deposits of approximately 10%. Moody's, however, considers this scenario unlikely given the very stable trends of the bank's retail funding.

LIST OF AFFECTED RATINGS

Issuer: Kutxabank, S.A.

..Affirmations:

....Long-term Counterparty Risk Assessment, affirmed Baa2(cr)

....Short-term Counterparty Risk Assessment, affirmed P-2(cr)

....Long-term Deposit Rating, affirmed Ba1, outlook changed to Positive from Stable

....Short-term Deposit Rating, affirmed NP

....Senior Unsecured Regular Bond/Debenture, affirmed Ba1, outlook changed to Positive from Stable

....Senior Unsecured Medium-Term Note Program, affirmed (P)Ba1

....Subordinate Medium-Term Note Program, affirmed (P)Ba2

....Adjusted Baseline Credit Assessment, affirmed ba1

....Baseline Credit Assessment, affirmed ba1

..Outlook Action:

....Outlook changed to Positive from Stable

Issuer: Caja Vital Finance B.V.

..Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed Ba1, outlook changed to Positive from Stable

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)Ba1

..Outlook Action:

....Outlook changed to Positive from Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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 Jose Mori
VP - Senior Credit Officer
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

Carola Schuler
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

No Related Data.
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