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Rating Action:

Moody´s affirms all of Banco Santander's ratings; Banco Popular's senior unsecured debt and deposit ratings upgraded to Ba1 on review for upgrade

08 Jun 2017

Actions follow Banco Popular's resolution and subsequent acquisition by Banco Santander

Madrid, June 08, 2017 -- Moody's Investors Service has today affirmed all of Banco Santander S.A. (Spain)'s (Banco Santander) and its supported entities' ratings: (1) The A3/Prime-2 deposit and senior debt ratings; (2) the (P)Baa2 subordinated debt ratings; (3) the Baa2 junior senior unsecured debt ratings; (4) the Ba1(hyb) and Ba2(hyb) preference shares ratings; (5) the bank's baseline credit assessment (BCA) and adjusted BCA of baa1; and (6) its Counterparty Risk Assessment (CR Assessment) of A3(cr)/Prime-2(cr). The outlook for the long-term senior debt and deposit ratings remains stable.

At the same time, Moody's has taken actions on the following ratings of Banco Popular Espanol, S.A. (Banco Popular): (1) upgraded the bank's long-term deposit ratings to Ba1 from B2 and placed these on review for further upgrade; (2) upgraded the long-term senior programme ratings to (P)Ba1 from (P)B3 and placed these on review for further upgrade; and (3) upgraded the bank's CR Assessment to Baa3(cr)/Prime-3(cr) from Ba3(cr)/Not Prime(cr) and placed these on review for further upgrade. Banco Popular's short-term ratings of Not Prime have also been placed on review for upgrade.

As part of today's rating actions on Banco Popular, Moody's has also: (1) downgraded the bank's BCA to ca; (2) upgraded the adjusted BCA to b1 on review for upgrade from caa1; (3) downgraded the bank's subordinated debt ratings to C from Caa2, and (4) downgraded various ratings of preference stock to C(hyb) from Ca(hyb), which are guaranteed by Banco Popular and issued by several issuing vehicles. Moody's will subsequently withdraw the ratings of Banco Popular's subordinated debt and preference stock.

The rating actions were triggered by the announcement made on 7 June 2017 by the Single Resolution Board (SRB) and the Spanish resolution authority (the FROB or "Fondo de Reestructuración Ordenada Bancaria") that they had taken a resolution action in respect of Banco Popular. As part of the resolution scheme adopted for the bank, the resolution authorities have decided to transfer Banco Popular to Banco Santander. Prior to the transfer, all of Banco Popular's existing shares and the Additional Tier 1 instruments were written down, while the Tier 2 instruments were converted into shares and acquired by Banco Santander for the price of €1.

As part of the acquisition of Banco Popular, Banco Santander has announced a fully underwritten capital increase for around €7 billion, that will offset the negative impact of integrating Banco Popular.

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

RATINGS RATIONALE

-- RATIONALE FOR THE AFFIRMATION WITH A STABLE OUTLOOK OF BANCO SANTANDER'S RATINGS

The affirmation of Banco Santander's standalone BCA at baa1 follows Moody's assessment that Banco Santander's capital position remains broadly unchanged after the acquisition of Banco Popular. The rating agency considers that the impact of acquiring a materially weaker institution will be largely offset by the announced €7 billion rights issue that has been fully subscribed. Banco Popular accounted for 10.9% of Santander's total assets at end-March 2017.

The acquisition of Banco Popular has a negative impact on Santander's asset risk metrics with non-performing loans (NPLs) to total gross loans increasing to 5.9% for the combined entity from 4.2% for Banco Santander at end-March 2017. At the same time, the level of non-performing assets (NPAs, defined as NPLs plus real estate assets) increases to 9.4% from 6.1%. However, Moody's notes positively that the level of provisions of Banco Popular's NPAs has significantly increased by €7.9 billion, resulting in a coverage ratio of 67% up from 45% prior to the acquisition. Moreover, Banco Santander is targeting the disposal of the totality of Banco Popular's NPAs by 2022 with 50% to be accomplished in 18 months.

With this acquisition, Banco Santander will significantly strengthen its market positioning in the more profitable SME market in Spain achieving a 24.8% market share up from 11.1%. Banco Santander will also become Spain's leading domestic bank by loans and customer funds.

The combined group's profitability will be negatively impacted by restructuring charges that are estimated at €1.3 billion, although no decision has been taken regarding the timing of its materialization. Banco Santander targets €500 million of pre-tax efficiency gains by 2020, which represents one-third of Banco Popular's existing cost base and approximately 10% of that of the combined entity.

The affirmation of Banco Santander's deposit and senior debt ratings reflects: (1) the affirmation of the bank's standalone BCA at baa1; (2) the outcome of Moody's Advanced Loss-Given-Failure (LGF) analysis that results in two notches of uplift respectively for the deposit and debt ratings; and (3) Spain's sovereign rating of Baa2 stable, which caps Banco Santander's deposit and senior ratings, in turn, at A3, which is two notches above the sovereign rating.

-- RATIONALE FOR THE ACTIONS ON BANCO POPULAR's RATINGS

The downgrade of Banco Popular's BCA to ca follows the resolution of the bank which according to Moody's definitions constitutes an event of default. The bank's adjusted BCA has been upgraded to b1 to reflect Moody's assessment of a very high probability of affiliate support coming from Banco Santander. Moody's considers that Banco Popular's senior creditors could benefit from Banco Santander's affiliate support following the acquisition, therefore mitigating the risks emerging from the bank's extremely weak standalone credit profile. The adjusted BCA is on review for further upgrade to reflect the upcoming merger of Banco Popular into Banco Santander.

The upgrade of Banco Popular's deposit ratings to Ba1 (and placement on review for further upgrade) from B2 and the bank's and its supported entities' senior unsecured debt ratings to Ba1 (and placement on review for further upgrade) from B3 reflect: (1) the upgrade of adjusted BCA to b1 (and placement on review for further upgrade); (2) the result of the rating agency's Advanced LGF analysis; and (3) Moody's assessment of moderate probability of government support for Banco Popular, which results in one notch of uplift for both the deposit and the senior debt ratings. As a domestic subsidiary of Banco Santander, Moody's considers both entities to be subject to the same resolution perimeter and therefore applies the Advanced LGF analysis of Banco Santander, which now results in two notches of uplift for the deposit and senior debt ratings from one notch and no uplift respectively previously.

The downgrade of Banco Popular's subordinated debt and preference share ratings to C and C(hyb) reflects the decision taken by the resolution authorities to bail-in these instruments to address the shortfall in the valuation of Banco Popular and as part of the resolution scheme approved for the bank. The ratings on these instruments will consequently be withdrawn.

---RATIONALE OF THE CR ASSESSMENTS

As part of today's rating action, Moody's has also affirmed at A3(cr)/Prime-2(cr) the CR Assessment of Banco Santander, one notch above the adjusted BCA of baa1 and reflecting the cushion provided by the volume of bail-in-able debt and deposits (20% of tangible banking assets at end-December 2016), which would likely support operating obligations in resolution. The CR Assessment is capped at A3(cr), two notches above Spain's sovereign rating.

At the same time, Moody's has upgraded Banco Popular's CR Assessment to Baa3(cr)/Prime-3(cr) and placed it on review for further upgrade, in line with the review for upgrade of the bank's b1 adjusted BCA. The CR Assessment is driven by the bank's b1 adjusted BCA, Banco Santander's Advanced LGF analysis that provides three notches of uplift and a moderate likelihood of systemic support, leading to another notch of uplift for the CR Assessment.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on Banco Santander's ratings are primarily dependent on an upgrade of the government of Spain as the bank's home country sovereign, given that Moody's current A3 long-term debt and deposit ratings already exceed the sovereign ratings by two notches and are constrained at that level under the rating agency's methodology.

In terms of BCA, Moody's assessment already incorporates some expected further improvement in the bank's fundamentals, and as such the rating agency does not expect to increase the BCA over the medium term. In addition, any upward pressure on Santander's BCA is unlikely to materialise as long as the Spanish government's bond rating remains at Baa2, because the bank's BCA already exceeds the Spanish sovereign rating by one notch.

Banco Santander's current BCA already incorporates Moody's expectation for an improvement in its financial fundamentals. A weakening or reversal in the positive trajectory could, therefore, have negative rating implications. In relation to Banco Santander's acquisition of Banco Popular, challenges on the group's asset risk and profitability could stem from a slower than expected disposal of Banco Popular's NPAs, higher provisioning needs in relation to its NPAs portfolio and litigations costs.

A downgrade of Spain's government rating could also lead to the downgrade of Banco Santander's BCA and of its deposit and senior unsecured ratings. The bank's debt and deposit ratings are linked to the standalone BCA; as such, any change to the BCA could also affect these ratings.

Banco Popular's debt and deposit ratings will be aligned to those of Banco Santander once the merger effectively takes place.

A downgrade of Banco Popular's debt and deposit ratings is highly unlikely given the current review for upgrade.

LIST OF AFFECTED RATINGS

Issuer: Banco Santander S.A. (Spain)

..Affirmed:

....Long-term Counterparty Risk Assessment, affirmed A3(cr)

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

....Long-term Bank Deposits, affirmed A3 Stable

....Short-term Bank Deposits, affirmed P-2

....Long-term Issuer Rating, affirmed A3 Stable

....Senior Unsecured Medium-Term Note Program, affirmed (P)A3

....Senior Unsecured Shelf, affirmed (P)A3

....Junior Senior Unsecured Medium-Term Note Program, affirmed (P)Baa2

....Junior Senior Unsecured Shelf, affirmed (P)Baa2

....Junior Senior Unsecured Regular Bond/Debenture, affirmed Baa2

....Subordinate Medium-Term Note Program, affirmed (P)Baa2

....Subordinate Shelf, affirmed (P)Baa2

....Preferred Stock Non-cumulative, affirmed Ba1(hyb)

....Commercial Paper, affirmed P-2

....Adjusted Baseline Credit Assessment, affirmed baa1

....Baseline Credit Assessment, affirmed baa1

..Outlook Action:

....Outlook remains Stable

Issuer: Banco Espanol de Credito, S.A. (Banesto)

..Affirmed:

....Preferred Stock Non-cumulative, affirmed Ba2 (hyb) (assumed by Banco Santander, S.A. (Spain))

..Outlook Action:

....No Outlook assigned

Issuer: Banesto Holdings, Ltd.

..Affirmed:

....Backed Preferred Stock Non-cumulative, affirmed Ba2 (hyb)

..Outlook Action:

....No Outlook assigned

Issuer: Santander International Products PLC

..Affirmed:

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)A3

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A3 Stable

....Backed Other Short Term, affirmed (P)P-2

....Backed Commercial Paper, affirmed P-2

..Outlook Action:

....Outlook remains Stable

Issuer: Banco Santander, S.A., London Branch

..Affirmed:

....Long-term Counterparty Risk Assessment, affirmed A3(cr)

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

....Long-term Deposit Note/CD Program, affirmed (P)A3

....Short-term Deposit Note/CD Program, affirmed (P)P-2

..Outlook Action:

....No Outlook assigned

Issuer: Emisora Santander Espana S.A.U

..Affirmed:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A3 Stable

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)A3

..Outlook Action:

....Outlook remains Stable

Issuer: Santander Central Hispano International Ltd

..Affirmed:

....Backed Commercial Paper, affirmed P-2

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)A3

....Backed Other Short Term, affirmed (P)P-2

..Outlook Action:

....No Outlook assigned

Issuer: Santander Central Hispano Issuances Ltd.

..Affirmed:

....Backed Subordinate Medium-Term Note Program, affirmed (P)Baa2

....Backed Subordinate Shelf, affirmed (P)Baa2

..Outlook Action:

....No Outlook assigned

Issuer: Santander Commercial Paper, S.A. Unipersonal

..Affirmed:

....Backed Commercial Paper, affirmed P-2

..Outlook Action:

....No Outlook assigned

Issuer: Santander Finance Capital, S.A. Unipersonal

..Affirmed:

....Backed Preferred Stock, affirmed Ba2(hyb)

....Backed Preferred Stock Non-cumulative, affirmed Ba2(hyb)

..Outlook Action:

....No Outlook assigned

Issuer: Santander Finance Preferred, S.A. Unipersonal

..Affirmed:

....Backed Preferred Stock Non-cumulative, affirmed Ba2 (hyb)

..Outlook Action:

....No Outlook assigned

Issuer: Santander International Preferred, S.A.U.

Affirmed:

....Backed Preferred Stock Non-cumulative, affirmed Ba2 (hyb)

..Outlook Action:

....No Outlook assigned

Issuer: Santander Int'l Debt, S.A. Unipersonal

..Affirmed:

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Backed Other Short Term, affirmed (P)P-2

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A3 Stable

..Outlook Action:

....Outlook remains Stable

Issuer: Santander Issuances S.A. Unipersonal

..Affirmed:

....Backed Subordinate Medium-Term Note Program, affirmed (P)Baa2

....Backed Subordinate Shelf, affirmed (P)Baa2

....Backed Subordinate Regular Bond/Debenture, affirmed Baa2

..Outlook Action:

....No Outlook assigned

Issuer: Santander Perpetual, S.A. Unipersonal

..Affirmed:

....Backed Junior Subordinated Regular Bond/Debenture, affirmed Baa3(hyb)

..Outlook Action:

....No Outlook assigned

Issuer: Santander US Debt, S.A. Unipersonal

..Affirmed:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A3 Stable

....Backed Senior Unsecured Shelf, affirmed (P)A3

..Outlook Action:

....Outlook remains Stable

Issuer: Banco Popular Espanol, S.A.

..Placed on Review for Upgrade:

....Short-term Bank Deposits, currently NP

....Other Short Term, currently (P)NP

....Commercial Paper, currently NP

..Upgraded and placed under Review for further Upgrade:

....Long-term Bank Deposits, upgraded to Ba1 from B2, outlook changed to Ratings under Review from Negative

....Long-term Counterparty Risk Assessment, upgraded to Baa3(cr) from Ba3(cr)

....Short-term Counterparty Risk Assessment, upgraded to Prime-3(cr) from NP(cr)

....Senior Unsecured Medium-Term Note Program, upgraded to (P)Ba1 from (P)B3

....Adjusted Baseline Credit Assessment, upgraded to b1 from caa1

Downgraded:

....Baseline Credit Assessment, downgraded to ca from caa1

....Subordinate Medium-Term Note Program, downgraded to (P)C from (P)Caa2, to be withdrawn at close

....Subordinate Regular Bond/Debenture, downgraded to C from Caa2, to be withdrawn at close

....Preferred Stock Non-cumulative, downgraded to C(hyb) from Ca(hyb), to be withdrawn at close

..Outlook Action:

....Outlook changed to Ratings under Review from Negative

Issuer: BPE Finance International Limited

..Upgraded and placed under Review for further Upgrade:

....Backed Senior Unsecured Regular Bond/Debenture, upgraded to Ba1 from B3, outlook changed to Ratings under Review from Negative

..Outlook Action:

....Outlook changed to Ratings under Review from Negative

Issuer: BPE Financiaciones, S.A.

..Downgraded:

....Backed Subordinate Medium-Term Note Program, downgraded to (P)C from (P)Caa2, to be withdrawn at close

....Backed Subordinate Regular Bond/Debenture, downgraded to C from Caa2, to be withdrawn at close

..Upgraded and placed under Review for further Upgrade:

....Backed Senior Unsecured Medium-Term Note Program, upgraded to (P)Ba1 from (P)B3

....Backed Senior Unsecured Regular Bond/Debenture, upgraded to Ba1 from B3, outlook changed to Ratings under Review from Negative

..Outlook Action:

....Outlook changed to Ratings under Review from Negative

Issuer: Banco Pastor, S.A.

..Downgraded:

....Subordinate Regular Bond/Debenture, downgraded to C from Caa2 (assumed by Banco Popular Espanol, S.A.), to be withdrawn at close

..Outlook Action:

.No Outlook assigned

Issuer: Pastor Particip. Preferent., S.A. Unipersonal

..Downgraded:

....Backed Preferred Stock Non-cumulative, downgraded to C (hyb) from Ca (hyb), to be withdrawn at close

..Outlook Action:

.No Outlook assigned

Issuer: Popular Capital, S.A.

..Downgraded:

....Backed Preferred Stock Non-cumulative, downgraded to C(hyb) from Ca(hyb), to be withdrawn at close

..Outlook Action:

.No Outlook assigned

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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

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 Cabanyes
Senior Vice President
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
Client Service: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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