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Rating Action:

Moody's affirms ratings on Bankia; outlook developing

05 Jul 2017

Madrid, July 05, 2017 -- Moody's Investors Service has today affirmed Spain-based Bankia, S.A.'s (Bankia) Baa3 long-term deposit and Ba1 senior debt ratings as well as the bank's Baseline Credit Assessment (BCA) and adjusted BCA at ba2, its short-term deposit ratings at Prime-3 and its Not Prime short-term senior programme ratings. The bank's Counterparty Risk Assessment (CRA) was also affirmed at Baa2(cr)/Prime-2(cr). At the same time, the rating agency changed the outlook on the Baa3 long-term deposit and Ba1 senior debt ratings to developing from stable.

The rating actions were triggered by (1) Bankia's announcement on 27 June 2017 that it had decided to enter into a business integration agreement with Banco Mare Nostrum (unrated, BMN) under which Bankia will carry out a merger by absorption of BMN; and (2) its announced plan to issue Additional Tier 1 (AT1) instruments.

The affirmation of the ratings takes into account Bankia's overall credit profile, its track record of de-risking as well as Moody's expectation that its merger with BMN will not significantly lessen the bank's solvency provided that the bank enhances its capitalisation over the outlook period. The developing outlook on the bank's long-term debt and deposit ratings reflects the adverse effect that a merger with a weaker domestic peer may have on Bankia's creditworthiness, particularly its capital levels, but also the positive impact on the bank's debt and deposit ratings from the forthcoming AT1 issuance.

The transaction is expected to close at the end of this year once all approvals have been obtained.

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

RATINGS RATIONALE

-- RATIONALE FOR THE AFFIRMATION OF THE BCA

Moody's affirmation of Bankia's BCA, reflects the bank's overall credit profile together with BMN's increased coverage of problematic assets ahead of the merger. The affirmation also takes into account Bankia's successful de-risking track record as well as our view that a merger with BMN will not significantly lessen the bank's solvency provided that the bank enhances its capitalisation over the outlook period.

The merger with BMN will have a negative impact on Bankia's asset risk metrics, with the proforma ratio of non-performing loans (NPLs) to total loans increasing to 9.7% for the combined entity from 9.4% for Bankia at end-March 2017. At the same time, the level of real estate assets will increase to 4.2% of gross loans and real estate assets from 3.2%. However, Moody's views positively an increase of related provisions ahead of the merger of EUR500 million (against NPLs) and EUR200 million (against real estate), mitigating the risk of BMN's weaker asset quality.

The transaction will also adversely affect Bankia's capitalisation, bringing down its Common Equity Tier 1 (CET1) ratio (on a fully loaded basis) by close to 200 basis points from 13.4% at end-March 2017, with a similar impact on Moody's key capital metric, tangible common equity (TCE) to risk-weighted assets. BMN's TCE / RWAs ratio stood at just 4.7% at end-2016, significantly weaker than Bankia's ratio of 9.3% in the same period. Under Moody's assessment, BMN's capitalisation is burdened by (1) sizeable deferred tax assets, mostly excluded from TCE, stemming from losses incurred during the financial crisis, (2) weak profit generation; and (3) significant holdings of sovereign debt. Moreover Moody's applies a more conservative risk weighting to banks' sovereign exposure.

As a mitigating factor, Moody's notes Bankia's successful de-risking strategy as reflected in the sustained improvement in its asset quality due not only to recoveries but also by an active asset disposal strategy. Since December 2013, the bank has reduced its stock of NPLs by 46%, compared to a 43% reduction for the Spanish banking system. Moreover, the bank has been able to reduce its stock of real estate assets (calculated according to the rating agency's criteria) by 35% in the same period versus an increase of 1% for the system.

In addition Bankia's experience in integrating banks (itself the result of the merger of seven savings banks) significantly reduces execution risks, in the ratings agency's views. Bankia estimates merger-related restructuring charges of EUR334 million and EUR155 million of annual pre-tax efficiency gains the third year of the merger, which represents 40% of BMN's cost base at end-2016.

With this merger, Bankia will significantly increase its footprint in Granada, Murcia and the Balearic Islands where BMN has leading market shares, and will benefit from a more stable funding source. Bankia's gross loans will increase by 20% and its deposit base by 28% following the merger with BMN.

-- RATIONALE FOR AFFIRMING THE BANK'S DEBT AND DEPOSIT RATINGS WITH DEVELOPING OUTLOOK

The affirmation of Bankia's deposit ratings at Baa3/Prime-3 and its senior debt ratings at Ba1 reflects (1) the affirmation of the bank's BCA and adjusted BCA at ba2; (2) the rating agency's LGF analysis, resulting in one and zero notches of uplift from the adjusted BCA respectively; and (3) Moody's assessment of a moderate probability of government support for Bankia, giving rise to a further one notch of uplift for both the deposit and senior debt ratings.

The developing outlook on Bankia's long-term deposits and senior debt ratings reflect two opposing considerations. On the one hand, the agency anticipates some downward pressure on the bank's BCA and adjusted BCA arising from weaker capital levels resulting from the merger. On the other hand, the forthcoming AT1 issuance would provide an additional buffer against loss for the bank's senior unsecured debt and deposits. Under the rating agency's LGF analysis, this may lead to a one notch increase in the long-term ratings of these instruments.

-- RATIONALE FOR THE AFFIRMATION OF THE CRA

Moody's has also affirmed Bankia's long- and short-term CRAs of Baa2(cr)/Prime-2(cr), three notches above the adjusted BCA of ba2. The CRA is driven by the banks' adjusted BCA, the cushion against default provided to senior operating obligations by subordinated instruments, amounting to about 15.8% of tangible banking assets, and a moderate likelihood of government support.

-- WHAT COULD CHANGE THE RATING -- UP

The bank's BCA could be upgraded as a result of (1) stronger capitalisation; (2) a further improvement in asset risk indicators, notably a material reduction in the stock of problematic assets; (3) a sustained recovery in recurrent profitability; and/or (4) a further reduction in the bank's reliance on market funding.

Bankia's deposit and senior debt ratings could also be upgraded as a result of reduced loss-given-failure faced by these securities provided by the forthcoming AT1 issuance provided the bank's BCA remains unchanged.

---WHAT COULD CHANGE THE RATING -- DOWN

The bank's BCA could be downgraded as a result of (1) a failure to restore the bank's TCE / RWAs ratio; (2) a reversal in current asset risk trends, with an increase in the stock of NPLs and/or other problematic exposures; and/or (3) a significant deterioration in profitability, which would constrain Bankia's internal capital generation and risk-absorption capacity.

A downward movement in Bankia's BCA would likely result in downgrades of all other rating classes.

LIST OF AFFECTED RATINGS

Issuer: Bankia, S.A.

..Affirmations:

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

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

....Long-term Bank Deposits, affirmed Baa3, outlook changed to Developing from Stable

....Short-term Bank Deposits, affirmed P-3

....Senior Unsecured Regular Bond/Debenture (Local Currency), affirmed Ba1, outlook changed to Developing from Stable

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

....Commercial Paper, affirmed NP

....Adjusted Baseline Credit Assessment, affirmed ba2

....Baseline Credit Assessment, affirmed ba2

..Outlook Action:

....Outlook changed to Developing from Stable

Issuer: Bancaja Emisiones, S.A. Unipersonal

..Affirmation:

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

..Outlook Action:

....Outlook changed to Developing from Stable

Issuer: Caymadrid International Ltd.

..Affirmations:

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

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

..Outlook Action:

....Outlook changed to Developing 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.

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

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.
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