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Rating Action:

Moody's affirms the ratings of CaixaBank and places Bankia's ratings on review for upgrade

22 Sep 2020

Actions follow merger announcement

Madrid, September 22, 2020 -- Moody's Investors Service, ("Moody's") today affirmed the baa3 Baseline Credit Assessment (BCA) and all ratings and assessments of CaixaBank, S.A. ("CaixaBank"). The rating agency maintains a stable outlook on the bank's A3 long-term deposit and Baa1 long-term senior unsecured debt ratings.

At the same time, Moody's placed on review for upgrade the following ratings and assessments of Bankia, S.A. ("Bankia"): (1) the bank's ba2 BCA and Adjusted BCA, (2) its Baa2 long-term deposit ratings, (3) its Baa3 senior unsecured debt and Prime-3 Commercial Paper ratings, (4) the bank's Ba3 junior senior unsecured debt ratings; (5) its B2(hyb) preferred stock ratings, (6) the bank's long-term Baa1(cr) Counterparty Risk (CR) Assessment, and (7) its long-term Baa1 Counterparty Risk Rating (CRR). As part of today's rating action, the rating agency has also affirmed Bankia's Prime-2 short-term deposit ratings and CRR as well as its Prime-2(cr) short-term CR Assessment.

The rating actions reflect the announcement made on 18 September 2020, that the board of directors of both banks had approved the merger by absorption of Bankia by CaixaBank. The transaction, that still needs to be approved by the shareholders' meetings of both banks, is expected to be closed during Q1 2021 pending to receive all relevant regulatory authorizations.

The affirmation of CaixaBank's ratings captures Moody's view that the bank's standalone credit profile is resilient to the integration of Bankia, despite the expected one-off negative impact on capital and the rating agency's assessment of the challenges to the combined group's financial indicators from the pandemic-induced economic downturn principally in terms of asset risk and profitability. The affirmation also incorporates Moody's expectation that the degree of protection for the senior creditors of the combined entity from the stock of bail-in-able liabilities will not materially change.

The review for upgrade of Bankia's ratings indicates the potential for convergence with CaixaBank's ratings reflecting the benefit of the merger to Bankia's creditors once it will be finalized.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL433118 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

-- DETAILS OF THE TRANSACTION

On 18 September 2020, the board of directors of CaixaBank and Bankia approved a merger by absorption of Bankia into CaixaBank by means of an exchange ratio of 0.6845 shares in CaixaBank for each share in Bankia. Once the merger has been executed, state ownership by Spain's resolution authority (FROB, Fondo de Reestructuracion Ordenada Bancaria) will fall from the current 61.8% to around 16%. The interest in CaixaBank of Criteria Caixa, S.A., Sociedad Unipersonal (and, indirectly, of Fundación Bancaria Caja de Ahorros y Pensiones de Barcelona, "la Caixa") will continue to be around 30%. The exchange will be effected with newly issued shares in CaixaBank for a total consideration of approximately €4.3 billion.

The transaction, which is expected to close in Q1 2021, is subject to the relevant shareholders and regulatory approvals.

--RATIONALE FOR THE AFFIRMATION OF CAIXABANK'S RATINGS

The affirmation of CaixaBank's standalone BCA is based on Moody's view that the combined entity's credit profile, following the integration of Bankia remains commensurate with a BCA of baa3. This is underpinned by the rating agency's consideration of the long-term benefits of the transaction namely in terms of efficiency gains and revenue potential.

The combined entity will have pro forma assets amounting to €664 billion at the end of June 2020 -- reinforcing CaixaBank's position as the largest domestic player -- accounting for 25% of the system's total assets, up from 16%. The new group would have approximately 6,700 branches (4,500 at CaixaBank and 2,300 at Bankia) and a joint workforce of approximately 51,500 employees (35,600 at CaixaBank and close to 15,900 at Bankia). The transaction enables a material downsizing of the combined cost structure with estimated annual cost synergies amounting to €770 million pre-tax (approximately 40% of Bankia's 2019 cost base) providing some counterbalancing uplift to expected profitability pressures from the pandemic-induced economic downturn and persistently low interest rates. The merger will generate badwill that will fully absorb the impact of the restructuring costs of around €2.2 billion. The new entity is also expected to generate revenue synergies amounting to €290 million by 2025.

The combined entity will display a similar asset risk profile to that of CaixaBank, with an estimated proforma non-performing loan (NPL) ratio net of loan loss reserves of 1.6% based on reported figures end of June 2020 and including expected fair value adjustments at the closing of the transaction, broadly in line with the net NPL ratio reported by CaixaBank as of the same date of 1.4%.

Given the absence of a capital increase, regulatory capital ratios will drop from CaixaBank's current levels. At end of June 2020, CaixaBank's fully loaded Common Equity Tier 1 (CET1) ratio stood at 11.8% (Bankia's at 13.27% and both excluding IFRS 9 transitional arrangements) and the combined entity is expected to maintain regulatory capital ratios at all times within the 11-11.5% range. This, together with a higher Supervisory Review and Evaluation Process (SREP) requirement for the combined entity (estimated at 8.45% up from 8.10%), will reduce CaixaBank's CET1 management buffer from 419 to 250-300 basis points above minimum requirements (including transitional IFRS 9 adjustments), a credit negative against current downside risks stemming from the coronavirus-induced economic downturn that could result in higher-than-anticipated credit losses.

When assessing the impact of the deal on our key capital metric, the Tangible Common Equity ratio (TCE), the negative impact on the combined TCE is further impacted by Bankia's weaker TCE versus that of CaixaBank (8.4% at Bankia versus 10.9% at CaixaBank at end of December 2019). The gap is to a large extent explained by Bankia's relatively high volume of deferred tax assets and government holdings to which Moody's applies a more conservative treatment than that of regulators when assessing these assets' capital and risk characteristics.

As counterbalancing factors, Moody's recognizes the long-term benefits of the transaction namely in terms of efficiency gains and revenue potential. The rating agency also acknowledges CaixaBank's proven track record in preserving sound capital ratios in previous acquisitions.

Finally, given the depressed macroeconomic outlook for the Spanish economy, execution risks are high although somewhat mitigated by the complementary nature of both banks' business profiles, the clear definition of roles and responsibilities among both banks at the outset and their strong track record of successfully integrating acquired institutions.

The affirmation of CaixaBank's deposit and senior unsecured debt ratings reflects: (1) the affirmation of the bank's BCA and Adjusted BCA of baa3; (2) the rating agency's Advanced Loss Given Failure (LGF) analysis which would lead to three notches of uplift for the long-term deposit and two notches for senior unsecured debt ratings when incorporating expected funding plans; and (3) Moody's assessment of a moderate probability of government support for the combined entity, resulting, however, in no uplift for the deposit and senior unsecured debt ratings given that these ratings, prior to government support, are either above or at the same level as Spain's Baa1 sovereign rating.

The long-term deposit and senior unsecured debt ratings for CaixaBank carry stable outlooks, indicating the rating agency's expectation that the combined entity's credit profile will not materially change over the next 12 to 18 months. The stable outlook also reflects CaixaBank's strong commitment to fulfil new Minimum Requirements for own funds and Eligible Liabilities (MREL) requirements primarily with subordinated instruments and to ensure that the degree of protection for its senior creditors from the stock of bail-in-able liabilities will not materially change.

-- RATIONALE FOR THE REVIEW FOR UPGRADE ON BANKIA's RATINGS

The review for upgrade of Bankia's ratings and assessments reflects Moody's views that they will converge with those of CaixaBank once the merger is finalized and receives all relevant authorizations.

Moody's expects that Bankia will be legally merged into CaixaBank which will legally assume Bankia's debt and liabilities upon closing. The rating agency anticipates to conclude the ratings review once the transaction will be formally approved by both banks' governing bodies with Bankia's ratings and assessments converging to those of CaixaBank.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

CaixaBank's baa3 BCA could be upgraded if there is a significant improvement in the bank's risk absorption capacity which we are not anticipating. CaixaBank's deposit and senior debt ratings could be upgraded if the bank's BCA is upgraded.

In the context of the announced merger, pressure on the bank's BCA could develop if the bank fails to deliver on its expected synergies reducing the combined bank's internal capital generation and risk absorption capacities.

As the bank's debt and deposit ratings are linked to its standalone BCA, any changes to the BCA would also likely affect these ratings. CaixaBank's deposit and senior unsecured debt ratings could also be constrained because of movements in the loss given failure faced by these securities, in particular, if the bank fails to deliver on its expected funding plan. However, the impact on the bank's senior debt ratings could be offset by the incorporation of government support.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL433118 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Endorsement

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.
© 2021 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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