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Rating Action:

Moody's assigns Baa1/P-2/D+ ratings to Caja España de Inversiones, Salamanca y Soria, Caja de Ahorros y Monte de Piedad

08 Oct 2010

Madrid, October 08, 2010 -- Moody's Investors Service has today assigned Baa1/Prime-2/D+ ratings with a stable outlook to the new entity called Caja España de Inversiones, Salamanca y Soria, Caja de Ahorros y Monte de Piedad (new "Caja España"). The D+ standalone Bank Financial Strength Rating maps to a Ba1 on the long-term scale. Moody's rates the subordinated debt of the new entity at Baa2 and the preferred shares at B2, both with a stable outlook.

This new entity is the result of the merger of Caja España de Inversiones ("Caja España -- old", previously rated Baa1/Prime-2/E+, negative outlook) with the neighbouring Caja de Ahorros de Salamanca y Soria (Caja Duero, previously rated A3/Prime-2/D+, negative outlook). The merger is effective since 1 October 2010. The deposit and debt obligations of the two savings banks have been assumed by the new Caja España, and the two savings banks have ceased to exist upon completion of the merger on October 1st, so all the other ratings of these individual entities are subsequently withdrawn.

RATINGS RATIONALE

Moody's views this merger as broadly credit positive for the new Caja España. (i) The restructuring and streamlining of the new entity's greater regional presence, (ii) improved provisioning levels against non-performing assets and (iii) the EUR 525million capital injection in the form of preferred shares from the Fondo de Restructuración Ordenada Bancaria (FROB, or Spain's fund for orderly bank restructuring), are all contributing to strengthening the credit profile of this new entity. However, at this point in time, Moody's believes that further positive rating pressure is constrained primarily by the overall moderate degree of capitalisation, even when taking into account the capital injection from the FROB (Tier 1 capital is expected to be at 9.4% at FYE 2010).

RATIONALE FOR THE BFSR OF THE NEW GROUP

In assigning the D+ (Ba1) BFSR to the new savings bank, Moody's has focused on the assessment of the creditworthiness of the resulting merged entity, which the rating agency considers to be stronger on a standalone basis than the sum of its parts, with Caja Duero and Caja España -- old having been rated D+ and E+ respectively.

The new entity will receive public funds from the FROB amounting to EUR525 million, equivalent to 1.8% of its risk-weighted assets, which together with the loan-loss provisioning efforts and the write-offs carried out by the two savings banks before the merger, will serve to strengthen the solvency of the new entity.

The new entity will also benefit from the cost savings that will arise from the restructuring plan that has been approved by the two existing savings banks, and whose implementation will be closely followed by the Bank of Spain. The restructuring plan entails a 15% reduction of the new group's combined workforce, and branch closures that will affect 23% of the new entity's existing networks.

Notwithstanding the clear benefits of the capital injection and restructuring, Moody's believes that the new group faces challenges that will have to be borne with a moderate Tier 1 capital ratio of around 9.4%. In the rating agency's view, this should be sufficient for the savings bank to absorb any further losses under its base-case scenario. However, given the uncertain macroeconomic outlook as well as remaining uncertainties over its real-estate asset quality, the recapitalisation may not have sufficiently immunised the bank against a more conservative scenario. Although the EUR525 million funds from the FROB are estimated to cover the bulk of loan-loss provisioning requirements for the next few years, the rating agency notes that internal capital generation from recurrent sources will be limited by a very challenging domestic operating environment of subdued growth and a downward pressure on margins -- on the back of low interest rates and relatively high non-earning assets. As a result, Moody's assigned a BFSR of D+, indicating that the new savings bank may have a remaining marginal vulnerability against more adverse scenarios.

RATIONALE FOR THE DEBT RATINGS

The new entity's rating of Baa1/Prime-2 incorporates Moody's assumption of ongoing exceptional systemic support. In this respect, Moody's believes that the Spanish government is generally both willing and able to support its banking system and the new entity in particular, as and when required.

In addition, the Baa1/Prime-2 debt ratings reflect Moody's long-term view as part of its ongoing stance to "look through" the current crisis to the specific franchise characteristics of the new group as it emerges out of this environment. On the one hand, Moody's believes that the new Caja España has the longer-term potential for a higher standalone rating to develop over time, which should support the Baa1 rating even in a future scenario of more uncertain systemic support. At the same time, Moody's notes that the assignment of a higher rating has been limited since the materialized support in form of the FROB capital injection did not result in a significantly higher standalone strength of the new entity. This reduced likelihood of a fast reversal of the standalone rating would however have been required to underpin a higher debt rating.

The stable outlook is commensurate with Moody's favorable view on the merger process, which will entail significant restructuring, stronger coverage of problem loans by loan loss provisions and higher capital adequacy levels following the FROB's capital injection. In assigning a stable outlook to all of the savings bank's ratings Moody's has taken into account the execution risks associated with the merger process as well as the operating environment in Spain, which will remain challenging throughout 2011. Notwithstanding, Moody's will closely monitor the accomplishment of the financial plan that has been presented following the merger process. Any significant negative deviation from this plan could exert downward pressure on the BFSR, and thus on its debt ratings.

The principal methodologies used in rating Caja España de Inversiones, Salamanca y Soria, Caja de Ahorros y Monte de Piedad were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, and Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009 . Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

The last rating action on Caja Duero was on 7 October 2010, when Moody's downgraded Caja Duero's government-backed debt ratings to Aa1 with stable outlook from Aaa.

Moody's implemented the previous rating action on Caja España - old on 15 June 2009, when it downgraded the BFSR to E+ (mapping to a BCA of B1) from C- (mapping to a BCA of Baa2), and changed the outlook to negative. The bank's long-term debt and deposit rating was downgraded to Baa1 from A3, and the outlook changed to negative. Its senior subordinated debt was lowered to Baa2 from Baa1, and the outlook changed to negative, while the short-term debt and deposit ratings were affirmed at P-2. At that time, Caja Duero's ratings were also downgraded to A3/Prime-2/D+ (Ba1) with a negative outlook from A2/Prime-1/C.

Headquartered in Salamanca, Spain, Caja Duero reported total consolidated assets of EUR21.4 billion as at 31 December 2009.

Headquartered in Leon, Spain, Caja España - old reported total assets of EUR24.7 billion as at 31 December 2009.

The combined entity will be headquartered in Leon and will have combined assets ofEUR46.4 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Madrid
Maria Jose Mori
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Johannes Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Espana, S.A.
Barbara de Braganza, 2
Madrid 28004
Spain

Moody's assigns Baa1/P-2/D+ ratings to Caja España de Inversiones, Salamanca y Soria, Caja de Ahorros y Monte de Piedad
No Related Data.
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