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Rating Action:

Moody's assigns Baa1/P-2/D+ ratings to Caja de Ahorros de Galicia, Vigo, Ourense y Pontevedra

01 Dec 2010

Madrid, December 01, 2010 -- Moody's Investors Service has today assigned Baa1/P-2/D+ ratings with a negative outlook to the new entity Caja de Ahorros de Galicia, Vigo, Ourense y Pontevedra. The D+ standalone Bank Financial Strength Rating (BSFR) maps to a Ba1 rating on the long-term scale. Moody's rates the subordinated debt of the new entity at Baa2, the junior subordinated debt at Ba2 and the preferred shares at B2. The outlook is negative on all the ratings.

This new entity is the result of the merger of Caixa Galicia (previously rated A3/P-2/D, negative outlook) with Caixa de Aforros de Vigo, Ourense e Pontevedra (Caixanova, previously rated A3/P-2/D, negative outlook). The merger will be effective as of 1 December 2010. The new group has assumed the deposit and debt obligations of these two savings banks, which will both cease to exist on completion of the merger on 1 December. We will therefore withdraw all the other ratings of these individual entities.

RATIONALE FOR THE BFSR OF THE NEW GROUP

In assigning the D+ (Ba1) BFSR to the new savings bank, Moody's focused on assessing the creditworthiness of the merged entity. The rating agency considers the creditworthiness to be stronger on a consolidated basis (post-merger), compared with the previous individual BFSRs of D for both Caixa Galicia and Caixanova:

(i) the merger will improve provisioning levels against non-performing assets;

(ii) the EUR1,162million capital injection in the form of preferred shares from the Fondo de Restructuración Ordenada Bancaria (FROB, or Spain's fund for orderly bank restructuring), will strengthen the capitalisation of the new savings bank (Tier 1 capital is expected to be 9.1% at FYE2010); and

(iii) the new entity will benefit from the cost savings that will arise from the restructuring plan that the two savings banks have approved.

Moody's understands that the Bank of Spain will closely monitor the restructuring plan, which entails an approximate 16.5% reduction of the new group's combined workforce, and branch closures that will affect around 22% of the new entity's existing networks. In addition, the new savings bank plans to further deleverage its balance sheet by selling some of its less profitable branches and a large part of its equity portfolio.

Notwithstanding the clear benefits of the capital injection and restructuring, Moody's believes that the new savings bank faces challenges that will have to be aligned with its Tier 1 capital ratio of 9.1%. In the rating agency's view, this capitalization level should be sufficient for the savings bank to absorb any further losses under Moody's base-case scenario. However, given Spain's uncertain macroeconomic outlook and the remaining uncertainties over its real-estate asset quality, the recapitalisation may not have sufficiently immunised the savings bank against a more conservative scenario. Although Moody's estimates that the FROB funds will cover the bulk of loan-loss provisioning requirements for the next few years, the rating agency expects that internal capital generation from recurrent sources may be limited by the very challenging domestic operating environment of subdued growth and downward margin pressures. These will arise from relatively high non-earning assets and increased funding costs that will be impacted by the high coupon payment of 7.75% on the FROB preference shares and higher market-risk premiums.

RATIONALE FOR THE DEBT RATINGS

The new entity's rating of Baa1/P-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.

Part of the extraordinary support has already been realized via the capital injection and is reflected in the higher BFSR rating at D+ compared to the D BFSR's of the preceding institutions. The debt ratings therefore incorporate a somewhat reduced likelihood of further support, which however still underpins the ratings with a three notch uplift.

In assigning the negative outlook for both the debt and deposit ratings as well as for the BFSR, Moody's has taken into account the execution risks associated with the merger process and the vulnerability of the new savings bank to a further possible deterioration of the operating environment, both of which could result in additional downward rating pressure.

POTENTIAL TRIGGERS FOR AN UPGRADE/DOWNGRADE

An upgrade of the new entity's ratings is currently unlikely given the negative outlook on its ratings. Any upward pressure on the BFSR would depend on stronger capital adequacy levels, further offsetting estimated credit losses under our anticipated scenario and a lower transition risk to a more severe scenario.

Downward rating pressure would most likely result from: (i) greater-than-expected deterioration in the new group's risk-absorption capacity, beyond the estimations assumed in Moody's stress tests; and/or (ii) deterioration of the new savings bank's adequate liquidity position.

The principal methodologies used in rating Caja de Ahorros de Galicia, Vigo, Ourense y Pontevedra 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.

Headquartered in La Coruña, Spain, Caixa Galicia reported total consolidated assets of EUR45.1 billion as of 30 September 2010.

Headquartered in Vigo, Spain, Caixanova reported total consolidated assets of EUR29.9 billion as of 30 September 2010.

The combined entity will be headquartered in Vigo and will have combined assets of EUR72.9 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
Vice President - Senior 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 de Ahorros de Galicia, Vigo, Ourense y Pontevedra
No Related Data.
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