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Rating Action:

Moody's changes outlook on Banco Popular's ratings to negative from positive; affirms all ratings

15 Mar 2017

Madrid, March 15, 2017 -- Moody's Investors Service has today affirmed Banco Popular Espanol, S.A.'s (Banco Popular) long- and short-term deposit ratings at Ba1/Not-Prime and its long- and short-term senior unsecured programme debt ratings at (P)Ba2/(P)Not-Prime. Concurrently, Moody's has affirmed the Ba2 long-term senior unsecured debt ratings of Banco Popular's backed entities. Moody's has also changed the outlook on the long-term deposit and backed debt ratings to negative from positive.

Today's rating action follows the publication by Banco Popular of its 2016 results, witnessing slower progress towards its strategic goals for 2016-2018 than anticipated by Moody's. Despite a capital raise and increase in provisioning, the bank fell short of its target to accelerate the disposal of problematic assets and to significantly increase its problem loan coverage. In Moody's opinion, Banco Popular is now under pressure to accelerate the execution of its de-risking strategy, in the face of ongoing significant challenges to asset quality and its risk absorption capacity. The bank's new management is currently reviewing the existing asset disposal plan and may redefine its strategic targets, and seek alternative measures to enhance the bank's risk profile.

The negative outlook on the long-term deposit and backed debt ratings captures the near-term strategic challenges and pressures on Banco Popular's credit profile and reflects the downward rating pressure that could develop if the bank does not meet Moody's expectation regarding further balance sheet deleveraging, which could result in higher loss given failure and therefore lower notches of rating uplift for these instruments under Moody's Advanced Loss Given Failure (LGF) analysis.

All other ratings of Banco Popular and its supported entities have also been affirmed. Banco Popular's Counterparty Risk Assessment was also affirmed at Baa3(cr)/Prime-3(cr).

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

For further details, please see "FAQ: Slow Progress Towards Strategic Targets Triggers Negative Outlook" (http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1057971)

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE STANDALONE CREDIT PROFILE

Today's affirmation of the b1 BCA and adjusted BCA reflects Banco Popular's unchanged weak risk absorption capacity, measured as the bank's non-performing assets (NPAs, defined as non-performing loans and real estate assets) to balance-sheet cushions, as well as the bank's ongoing significant asset quality challenges and its deteriorated bottom-line profitability. The bank's BCA also reflects Banco Popular's strong franchise in the profitable small and medium-sized enterprises (SME) market and its adequate liquidity and funding profile which is mainly composed of retail deposits (66% of total funding at end-December 2016).

Since the announcement of the new strategic targets in mid-2016, Banco Popular has made little progress in its NPAs reduction plan. The bank's NPA ratio stood at a very high 32% at the end of 2016, up from 30% a year earlier and largely exceeded the system average of around 16% (latest data available as of end-June 2016). Furthermore, when aggregating refinanced loans which are not already captured in the NPA ratio, the overall ratio increases to 36%, indicating the magnitude of the existing balance-sheet pressures.

While Banco Popular targeted a NPA coverage ratio of 50% in 2016 (up from 38% a year earlier), the rise in NPAs as well as related provisions raised the coverage ratio to only 45% (compared to system average of 48% as of 1H 2016). The bank reported provisions of EUR5.7 billion for 2016, more than three times those booked in 2015, and ahead of its stated target of EUR4.7 billion. Despite this higher-than-expected provisioning effort, Moody's notes that Banco Popular's risk absorption capacity, measured as the ratio of the bank's NPAs to its balance sheet cushions that include shareholders' equity and reserves, has remained virtually unchanged at strained levels (133% at end-December 2016).

Due to the magnitude of provisions booked in 2016, Banco Popular reported a sizeable loss for the year of EUR3.5 billion, which largely exceeded the EUR2.5 billion capital raised in the market in 2016 and decreased the bank's capital ratios. Banco Popular reported a phased-in Common Equity Tier 1 (CET1) ratio of 12.1% and a total capital ratio (TCR) of 13.1% at the end of 2016, down from 13.1% and 13.8% respectively a year earlier. Moody's estimates that the bank has a buffer to regulatory thresholds of 424 basis points against the phased-in CET1 ratio, and 177 basis points for TCR, equivalent to €2.7 billion and €1.1 billion respectively.

Having missed 2016 targets, Banco Popular is now under pressure to accelerate the execution of its de-risking strategy. Moody's acknowledges that the increase in Banco Popular's NPA coverage levels is supportive of the bank's efforts to reduce NPAs, although the rating agency notes that this coverage remains below that of some domestic peers. As a result, Moody's believes that it will still be challenging for Banco Popular to sell parts of its NPA portfolios without potentially additional haircuts.

RATIONALE FOR THE AFFIRMATION OF THE LONG-TERM SENIOR RATINGS

The affirmation of the long-term deposit and backed senior unsecured debt ratings at Ba1 and Ba2 respectively reflect: (1) the affirmation of the bank's b1 BCA and adjusted BCA; (2) the result of the rating agency's Advanced Loss-Given Failure (LGF) analysis, which results in an unchanged two notches of uplift for the deposit ratings and one notch of uplift for the backed senior debt ratings; and (3) Moody's assessment of moderate probability of government support for Banco Popular, which results in an unchanged further one notch of uplift for both the deposit and the backed senior debt ratings.

The changes in Banco Popular's liability structure over the last year have narrowed the balance-sheet cushion for deposits and senior debt. These changes could exert downward pressure on the ratings of these instruments if the size of the balance-sheet is not reduced as expected, which would result in a higher loss given failure for these instruments.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook on the long-term deposit and backed debt ratings reflects the negative pressure that could be exerted on the bank's ratings if the bank fails to accelerate its de-risking strategy, consequently reducing the level of NPAs in its balance sheet and improving its risk absorption capacity.

Banco Popular's negative outlook also reflects the downward pressure on the bank's ratings if it does not meet Moody's expectation regarding its liability structure and balance sheet deleveraging.

RATIONALE FOR AFFIRMING THE CR ASSESSMENT

As part of today's rating actions, Moody's has also affirmed at Baa3(cr)/Prime-3(cr) the CR Assessment of Banco Popular, four notches above the adjusted BCA of b1. The CR Assessment is driven by the bank's b1 adjusted BCA, the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 16% of tangible banking assets and a moderate likelihood of systemic support.

WHAT COULD CHANGE THE RATING UP/DOWN

An upgrade of Banco Popular's ratings is currently unlikely given the negative outlook. However, the bank's BCA could be upgraded as a consequence of: (1) a significant improvement of asset risk indicators, namely a material reduction of the stock of problematic assets, coupled with an enhanced risk-absorption capacity; and (2) a sustained recovery of recurrent profitability levels.

Downward pressure could be exerted on Banco Popular's BCA if (1) the bank fails to improve its risk-absorption capacity due to continued asset quality weakening and/or additional provisioning efforts in excess of its organic and inorganic capital generation capacity; and/or (2) the bank's liquidity profile deteriorates significantly.

Any change to the BCA would likely also affect debt and deposit ratings, as they are linked to the BCA. The deposit and backed senior unsecured ratings could also change as a result of changes in the loss-given-failure faced by these securities. In particular, the long-term deposit and backed debt ratings could be downgraded if the bank does not reduce the size of its balance-sheet as expected.

In addition, any changes to our considerations of government support could trigger downward pressure on the banks deposit and debt ratings.

LIST OF AFFECTED RATINGS

Issuer: Banco Popular Espanol, S.A.

..Affirmations:

....Long-term Counterparty Risk Assessment, affirmed Baa3(cr)

....Short-term Counterparty Risk Assessment, affirmed P-3(cr)

....Long-term Deposit Ratings, affirmed Ba1, outlook changed to Negative from Positive

....Short-term Deposit Ratings, affirmed NP

....Senior Unsecured Medium-Term Note Program, affirmed (P)Ba2

....Subordinate Regular Bond/Debenture, affirmed B2

....Subordinate Medium-Term Note Program, affirmed (P)B2

....Preferred Stock Non-cumulative, affirmed Caa1(hyb)

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

....Commercial Paper, affirmed NP

....Adjusted Baseline Credit Assessment, affirmed b1

....Baseline Credit Assessment, Affirmed b1

..Outlook Action:

....Outlook changed to Negative from Positive

Issuer: BPE Finance International Limited

..Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed Ba2, outlook changed to Negative from Positive

..Outlook Action:

....Outlook changed to Negative from Positive

Issuer: BPE Financiaciones, S.A.

..Affirmations:

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)Ba2

....Backed Subordinate Medium-Term Note Program, affirmed (P)B2

....Backed Senior Unsecured Regular Bond/Debenture, affirmed Ba2, outlook changed to Negative from Positive

....Backed Subordinate Regular Bond/Debenture, affirmed B2

..Outlook Action:

....Outlook changed to Negative from Positive

Issuer: BPE Preference International Limited

..Affirmation:

....Backed Preferred Stock Non-cumulative, affirmed Caa1(hyb)

..Outlook Action:

....No Outlook assigned

Issuer: Banco Pastor, S.A.

..Affirmations:

....Backed Subordinate Regular Bond/Debenture, affirmed B2

....Backed Junior Subordinated Regular Bond/Debenture, affirmed B3(hyb)

..Outlook Action:

....No Outlook assigned

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

..Affirmations:

....Backed Preferred Stock Non-cumulative, affirmed Caa1(hyb)

..Outlook Action:

....No Outlook assigned

Issuer: Popular Capital, S.A.

....Backed Preferred Stock Non-cumulative, affirmed Caa1(hyb)

..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.

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 Vinuela
Asst Vice President - Analyst
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
SUBSCRIBERS: 44 20 7772 5454

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

No Related Data.
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