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Rating Action:

Moody's changes outlook on Banco Santander's Baa2 ratings to stable from negative; affirms ratings

11 Feb 2014

Madrid, February 11, 2014 -- Moody's Investor's Service has today changed to stable from negative the outlook on Banco Santander S.A. (Spain)'s (Santander) Baa2 long-term senior debt and deposit ratings. Concurrently, Moody's affirmed these ratings. The change in outlook and affirmation of the Baa2 ratings follow (1) the affirmation of the bank's standalone bank financial strength rating (BFSR) at C- (equivalent to a baa2 baseline credit assessment (BCA)) with a stable outlook; (2) the gradual economic recovery in Spain; and (3) Moody's view that the group's risk-absorption capacity remains resilient despite ongoing asset-quality pressures.

The bank's short-term ratings were affirmed at Prime-2.

RATINGS RATIONALE

--- RATIONALE FOR CHANGING THE OUTLOOK TO STABLE

The change in outlook of Banco Santander's standalone C- BFSR to stable from negative prompted the outlook change on the long-term ratings. This reflects Moody's view that the downside risks to the bank's credit profile have substantially decreased because of the gradual economic improvement in Spain. Moody's takes comfort from Santander's strong earnings diversification, which will continue to offset expected ongoing negative asset-quality trends, as well as from the group's improved capitalisation levels and its ability to generate capital in times of stress. This should make Santander's credit profile sufficiently resilient against any further asset-quality pressures.

--- RATIONALE FOR AFFIRMATION OF SANTANDER's RATINGS

Today's affirmation of Santander's ratings has been driven by Moody's view that the group's risk absorption capacity remains resilient despite ongoing asset-quality pressures. At end-December 2013, Santander's problem-loan ratio increased to 5.64%, compared with 4.54% at end-December 2012, which was mainly driven by the increased level of problem loans in Spain. The rating agency notes that the deterioration of the Spanish loan book not only affects those exposures related to the real-estate and construction sectors, but also loans extended to companies in other economic sectors. Despite the negative credit trends in the domestic market, Santander has been able to cope with increased provisioning efforts while maintaining very high pre-provision profitability metrics when compared to international peers. At around 72%of shareholders equity and loan loss reserves, the group's broadly defined problematic exposures (measured as NPLs, real-estate assets and refinanced loans) are nevertheless high, a key factor underpinning a standalone rating in the baa range.

In affirming Santander's standalone BCA, Moody's has incorporated the weakening trend in pre-provision income during 2013, a function of the low interest rates and subdued business growth in the group's mature markets. The rating agency expects that bottom line profitability will start benefiting from a lower level of loan loss provisions, as the pace of deterioration of the domestic loan book is likely to decelerate in line with the expected stabilisation of the Spanish economy (i.e., Moody's announced on 04 December 2013 its forecast of 0.7% GDP growth in 2014 for Spain).

Moody's acknowledges Santander's ability to strengthen its capital ratios despite the group's strong provisioning effort. This highlights its capacity to reinforce its solvency both through retained profits and the monetisation of capital gains from investments in its subsidiaries, and underpins its resilience to ongoing asset-quality pressures. At end-December 2013, Santander's core capital ratio (on a consolidated basis) increased to 11.71% up from 10.33% at end-2012.

Santander's debt ratings have been affirmed at Baa2, in line with the affirmation of its BCA at baa2. Santander's standalone BCA is rated one-notch higher than the Spanish sovereign due to (1) the high degree of geographical diversification of its balance sheet and income sources; and (2) its manageable level of direct exposure to Spanish sovereign and sub-sovereign debt relative to its Tier 1 capital, including under stress scenarios. As a result, Moody's believes that Santander's limited direct linkages to sovereign risk justify a one-notch difference (see Moody's Sector Comment "How Sovereign Credit Quality May Affect Other Ratings" published 13 February, 2012).

--- SUBORDINATED DEBT AND HYBRID RATINGS

In line with the affirmation of Santander's BFSR, Moody's has today affirmed the bank's senior subordinated debt ratings at Baa3, its junior subordinated debt ratings at Ba1(hyb) and its preference shares ratings at Ba3 (hyb). The outlook on these ratings has also been changed to stable from negative.

WHAT COULD MOVE THE RATING UP/DOWN

Any upward pressure on Santander's ratings is unlikely as long as the Spanish government's bond rating remains a Baa3 given that the bank is already rated one notch above Spain's government bond rating. However, even were the sovereign to be upgraded, Santander's standalone rating would need to balance the positive rating drivers stemming from its strong and relatively resilient earnings generation of its international activities with the continuing pressure stemming from its high stock of non-performing loans (including real estate and refinanced loans) and weakened profitability in its domestic market.

Downward pressure on Santander's BCA could develop following (1) inadequate risk-absorption capacity (i.e., recurring earnings, excess capital and loan loss reserves) compared with Moody's estimated credit losses; (2) failure to withstand Moody's liquidity stress test; (3) a lower share of recurring earnings; or (4) increased exposure to its domestic market (including sovereign exposure) that would no longer justify the current credit de-linkage with Spain's rating.

As the bank's debt and deposit ratings are linked to the standalone BCA, any change to the BCA would likely also affect these ratings.

Outlooks have been changed to stable from negative.

Affirmations:

..Issuer: Banco Espanol de Credito, S.A. (Banesto)

....Pref. Stock Non-cumulative Preferred Stock, Affirmed Ba3(hyb)

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Banco Santander S.A. (Spain)

.... Adjusted Baseline Credit Assessment, Affirmed baa2

.... Baseline Credit Assessment, Affirmed baa2

.... Bank Financial Strength Rating, Affirmed C-

.... Issuer Rating, Affirmed Baa2

.... Deposit Rating, Affirmed P-2

....Multiple Seniority Medium-Term Note Program, Affirmed (P)Baa3

....Multiple Seniority Medium-Term Note Program, Affirmed (P)Baa2

....Subordinate Regular Bond/Debenture, Affirmed Baa3

....Senior Unsecured Deposit Rating, Affirmed Baa2

..Issuer: Banco Santander, S.A., London Branch

....Senior Unsecured Deposit Program, Affirmed (P)P-2

....Senior Unsecured Deposit Program, Affirmed (P)Baa2

..Issuer: Banesto Banco de Emisiones, S.A.

....Subordinate Regular Bond/Debenture, Affirmed Baa3

..Issuer: Banesto Financial Products PLC

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Banesto Holdings, Ltd.

....Pref. Stock Non-cumulative Preferred Stock, Affirmed Ba3(hyb)

..Issuer: Santander Central Hispano Fin. Serv. Ltd

....Junior Subordinated Regular Bond/Debenture, Affirmed Ba1(hyb)

..Issuer: Santander Central Hispano International Ltd

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

..Issuer: Santander Central Hispano Issuances Ltd.

....Multiple Seniority Medium-Term Note Program, Affirmed (P)Baa3

....Subordinate Regular Bond/Debenture, Affirmed Baa3

....Subordinate Shelf, Affirmed (P)Baa3

..Issuer: Santander Commercial Paper, S.A. Unipersonal

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Santander Finance Capital, S.A. Unipersonal

....Pref. Stock Preferred Stock, Affirmed Ba3(hyb)

....Pref. Stock Non-cumulative Preferred Stock, Affirmed Ba3(hyb)

..Issuer: Santander Finance Preferred, S.A. Unipersonal

....Pref. Stock Non-cumulative Preferred Stock, Affirmed Ba3(hyb)

..Issuer: Santander International Preferred, S.A.U.

....Pref. Stock Non-cumulative Preferred Stock, Affirmed Ba3(hyb)

..Issuer: Santander Int'l Debt, S.A. Unipersonal

....Senior Unsecured Medium-Term Note Program, Affirmed (P)P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Santander Issuances S.A. Unipersonal

....Subordinate Medium-Term Note Program, Affirmed (P)Baa3

....Subordinate Regular Bond/Debenture, Affirmed Baa3

..Issuer: Santander Perpetual, S.A. Unipersonal

....Junior Subordinated Regular Bond/Debenture, Affirmed Ba1(hyb)

..Issuer: Santander US Debt, S.A. Unipersonal

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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 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
SUBSCRIBERS: 44 20 7772 5454

Johannes Felix Wassenberg
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

Moody's changes outlook on Banco Santander's Baa2 ratings to stable from negative; affirms ratings
No Related Data.
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