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Rating Action:

Moody's changes outlook on Kutxabank's standalone ratings to positive, affirms ratings

02 Dec 2014

Madrid, December 02, 2014 -- Moody's Investors Service has today changed to positive from stable the outlook on the standalone bank financial strength rating (BFSR) of D (equivalent to a ba2 baseline credit assessment) of Kutxabank, S.A. The rating action reflects the bank's improving risk-absorption capacity, underpinned by sound capital ratios and stabilising asset-quality metrics that should continue to improve in 2015 as the economy in Spain (Baa2 positive) gradually recovers.

Concurrently, Moody's has affirmed the bank's Ba1 senior unsecured debt and Ba1/Not prime deposit ratings at Ba1/Not Prime. The outlook on the long-term ratings remains negative reflecting Moody's concerns following the recent adoption of the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) regulation in the EU that the likelihood of government (systemic) support for creditors may be decreasing.

A full list of affected entities and ratings is included at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR THE POSITIVE OUTLOOK ON THE STANDALONE BFSR; NEGATIVE ON SENIOR RATINGS

Moody's says that the change in the outlook of the bank's standalone ratings stems primarily from the bank's improving risk-absorption capacity. The bank's transitional Common Equity Tier 1 (CET1) ratio stood at 12.9% in Q3 2014, which is an improvement of 82 bps relative to the 12.1% reported in Q1 2014, whilst the leverage ratio reached 7.4%, the highest among Spanish banks. Furthermore, Kutxabank is gradually consolidating a declining trend in the stock of non-performing loans since early 2014, that Moody's expects will continue into 2015 as the Spanish economy gradually recovers. In changing the outlook, Moody's has also taken into account Kutxabank's demonstrated capacity to generate capital from internal resources throughout the Spanish banking crisis. Its ability to do so should further improve as asset-quality pressures continue to ease.

The negative outlook on Kutxabank's debt and deposit ratings reflects Moody's view of a trend towards a lower probability of systemic support for European banks following the recent adoption of the BRRD and the SRM regulation in the EU. In particular, this outlook reflects that the balance of risk for banks' senior unsecured creditors has shifted to the downside. This is because the legislation underlying the new resolution framework now in place explicitly includes burden-sharing with unsecured creditors as a means of reducing the public cost of bank resolutions.

RATIONALE FOR AFFIRMATION OF KUTXABANK'S RATINGS

Today's affirmation of Kutxabank's ratings has been driven by Moody's view that the expected gradual recovery of the domestic operating environment should underpin the resilience of Kutxabank's financial fundamentals in 2015. The bank's results under the ECB's Comprehensive Assessment showed sound provisioning levels under the Asset Quality Review (AQR) with a minor adjustment of 8 bps in the transitional CET 1 ratio. The stress test also highlighted large resilience to the European Banking Authority's (EBA) adverse scenario, with a transitional CET 1 of 11.88% and a fully loaded CET 1 of 10.69%.

Moody's expects bottom-line profitability to continue benefiting next year from a lower level of credit impairments as the stock of NPLs continues to decline. However, the rating agency acknowledges that Kutxabank's pre-provision income is likely to remain at modest levels because of the prevalence of very low interest rates and subdued business levels.

Moody's also notes that positive rating pressure will likely materialise once Kutxabank reduces its still high level of problematic exposures. At 118.7% of shareholders' equity and loan loss reserves, Kutxabank's problematic exposures (broadly defined as NPLs, real-estate assets and refinanced loans) remain high compared with those of its international peers, a key factor constraining the standalone BCA at ba2.

GOVERNMENT SUPPORT ASSUMPTIONS

Moody's assesses a moderate probability of support from the Spanish government, in case of need. This support assessment provides Kutxabank's long-term debt and deposit ratings with one notch of uplift from its ba2 BCA.

SUBORDINATED DEBT

In line with the change in the outlook of Kutxabank's BFSR, Moody's has changed the outlook to positive from stable of the bank's senior subordinated debt, and affirmed the rating of these instruments at Ba3.

WHAT COULD CHANGE THE RATING UP/DOWN

Kutxabank's standalone BCA could be adjusted upwards if the bank is able to (1) decline the stock of problematic assets, with a continued decline in provisioning requirements, and (2) achieve a sustainable recovery in its recurring earnings, with improved profitability metrics (i.e., pre-provision income as a percentage of risk-weighted assets (RWAs) consistently above 1.5-2%).

Downward pressure could develop on the standalone BCA from (1) an acceleration in the trend of NPL formation, both on an absolute level and in relation to the Spanish banking system average; (2) a weakening of Kutxabank's internal capital generation and risk-absorption capacity; and/or (3) any worsening in operating conditions beyond Moody's current expectations, (i.e., a broader economic recession beyond our current GDP forecast of a 1.3% GDP growth for 2014 and 1.9% for 2015).

The bank's debt and deposit ratings are linked to the standalone BCA, and any change to the BCA would likely also affect these ratings. Furthermore, any change in Moody's systemic support assumptions may directly affect Kutxabank's senior debt and deposit ratings.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Kutxabank, S.A.

.... Adjusted Baseline Credit Assessment, maintained ba2

.... Baseline Credit Assessment, maintainded ba2

.... Bank Financial Strength Rating, Affirmed D, positive

.... Long-Term Bank Deposit Rating, Affirmed Ba1, negative

.... Short-Term Bank Deposit Rating, Affirmed NP

....Multiple Seniority Medium-Term Note Program, Affirmed (P)Ba3

....Multiple Seniority Medium-Term Note Program, Affirmed (P)Ba1

....Subordinate Regular Bond/Debenture, Affirmed Ba3, positive

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1, negative

..Issuer: Caja Vital Finance B.V.

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1, negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Banks published in July 2014. 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 Jose Mori
VP - Senior Credit Officer
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 Kutxabank's standalone ratings to positive, affirms ratings
No Related Data.
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