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Rating Action:

Moody's concludes review of Portuguese banks' ratings

16 Sep 2009

Moderate effect on senior debt ratings

Madrid, September 16, 2009 -- Moody's Investors Service today confirmed the debt and deposit ratings of three Portuguese banks and downgraded the senior unsecured debt and deposit ratings of four Portuguese banks and the issuer rating of one holding company, four by one notch and one by two notches. At the same time, Moody's lowered the bank financial strength ratings (BFSRs) of seven banks -- three by one notch, three by two notches and one by three notches. This rating action concludes Moody's review for possible downgrade on several Portuguese banks, initiated on 6 April 2009.

"The rating action incorporates our expectation of a heightened probability of systemic support during the ongoing crisis, which should help to offset some of the challenges the Portuguese banks are facing, notably asset quality deterioration, pressure on profitability and selective challenges in risk management., which is evidenced by high borrower concentration levels and some related-party lending," explained Olga Cerqueira, Moody's lead analyst for Portuguese banks.

Macroeconomic indicators were revised downwards by the Bank of Portugal and it now expects GDP to contract by 3.5%. The IMF forecasts a 4% contraction in GDP and an unemployment rate of 9.6% in 2009. In Q2 2009, GDP contracted by 3.7% (a 0.3% increase q-o-q) and the unemployment rate reached 9.1%, from 7.6% at the end of 2008. Moody's notes that the modest growth of the Portuguese economy in the past five years has translated into a less abrupt downward adjustment than that suffered by other European economies that experienced stronger expansions. Nevertheless, and despite the moderate growth in lending in the past few years, household and corporate indebtedness levels in Portugal are among the highest in Europe. Together with the severe contraction in the export sector and rising unemployment, this will continue to adversely affect banks' asset quality and Moody's expects delinquencies to continue to increase. Asset quality indicators deteriorated significantly in H1 2009, with the problem loan ratio reported by the Bank of Portugal increasing to 2.8% at the end of June 2009 from 2% at the end of December 2008.

Despite almost all Portuguese banks having strengthened or being in the process of strengthening their regulatory capital levels, in line with the Bank of Portugal's recommendation that they should have Tier 1 capital ratios in excess of 8% by 30 September 2009, Moody's considers that this might not be sufficient to absorb the losses on the credit portfolios of a couple of institutions that now have BFSRs at D and D-. These entities may therefore require further capital injections.

Due to the heightened probability of systemic support in this crisis, Moody's notes that the impact of the BFSR downgrades has not translated into equivalent downgrades of the banks' senior debt and deposit ratings, with three out of seven banks having their senior ratings confirmed, three having their senior ratings downgraded by one notch and only one having their senior ratings downgraded by two notches.

The moderate downgrade of the banks' senior ratings reflects Moody's expectation that government support would be forthcoming for these institutions, given the importance of these banks to the domestic banking system, should such support become necessary. Such support has already been demonstrated by the EUR4 billion recapitalisation that the Portuguese government put in place at the end of 2008, but which has not yet been used by any institution.

RATING OF HYBRIDS

The downgrades of the hybrid securities were in line with Moody's current methodology, i.e. the magnitude of the downgrades were in line with the downgrades of the senior debt ratings for banks with BFSRs above D+ and the downgrades were widened by one notch for junior subordinated debt and preferred securities of banks now rated D+ or lower. Moody's published a Request for Comment in July 2009 on its proposed changes to banks' subordinated capital ratings. If implemented in their proposed form, the changes could lead to multi-notch downgrades of hybrids. Please refer to the Request for Comment "Moody's Proposed Changes to Bank Subordinated Capital Ratings" for further details.

RATING ACTIONS IN DETAIL

Moody's has taken the following rating actions:

CAIXA GERAL DE DEPOSITOS (CGD)

Moody's downgraded CGD's BFSR by one notch to C- (mapping to a Baa2 baseline credit assessment, BCA) from C. The outlook on the BFSR is negative. The downgrade primarily reflects CGD's lower profitability levels, pressured capitalisation under a worse-than-anticipated scenario and deterioration in its historically worse-than-average asset quality indicators. CGD's profitability has been under pressure due to: (i) the low interest environment and the slow pace of the re-pricing of its loan book; (ii) pressure from its insurance operations; (iii) its relatively sizeable portfolio of securities that have also weighted negatively on its capital; and (iv) the large increase in impairment levels. CGD's asset quality is weaker than the average for Portuguese rated banks, with a reported problem loan ratio of 2.67% in June 2009. Despite the very large component of mortgages to individuals (53%) in its domestic portfolio, expected losses (ELs) under the base and stressed scenarios are higher than the average due to Moody's anticipation of worsening asset quality, particularly in corporates and the ELs from the securities portfolios. Despite reporting Tier 1 and core capital ratios of 8.34% and 8.15% at the end of June 2009, CGD's capitalisation would come under pressure under a worse-than-anticipated scenario, underpinning Moody's negative outlook on its BFSR.

In Moody's view, CGD, as a fully government-owned bank, will also face some challenges related to its role as a fundamental financial intermediary in the depressed Portuguese economy.

CGD's LT debt and deposit ratings were downgraded to Aa2 from Aa1. The outlook on these is also negative. Short-term ratings were affirmed at Prime-1. The downgrade reflects the downgrade of the BFSR. The uplift for CGD's long-term ratings from its Baa2 BCA continues to reflect Moody's view of its full probability of systemic support, given its dominant position in Portugal and its 100% government ownership.

CGD's senior and junior subordinated debt was downgraded to Aa3 from Aa2 and its preferred securities were downgraded to A1 from Aa3. All these ratings have a negative outlook.

BANCO COMERCIAL PORTUGUES (BCP)

Moody's downgraded BCP's BFSR to D+ (mapping to a Baa3 BCA) from C+. The outlook on the BFSR is negative. The downgrade primarily reflects: (i) the sharp deterioration in BCP's asset quality, with the problem loan ratio (according to the Bank of Portugal's definition) increasing to 2.6% from 1.4% in December 2008 and the rating agency's expectation that the deterioration will continue beyond these levels; (ii) Moody's expectation of higher losses from its Polish operations and adverse pressure from its international operations (particularly Poland), which made a negligible contribution to consolidated net income in H1 2009; (iii) the relatively weak performance of BCP's retail banking operations in Portugal, which is likely to continue, with a decline of 55% in net income in H1 2009; and (iv) the relatively weak tangible common equity, due to the high component of hybrids and minority interests.

In addition, BCP continues to finance some of its shareholders, a situation inherited from the past and that Moody's acknowledges the current management wants to reduce, but that in the rating agency's view continues to pose a risk for BCP, particularly in the current economic crisis.

While BCP would remain adequately capitalised under Moody's anticipated scenario, it would very likely need more capital under the worse-than-anticipated scenario. This, together with uncertainties in some of its international operations and Moody's expectation of adverse credit trends in its domestic operations, underpin the negative outlook on the BFSR.

BCP's debt and deposit ratings were downgraded to A1 from Aa3. The outlook on these is also negative. Despite the multi-notch downgrade of the BFSR, the several notches of uplift that the debt and deposit ratings receive from the BCA reflect the key systemic importance of BCP as the largest privately owned Portuguese bank and therefore Moody's assessment of a very high probability of systemic support, which providess some stability to the rating.

Short-term ratings were affirmed at Prime-1. BCP's senior subordinated debt was downgraded to A2 from A1, with a negative outlook. BCP's Tier 1 capital instruments were downgraded to Baa1 from A2, with a negative outlook.

Furthermore, the deposit ratings of Bank Millennium were downgraded to Baa2/P-3 with negative outlook from A3/P-2. The downgrade is based on the rating action of the parent bank Banco Commercial Portugues and concludes the review for possible downgrade initiated in April 2009. The Bank financial strength rating of D was not affected.

BANCO ESPIRITO SANTO (BES)

Moody's downgraded BES's BFSR to C- (mapping to a Baa1 BCA) from C+. The outlook on the BFSR is stable. The downgrade primarily reflects: (i) BES's asset quality deterioration, with the problem loan ratio (according to the Bank of Portugal's definition) increasing to 2.09% from 1.58% in December 2008 and the worsened prospects for the corporate sector, which represents almost 70% of BES's loan book; (ii) the higher volatility of its earnings due to its relatively large appetite for market risk; (iii) Moody's expectation of continuing pressure from its operations in Spain, which account for 9% of the loan book and made an adverse contribution to net income in H1 2009; and (iv) the ongoing increase in credit impairments, which will continue to reduce bottom-line profitability.

With the €1.2 billion capital increase in April 2009, BES strengthened its capital ratios and, even under Moody's worse-than expected scenario, BES would remain modestly capitalised. Despite the rating agency's anticipation of adverse credit trends for the bank, its risk absorption capacity under Moody's scenario of more severe stress underpins the stable outlook on the BFSR.

BES's debt and deposit ratings were downgraded to A1 from Aa3. The outlook is stable. The downgrade reflects the two-notch downgrade of the BFSR. The uplift from the Baa1 BCA reflects the key systemic importance of BES for the Portuguese financial system and therefore Moody's assessment of a very high probability of systemic support.

Short-term ratings were affirmed at Prime-1. BES's senior and junior subordinated debt was downgraded by one notch to A2, with a stable outlook. BES's Tier 1 capital instruments were also downgraded by one notch to A3, with a stable outlook.

The potential impact of BES's downgrade on other rated subsidiaries will be discussed in separate press releases.

ESPÍRITO SANTO FINANCIAL GROUP (ESFG)

Moody's downgraded ESFG's issuer rating to A3, with stable outlook, from A2. The downgrade reflects the downgrade of BES to A1/P-1/C-, which is ESFG's main operating subsidiary and accounted for 90% of ESFG's operating income in H1 2009. The stable outlook is aligned with BES's stable outlook. Moody's downgraded the short-term ratings of ESFG's ECP programme to Prime-2 from Prime-1. Moody's downgraded the preferred securities to Baa2, with stable outlook, from Baa1.

BANCO BPI (BPI)

Moody's downgraded BPI's BFSR by one notch to C- (mapping to a Baa2 BCA) from C. The outlook on the BFSR is negative. The downgrade primarily reflects BPI's: (i) modest performance in its domestic operations, with a 60% drop in net income; (ii) increasing dependence on its Angolan operations to support its profitability; (iii) asset quality deterioration, with the problem loan ratio (according to Bank of Portugal's definition) increasing to 1.8% at the end of June 2009 from 1.2% at the end of 2008 (which still comparing favourably with the ratios of its main peers); (iv) relatively weak tangible common equity as result of minority interests, hybrids and some negative fair value reserves on its fixed-income portfolio; and (v) exposure to some Spanish corporates through its branch in Madrid.

Under Moody's anticipated scenario, BPI would remain adequately capitalised, but under the stressed scenario, tangible common equity would fall below minimum levels, resulting in a one-notch downgrade of the BFSR, which thus explains the negative outlook. Moody's notes that BPI has one of the lowest ELs among rated Portuguese banks, as result of its lower-than-average exposure to the construction and real estate sectors and its better-than-average asset quality indicators, but will monitor closely developments in the bank's asset quality during the remainder of 2009 and in 2010. BPI's debt and deposit ratings were confirmed at A1 and the outlook was changed to negative. The confirmation reflects the modest one-notch downgrade of the BFSR and Moody's assessment that the probability of systemic support in the event of need is very high, resulting in the debt and deposit ratings receiving a three-notch uplift from the Baa2 BCA.

Short-term ratings were affirmed at Prime-1. BPI's senior and junior subordinated debt was confirmed at A2, with a negative outlook. BPI's preferred securities were confirmed at Baa1, with a negative outlook.

BANCO SANTANDER TOTTA (BST)

Moody's downgraded BST's BFSR by one notch to C (mapping to an A3 BCA) from C+. The outlook on the BFSR is negative. The downgrade primarily reflects: (i) the deteriorating operating environment, which will continue to adversely affect asset quality -- the Bank of Portugal problem loan ratio increased to 1.24% at the end of June 2009 from 0.8% at the end of December 2008, still very low when compared with some of its lower-rated peers; (ii) the ongoing profitability pressure due to the low interest rate environment, the lower revenues from fee and commission income than in the past and higher provisioning requirements; and (iii) its relatively low tangible common-equity when compared with that of its international peers with higher BFSRs.

Both under Moody's anticipated and stressed scenarios, BST would display adequate financial fundamentals. Its resilience under the Moody's stressed scenario explains why its ratings are different to those of other Portuguese banks. The low ELs when compared with those of its domestic peers are the result of: (i) BST's exposure being confined to the loan book, as it has no securities that are stressed; (ii) its above-average asset quality indicators; and (iii) the large portion (50%) of mortgages with lower loss expectations in the loan book.

BST's debt and deposit ratings were confirmed at Aa3 and the outlook was changed to negative. The confirmation reflects the modest one-notch downgrade of the BFSR, Moody's assessment that the probability of systemic support in case of need is very high and a high probability of parental support from Santander (rated B-/Aa2/Prime-1). The negative outlook on both the BFSR and the debt and deposit ratings reflects both the weakening credit environment and the negative outlook on the parent's ratings.

Short-term ratings were affirmed at Prime-1. BST's senior and junior subordinated debt was confirmed at A1, with a negative outlook. BST's preferred securities were confirmed at A2, with a negative outlook.

CAIXA ECONOMICA MONTEPIO GERAL (Montepio)

Moody's downgraded Montepio's BFSR to D (mapping to a Ba2 BCA) from C- (mapping to a Baa2 BCA). The outlook on the BFSR is negative. The downgrade primarily reflects: (i) the sharp deterioration in asset quality indicators with the Bank of Portugal problem loan ratio increasing to 3.96% at the end of June 2009 from 2.90% at the end of December 2008; (ii) the low risk absorption capacity, with capital levels very strained under Moody's anticipated scenario; and (iii) high exposure to the real estate and construction sectors, which account for 25% of the loan portfolio.

Montepio has a strong franchise in the mortgage and construction business, with mortgages to individuals accounting for 59% of the loan book and construction and real estate accounting for 25% of the loan book. Montepio's ELs are high when compared with those of its domestic peers due to its worse-than-average asset quality indicators (3.96% versus 2.8% for the system) and its high exposure to the real estate and construction sectors. Consequently, despite a EUR100 million capital increase in 2009, which boosted the Tier 1 ratio to 8.7%, Montepio would display weak financial fundamentals under Moody's anticipated scenario.

In H1 2009, Montepio reported a significant increase (+62%) in pre-provision income as result of good growth in net interest income, some extraordinary gains and several cost-cutting initiatives. That notwithstanding, credit impairments continue to rise and the ability to generate internal capital through recurrent earnings may not, in Moody's view, be sufficient to absorb the credit losses on its loan and securities portfolios. Under Moody's worse-than-anticipated scenario, Montepio would display a significant shortfall in capital, which explains the negative outlook on the BFSR.

Montepio's debt and deposit ratings were downgraded to Baa1 from A2, with a negative outlook, driven by the downgrade of the BFSR and incorporating Moody's assessment of a high probability of systemic support, which results in several notches of uplift from the Ba2 BCA.

Short-term ratings were downgraded to Prime-2 from Prime-1. Montepio's senior subordinated debt was downgraded to Baa2, with a negative outlook, and the junior subordinated debt was downgraded to Baa3, with a negative outlook.

BANIF

Moody's downgraded Banif's BFSR to D- (mapping to a Ba3 BCA) from D+ (mapping to a Baa3 BCA), with a negative outlook. The downgrade primarily reflects: (i) the bank's low capitalisation level -- with Tier 1 and core capital ratios of 7.7% and 6.2% at the end of June 2009 -- and that of its group (with a Tier 1 capital of 6.46%), when compared with the ELs on its loan and securities portfolios --under Moody's anticipated scenario, capital levels, particularly tangible common equity, could be very pressurised; (ii) the significant decline in profitability in the past 18 months, with no profits at the bank level in H1 2009; (iii) the deterioration in asset quality indicators with the Bank of Portugal problem loan ratio increasing to 2.79% at the end of June 2009 from 1.84% at the end of December 2008.

Banif Group is in the process of strengthening its capital ratios through the acquisition of a well-capitalised car finance company and a capital increase from its major shareholders, which it intends to strengthen its solvency levels at the bank level. Despite the expected capital increase, Moody's considers that the risks that this operation indirectly brings to Banif -- it could be required to support the company in the event of need -- offset the capital that this transaction brings to the group; this is already factored into the BFSR. The downgrade also incorporates Banif's high level of related-party lending to several group companies. Moody's acknowledges that lending to group companies is not a new issue, but could, particularly given the current difficult times, further pressurise Banif's already weak solvency levels.

Under Moody's worse-than-anticipated scenario, Banif displays a significant shortfall in capital, which underpins both its D- BFSR and the negative outlook. Banif's debt and deposit ratings were confirmed at Baa1 and the outlook was changed to negative. Despite the two-notch downgrade of the BFSR, Moody's assesses a high probability of systemic support for Banif given its very strong franchise in the Azores and Madeira and its national presence. This results in the ratings receiving several notches of uplift from the Ba3 BCA. Short-term ratings were confirmed at Prime-2. Banif's senior and junior subordinated debt was confirmed at Baa2 and Baa3, with negative outlook, respectively, and its preferred securities were confirmed at Ba1, with negative outlook. The potential impact of Banif's downgrade on other rated subsidiaries will be discussed in separate press releases.

LAST RATING ACTIONS AND METHODOLOGIES

Moody's last rating action on Caixa Geral de Depositos was on 6 April 2009, when the bank's ratings were placed on review for possible downgrade.

Moody's last rating action on Banco Comercial Portugues was on 6 April 2009, when the bank's ratings were placed on review for possible downgrade.

Moody's last rating action on Banco Espirito Santo was on 6 April 2009, when the bank's ratings were placed on review for possible downgrade.

Moody's last rating action on Espirito Santo Financial Group was on 6 April 2009, when the issuer rating was downgraded and placed on review for further possible downgrade. Moody's last rating action on Banco BPI was on 6 April 2009, when the bank's ratings were placed on review for possible downgrade.

Moody's last rating action on Banco Santander Totta was on 6 April 2009, when the bank's ratings were placed on review for possible downgrade.

Moody's last rating action on Caixa Economica Montepio Geral was on 6 April 2009, when the bank's ratings were placed on review for possible downgrade.

Moody's last rating action on Banif was on 6 April 2009, when the bank's ratings were downgraded and placed on review for further possible downgrade.

Moody's last rating action on Bank Millennium was on 7 April 2009 when the A3 and Prime-2 long- and short-term deposit ratings were placed on review for possible downgrade.

The principal methodology used in rating these issuers were the "Bank Financial Strength Ratings: Global Methodology", published in February 2007 and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", published in March 2007, and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Lisbon, Caixa Geral de Depositos had (unaudited) total assets of EUR118.2 billion at the end of June 2009.

Headquartered in Oporto, Banco Comercial Portugues had (unaudited) total assets of EUR93.8 billion at the end of June 2009.

Headquartered in Lisbon, Banco Espirito Santo had total assets of EUR81.4 billion at the end of June 2009.

Headquartered in Luxembourg, Espirito Santo Financial Group had (unaudited) total assets of EUR84.7 billion at the end of June 2009.

Headquartered in Lisbon, Banco BPI had total assets of EUR43.5 billion at the end of June 2009.

Headquartered in Lisbon, Banco Santander Totta had total assets of EUR43.5 billion at the end of June 2009.

Headquartered in Lisbon, Caixa Economica Montepio Geral had total assets of EUR17.3 billion at the end of June 2009.

Headquartered in Funchal, Banif SA had (unaudited) total assets of EUR11.1 billion at the end of June 2009.

Headquartered in Warsaw, Poland, Bank Millennium reported IFRS consolidated total assets of PLN47.1 billion (EUR11.4 billion) and net profit of PLN413 million (EUR100.2 million) at the end of December 2008.

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

Madrid
Olga Cerqueira
Analyst
Financial Institutions Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's concludes review of Portuguese banks' ratings
No Related Data.
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Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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