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Rating Action:

Moody's concludes reviews on six Portuguese banks' ratings

11 Jun 2015

Actions follow conclusion of methodology-related reviews and revision of government support considerations

Madrid, June 11, 2015 -- Moody's Investors Service has concluded its reviews on the ratings of six banks in Portugal. The reviews were initiated on 17 March 2015 (see press release at https://www.moodys.com/research/--PR_321005), following the publication of Moody's new bank rating methodology and revisions to Moody's government support assumptions for these banks.

In light of the new banking methodology, Moody's rating actions generally reflect the following considerations: (1) the "Moderate" macro profile of Portugal (Ba1 stable); (2) stabilizing credit trends, though the banks' core financial fundamentals are still weak; (3) the protections offered to depositors and senior creditors as assessed by Moody's Advanced Loss Given Failure (LGF) analysis, reflecting the benefit of instrument volume and subordination protecting creditors from losses in the event of resolution; and (4) Moody's view of a decline in the likelihood of government support for Portuguese banks.

Among the rating actions that Moody's has taken on the Portuguese banks are the following:

- 2 long-term bank deposit ratings upgraded, 2 confirmed and 2 downgraded

- 1 short-term bank deposit rating upgraded and 5 affirmed

- 1 bank senior unsecured debt rating upgraded, 3 confirmed and 1 downgraded

- 1 short-term bank senior debt rating confirmed and 4 affirmed

- 3 baseline credit assessments (BCAs) upgraded and 3 affirmed

Moody's has also assigned Counterparty Risk (CR) Assessments to the operating subsidiaries of six Portuguese banking groups and their branches, in line with its new bank rating methodology.

Moody's has withdrawn the outlooks on all junior instrument ratings and subordinated debt ratings for its own business reasons. Please refer to Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

Outlooks, which provide an opinion on the likely rating direction over the medium term, are now assigned only to long-term deposit and issuer/senior unsecured debt ratings.

Moody's has assigned stable outlooks to the deposit and senior debt ratings of all affected banks, with the exception of a negative outlook on the senior debt ratings of Caixa Geral de Depositos S.A (CGD) and on the deposit ratings of Banif -- Banco Internacional do Funchal, S.A. (Banif).

Today's rating action excludes Novo Banco S.A., whose senior debt and deposit ratings were placed on review with direction uncertain on 28 May 2015 (https://www.moodys.com/research/--PR_326203), and for which Moody's cannot conclude its LGF analysis until the bank discloses 2014 audited financial statements. Moody's will assign a CR Assessment to Novo Banco once it concludes its LGF analysis.

Please click on the following link to access the full list of affected credit ratings. This list is an integral part of this press release and identifies each affected issuer:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_182231

Please refer to this link for the new methodology:

http://www.moodys.com/viewresearchdoc.aspx?docid=PR_320662

RATINGS RATIONALE

The new methodology includes a number of elements that Moody's has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the crisis and the fundamental shift in the banking industry and its regulation.

(1) THE "MODERATE" MACRO PROFILE OF PORTUGAL

Portuguese banks' operations have a strong domestic focus, so they are constrained by Portugal's improving, albeit persistently challenging, macroeconomic environment, characterised by very high public and private sector indebtedness, weak economic growth outlook, as well as moderate susceptibility to event risk.

Large Portuguese banks display some geographic diversification and therefore are exposed to macro variables across various countries and regions.

(2) BANKS DISPLAY WEAK CORE FINANCIAL FUNDAMENTALS

The Portuguese banks' BCAs (average asset-weighted BCA is b3) reflect their very modest core financial ratios, including (i) a high level of problem loans in aggregate; (ii) improved, albeit still relatively weak, loss absorption capacity as solvency remains pressured by very weak core profitability metrics; and (iii) improved liquidity metrics thanks to continued balance sheet deleveraging and regained market access.

However, the banks' BCAs range widely from caa3 to ba3, with the differences reflecting the long-term execution of each bank's restructuring and recapitalization plans, which the EU and Portuguese authorities approved in 2012, and which has resulted in varying degrees of improvement in the banks' financial fundamentals, particularly for those that received extensive public sector support or have been forced to implement drastic restructuring measures. In addition, the Portuguese banks' BCAs reflect Moody's assessment of their resilience to the challenges of the domestic operating environment and their capacity to cope with such pressures, namely by improving or preserving their capital cushions (see below for the analytical considerations for the banks).

(3) PROTECTION OFFERED TO SENIOR CREDITORS, AS CAPTURED BY MOODY'S ADVANCED LGF LIABILITY ANALYSIS

Portuguese banks are subject to the European Bank Resolution and Recovery Directive (BRRD), which Moody's considers to be an Operational Resolution Regime. Accordingly, Moody's applies its Advanced LGF analysis to these banks' liability structures, thereby mostly applying its standard assumptions. These assumptions include a residual tangible common equity of 3%, losses post-failure of 8% of tangible banking assets, a 25% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, and a 25% probability of deposits being preferred to senior unsecured debt. Because Moody's assumes that the country's deposit base is essentially retail in nature, it considers a proportion of 10% of junior wholesale deposits below the estimated EU-wide average of 26% for the affected banks, except for Banco Santander Totta. The Advanced LGF analysis results generally in "low" to "moderate" loss-given-failure for long-term junior deposits as well as senior debt ratings, reflecting the banks' substantial volume of deposit funding as well as the amount of senior debt and securities more subordinated to it.

(4) DECLINE IN THE LIKELIHOOD OF GOVERNMENT SUPPORT

Deposit and senior unsecured debt ratings now range from Baa3 to Caa2. In addition to the effects of the new methodology on the banks' ratings, Moody's has lowered its expectations about the degree of government support for banks in Portugal. The main trigger for this reassessment is the introduction of the BRRD in the European Union in January 2015. Following Moody's revised assumptions, only three Portuguese banks' ratings continue to benefit from government support uplift. However, in some cases, the negative effect on the Portuguese banks' ratings from a decline in the expectation of government support has been counterbalanced by the low loss assumptions under the new LGF framework, but for other banks it has caused a downgrade of their deposit and senior debt ratings.

OUTLOOK RATIONALE

Almost all Portuguese banks affected by today's rating actions have a stable outlook on their deposit and senior unsecured debt/issuer ratings, reflecting Moody's expectations that the banks' credit profiles will remain resilient at current levels despite further asset quality and profitability pressures, which should nevertheless ease relative to 2014 performance.

Moody's has assigned a negative outlook to the B1 senior debt ratings of CGD and to the Caa2 deposit ratings of Banif. The assigned ratings reflect Moody's expectations that further moderate progress in the ongoing balance sheet deleveraging through 2015 will result in lower loss-given-failure for the banks' senior debt and deposits in the near term. However, the negative outlook indicates potential ratings pressure if the banks' deleveraging efforts prove insufficient to achieve the anticipated level of subordination and hence expected loss severity in the event of a resolution, which support the current senior debt or deposit rating levels.

--- BANK-SPECIFIC DRIVERS

-- Caixa Geral de Depositos S.A. (CGD)

The downgrade of the bank's long-term deposit and senior debt ratings to B1 from Ba3 incorporates a one-notch upgrade of the BCA and adjusted BCA to b3, as well as the Advanced LGF analysis that provides one notch of uplift from the bank's adjusted BCA, together partly offsetting reduced government support assumptions.

Moody's upgraded CGD's standalone BCA to b3, recognizing the bank's sound liquidity and appropriate funding position as the country's largest deposit-taking institution with regained market access. At the same time, the BCA remains constrained by a weak solvency consideration. In particular, the bank displays modest loss absorption capacity that is constrained by very weak revenue generation capacity and lack of flexibility to raise capital outside the support delivered by its owner, the Portuguese government. The BCA also reflects CGD's weakened asset quality indicators, although provisioning costs will likely decelerate as the formation of new problem loans slows against a backdrop of modest improvement in the Portuguese economy.

Although CGD is government-owned, Moody's has reduced its expectations for the possibility of government support for CGD because of the severe restrictions imposed by the BRRD, under which authorities can use public monies to fund a bank recapitalization. However, because CGD is the largest banking institution in the country, national authorities are likely to regard it as particularly important in the domestic market. As a result of both considerations, Moody's has lowered its government support assumptions for CGD to "moderate", leading to one notch of support uplift for the senior debt and deposit ratings, from "very high" and four notches previously.

The outlook on CGD's long-term deposit ratings is stable while it is negative on the long-term senior debt ratings, reflecting downward pressures from slower-than-anticipated balance sheet deleveraging and hence lower volumes of subordination for the benefit of senior creditors.

-- Banco Comercial Portugues S.A. (BCP)

The confirmation of the bank's long-term deposit and senior debt ratings at B1 with a stable outlook incorporates a one-notch upgrade of the BCA and adjusted BCA to caa1, as well as the Advanced LGF analysis that provides two notches of uplift from the bank's adjusted BCA, thereby counterbalancing the reduced government support assumptions.

In upgrading BCP's standalone BCA, Moody's has taken into account (1) the bank's overall still weak risk absorption capacity despite the broad public-sector support that it received in 2012; (2) improving, albeit still weak, profitability ratios; and (3) stabilizing asset risk trends, although BCP still displays a high level of problematic assets in its domestic portfolio. The BCA also reflects BCP's improved liquidity position, although reliance on ECB funding is still high.

The Advanced LGF analysis provides two notches of uplift from the bank's caa1 adjusted BCA given the very low loss-given-failure for BCP's deposit and senior debt obligations, which reflects the substantial volume of respective liabilities and the amount of subordinated debt.

Moody's reduced the government support assumptions for the bank to "moderate", leading to one notch of uplift from support for the senior debt and deposit ratings, from "very high" and four notches previously. The reduction reflects the expected implementation of resolution legislation and Moody's view that national authorities will recognize BCP as domestically important given that it is the second largest bank in the country.

-- Banco BPI S.A. (BPI)

The confirmation of BPI's long-term deposit and senior debt ratings at Ba3 with a stable outlook reflects (1) the affirmation of the bank's b1 BCA and the confirmation of its adjusted BCA at the same level, (2) the incorporation of the Advanced LGF analysis that provides no uplift from the bank's adjusted BCA, as well as (3) the maintenance of one notch of government support uplift.

BPI's affirmed BCA of b1 reflects the bank's weak risk-absorption capacity and its weak profitability levels. BPI's BCA also reflects the bank's solid market positioning in Portugal; its stabilising asset quality metrics, which compare better than the Portuguese system average; and its adequate liquidity profile.

Under Moody's Advanced LGF analysis, BPI's long-term deposit and senior debt ratings take into account their moderate loss-given-failure because of the group's relatively low volume of subordinated and senior unsecured debt outstanding, leading to no uplift from the bank's b1 adjusted BCA.

BPI's Ba3 long-term deposit and senior debt ratings continue to benefit from one notch of government support uplift despite Moody's revision of government support expectations to "moderate" from "high" for the third-largest banking institution in Portugal.

On 19 February 2015, Spain's Caixabank announced the launching of a public tender offer for the acquisition of the 55.9% of BPI's share capital that it does not already own. If this tender offer is successfully completed, BPI's senior unsecured debt and deposit ratings could benefit from Caixabank's parental support.

-- Banco Santander Totta S.A. (BST)

The upgrade of the bank's deposit ratings to Baa3/Prime-3 and the confirmation of its senior debt ratings at Ba1/Not Prime reflect the affirmation of the bank's ba3 BCA and its ba1 adjusted BCA after considering affiliate support. The rating actions also incorporate Moody's Advanced LGF analysis that provides one notch of uplift from the bank's adjusted BCA of ba1 for the deposit ratings and no uplift for the senior debt ratings.

The affirmation of BST's standalone ba3 BCA reflects the bank's resilient asset quality and profitability despite ongoing challenges for Portuguese banks and the bank's improved liquidity profile thanks to ongoing deleveraging. BST's BCA also reflects Moody's weak capital assessment given the significant burden of deferred tax assets. Moody's believes that the probability of affiliate support from its parent, Banco Santander S.A. (Baa1 review for upgrade, baa1), is high. As a result of Moody's support assessment, the rating agency affirmed BST's adjusted BCA at ba1, two notches above its BCA.

The upgrade of BST's deposit ratings reflects the low loss-given-failure for the bank's wholesale deposits because of the considerable volumes of deposits and subordination to it, leading to a one-notch uplift from its ba1 adjusted BCA. Conversely, BST's senior unsecured ratings take into account their moderate loss-given-failure, which reflects very limited volumes of senior debt outstanding, resulting in no further uplift.

-- Caixa Economica Montepio Geral (Montepio)

The upgrade of Montepio's long-term deposit and senior debt ratings to B1 with a stable outlook incorporates the affirmation of the bank's b3 BCA and adjusted BCA, as well as the Advanced LGF analysis that provides two notches of uplift from the bank's adjusted BCA, thereby more than offsetting the reduced government support assumptions.

In affirming Montepio's BCA of b3, Moody's anticipates the near-term implementation of a capital measure in the form of a EUR200 million issuance of participation units that the bank announced in May 2015. While the capital measure is still subject to parent company's agreement, the rating agency believes a decision is likely to be forthcoming shortly, followed by a swift execution. Such capital strengthening would enhance the bank's currently weak risk absorption capacity to levels more commensurate with the b3 BCA level. While Montepio's BCA is constrained by its weak profitability and its high level of non-earning assets, it also incorporates the bank's improved liquidity profile underpinned by ongoing deleveraging, although exposure to European Central Bank (ECB) funding remains high.

The upgrade of Montepio's long-term deposit and senior debt ratings reflects their very low loss-given-failure because of the bank's substantial volume of deposits and senior debt outstanding, leading to a two-notch uplift from its b3 adjusted BCA. This uplift was partially offset by the removal of one notch of government support uplift previously factored into the bank's long-term ratings.

-- BANIF-Banco Internacional do Funchal, S.A. (Banif)

The downgrade of Banif's long-term deposit ratings to Caa2 incorporates the one notch upgrade of the BCA and adjusted BCA to caa3, as well as the Advanced LGF analysis that provides one notch of uplift from the bank's adjusted BCA, together partly offsetting reduced government support assumptions.

In upgrading Banif's BCA to caa3, Moody's has incorporated the bank's improved liquidity profile aided by the increase in deposits in the domestic franchise, continued balance sheet deleveraging, reduced -- albeit high -- reliance on ECB funding as well as signs of stabilization on its very weak credit fundamentals, namely asset risk and profitability. The bank's standalone BCA incorporates its (1) very weak asset risk, which should stabilize as the Portuguese economy modestly recovers; (2) very weak profitability, which reached break-even in Q1 2015 after sizable losses over the last three years supported by trading income; and (3) very low loss absorption capacity, with capacity to generate capital dependent on the accomplishment of the restructuring plan focused on significant downsizing of the bank's balance sheet and is still in the process of being implemented.

The downgrade of Banif's long-term deposit ratings to Caa2 reflects (1) their low loss-given-failure under the Advanced LGF analysis under the assumption that the ongoing balance sheet deleveraging of the group will lead in the near term to a comfortable level of subordinated and senior unsecured debt outstanding, allowing one notch of uplift from the bank's caa3 adjusted BCA; and (2) the removal of three notches of government support uplift previously factored into the deposit ratings.

The outlook on the deposit ratings is negative, reflecting downward pressures from slower-than-anticipated balance sheet deleveraging and hence lower volumes of subordination for the benefit of senior creditors.

--- ASSIGNMENT OF COUNTERPARTY RISK ASSESSMENTS

Moody's has also assigned CR Assessments to six Portuguese banks. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than expected loss and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

The CR Assessment takes into account the issuer's standalone strength as well as the likelihood of affiliate and government support in the event of need, reflecting the anticipated seniority of these obligations in the liabilities hierarchy. The CR Assessment also incorporates other steps that authorities can take to preserve the key operations of a bank should it enter a resolution. The CR Assessments for most Portuguese banks are one notch above their deposit ratings.

For the six affected Portuguese banks, the CR Assessments are positioned, prior to government support, one to three notches above the banks' adjusted BCAs, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments. The main difference with Moody's Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than expected loss, therefore focusing purely on subordination and taking no account of the volume of the instrument class.

For two of these banks, the CR Assessments also benefit from government support in line with Moody's support assumptions on deposits and senior unsecured debt. This reflects Moody's view that any support that governmental authorities provide to a bank and that benefits senior unsecured debt or deposits is very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with Moody's belief that governments are likely to maintain such operations as a going-concern in order to reduce contagion and preserve a bank's critical functions.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Upward pressure on the six Portuguese banks' ratings could be driven by clear visibility of asset-quality improvements, together with a sustainable recovery in their profitability, leading to an overall strengthening of the banks' loss-absorption capacity.

Downward pressure could emerge if (1) asset-quality and profitability indicators deteriorate further than anticipated, leading to significant pressure on the banks' capital bases; (2) operating conditions fall significantly short of Moody's current central scenario of 1.7% GDP growth for 2015; and/or (3) the banks' liquidity profiles deteriorate significantly.

In addition, negative pressure on Montepio's ratings could arise if the announced capital increase does not succeed.

CGD's long-term senior debt and Banif's long-term deposit ratings could come under downward pressure if the banks' balance sheet deleveraging efforts prove insufficient to achieve the anticipated level of subordination and hence expected loss severity in the event of a resolution, which support the current debt or deposit rating levels.

The principal methodology used in these ratings was Banks published in March 2015. 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.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

For identification of which credit ratings have payors that have or have not paid Moody's for services other than determining a credit rating in the most recently ended fiscal year, please see the detailed list under the following link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_182231. The list is an integral part of this press release.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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

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

Moody's concludes reviews on six Portuguese banks' ratings
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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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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