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Rating Action:

Moody's confirms Caja Laboral's Ba1 ratings; outlook negative

Global Credit Research - 15 Oct 2013

Madrid, October 15, 2013 -- Moody's Investors Service has today confirmed Caja Laboral Popular Coop. de Credito (Caja Laboral) long-term deposit ratings at Ba1, and its standalone bank financial strength rating (BFSR) at D+ (equivalent to a ba1 baseline credit assessment or BCA). All ratings carry a negative outlook. Today's rating action concludes the review that Moody's initiated on 19 July 2013.

The confirmation of the ratings reflects the bank's ongoing resilience to the challenging operating environment, as evidenced by the very moderate asset-quality deterioration in Q2 2013, significantly better than the Spanish banking system average.

RATINGS RATIONALE

--- STANDALONE BFSR AND BCA

The confirmation of Caja Laboral's standalone ratings reflects its ongoing resilience to the challenging operating environment in Spain. When placing Caja Laboral's standalone ratings on review for downgrade in July 2013, Moody's considered that the bank's better asset-quality track record (relative to domestic peers) might proven unsustainable. Problem loans had increased significantly during 2012 and in Q1 2013. However, more recent asset-quality data from Q2 2013 have shown a reversal to a much better-than-system performance, with only a very moderate deterioration for the bank during this three-month period. Moody's notes that, in previous quarters, the increase in problem loans was largely due to the bank's application of conservative loan classification criteria, whereby an important portion of loans classified as problematic were current on their payment obligations, especially in the commercial real estate (CRE) portfolio. In Q1 2013, following the merger with Ipar Kutxa, Caja Laboral applied its more conservative loan classification criteria to Ipar Kutxa's original loan book and especially to its CRE portfolio, resulting in a material increase in the volume of problem loans.

As noted, following the bank's loan reclassification exercise, asset-quality deterioration has significantly eased in Q2 2013, which is significant given the sharp deterioration shown by the system during this period: the bank's NPL ratio only increased by 0.08%, which compares with an increase of 1.14% for the system. Moody's notes that Caja Laboral's residential mortgage book, which represents two thirds of the bank's loan portfolio, has been particularly resilient. NPLs for this asset class increased by less than 0.10% in Q2 2013 (growing to 2.2% from 2.1%), outperforming the system average that increased by almost 1% during the same period, to 4.9% from 4.0%. The total NPL ratio of Caja Laboral stood at 7.9% by end June 2013, which compares favourably to a 12.0% NPL ratio for the system.

This stronger asset quality performance of Caja Laboral relative to the system in Q2 2013 is also observed in other asset-quality indicators monitored by Moody's. Real-estate assets acquired from troubled borrowers amounted to 4.1% of the total loan book at end June 2013, actually reducing from 4.3% as of March 2013, and which compares favourably with a system-average ratio that Moody's estimates at almost 7% of total loans. The rating agency also notes that system-average asset-quality indicators have benefited from the transfer of problematic assets to Sareb, which otherwise would have resulted in a wider gap between the performance of Caja Laboral and the system.

Moody's will closely monitor Caja Laboral's asset-quality performance. The rating agency notes that any sign that the bank's asset quality performs weaker than the system, and/or any -- more than marginal -- downward revision of Moody's economic outlook will exert downward pressure on Caja Laboral's ratings.

--- DEPOSIT RATINGS

Caja Laboral's deposit ratings were confirmed at Ba1 following the confirmation of the bank's BFSR. Moody's does not incorporate any expectation of systemic or other third-party support into the ratings.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook that Moody's has assigned to the BFSR and the deposit ratings incorporates the challenges faced by the bank. These include the continuing weak operating environment in Spain, which is characterised by (1) the recessionary domestic economy and overall low growth expectations for the remainder of 2013 and 2014; (2) the ongoing real-estate crisis; (3) very high unemployment; and (4) the broader euro area sovereign and banking crisis. These conditions will likely lead to further asset-quality deterioration across the banking system.

WHAT COULD CHANGE THE RATING UP/DOWN

There is currently no upward pressure on the ratings given the negative outlook. Any upward rating pressure over the medium term would require a significant strengthening of either the Spanish economy or the bank's risk-absorption capacity.

Downward rating pressure could ultimately result from: (1) an acceleration in the trend of NPL formation, both on an absolute level and in relation to the system average; (2) any worsening in operating conditions beyond Moody's current expectations, (i.e., a broader economic recession beyond the rating agency's current GDP forecast of a 1.4% contraction for 2013 and a GDP growth forecast between 0% and 1% for 2014); and/or a (3) weakening of Caja Laboral's internal capital generation and risk-absorption capacity;

Headquartered in Mondragón, Spain, Caja Laboral reported total, audited consolidated assets of EUR25 billion at the end of 2012.

The principal methodology used in this rating 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.

Alberto Postigo
Vice President - Senior 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

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 confirms Caja Laboral's Ba1 ratings; outlook negative
No Related Data.
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