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Rating Action:

Moody's downgrades Banco CEISS to B3 from B1 and takes actions on its junior instruments

13 Nov 2012

Madrid, November 13, 2012 -- Moody's Investors Service has today downgraded Banco CEISS's senior debt and deposit ratings to B3 from B1, on review with direction uncertain, prompted by (1) the concurrent downgrade of Banco CEISS's standalone bank financial strength rating to E (equivalent to a caa3 standalone credit assessment from E+/b2); and (2) the higher risk for senior creditors arising not only from the bank's very weak financial condition, but also the change in the bank's restructuring schedule.

Moody's has also downgraded Banco CEISS's senior subordinated debt and hybrid instruments to C and C (hyb) respectively. The downgrade of the bank's junior instruments reflects the very high losses expected for such debt, as the government plans to impose losses on holders of these instruments, which is a condition for receiving support from the Spanish government.

Banco CEISS is categorised as Group 2 institutions in the restructuring of the Spanish banking sector (under the Memorandum of Understanding - MoU - signed by the Spanish government and the euro area members on 20 July 2012), which indicates that it depends on public support to remain adequately capitalised. The other banks in Group 2 are Liberbank (Ba3 senior debt and deposit ratings; BFSR E/BCA caa1, all ratings on review for downgrade), Banco Mare Nostrum (not rated) and Caja3 (not rated).

RATINGS RATIONALE

--- STANDALONE CREDIT STRENGTH AND LONG-TERM RATINGS

The downgrade of Banco CEISS's debt and deposit rating reflects (1) the further deterioration of its standalone credit profile; and (2) the risk for senior creditors now that uncertainties about the effective completion of the merger with Unicaja Banco (Unicaja, Ba1 senior debt and deposit ratings; BFSR D/BCA ba2, all ratings on review for downgrade) have materially increased, since it has been delayed until Banco CEISS accomplishes a restructuring plan.

The four-notch downgrade of Banco CEISS's standalone credit assessment to E/caa3 from E+/b2 follows the announcement made by Bank of Spain on 31 October 2012 that the bank will require government assistance to recapitalise as part of its individual restructuring plan. This plan was presented on a standalone basis, outside of the scope of the group formed with Unicaja. Previously, Banco CEISS was expected to benefit from the merger with (and support thus received from) Unicaja, which would have prevented the need of receiving public support.

The merger of these two banks was approved in September 2011, but it has been repeatedly delayed as a result of Banco CEISS's very weak credit profile. Although the merger has not been formally cancelled by either bank, it is likely to be further postponed until Banco CEISS has accomplished its restructuring plan.

In the evaluation performed by Oliver Wyman, Banco CEISS presented a capital shortfall of EUR2 billion (representing 8.7% of RWAs), which will force it to resort to public-sector support to recapitalise as the bank does not have sufficient capacity to raise capital through private means. Consistent with Moody's definitions, the lower standalone credit assessments reflect the rating agency's view that Banco CEISS has speculative intrinsic, or standalone, financial strength and is subject to very high credit risk absent any possibility of extraordinary support from the government. This view also incorporates the bank's weak profitability and insufficient internal capital generation capacity and the high reliance on ECB funding.

--- SUBORDINATED DEBT AND HYBRID RATINGS

Moody's downgrade of the subordinated debt and hybrid instruments of Banco CEISS reflects the fact that losses are likely to be imposed on subordinated and hybrid creditors of this bank. The regulatory framework (RD 24/2012 and the MoU signed on 20 July 2012) contemplates that such "burden-sharing" will be applied to banks that are deemed to require public-sector assistance.

The rating actions taken today on the junior instruments of Banco CEISS are consistent with the actions taken on 5 October 2012 on Group 1 banks (please see "http://www.moodys.com/research/Moodys-takes-actions-on-4-Spanish-banking-groups-due-to--PR_255526";). The downgrade follows the recent publication of the banks that were to be categorised in Group 2, announced by Bank of Spain on 31 October 2012. In its announcement, the Bank of Spain made public the assessment of the recapitalisation plans that the banks had submitted with capital needs resulting from the independent stress test exercise made on 28 September 2012. As a consequence of the analysis of these plans, Bank of Spain published that Banco Mare Nostrum, Caja 3, Liberbank and Banco CEISS will need to resort to public support within the framework of their capitalisation processes, thus falling into the Group 2 category.

Ratings at C are applied to debt instruments that are typically in default, with little prospect for recovery of principal or interest. The C rating also reflects an estimated recovery rate of less than 35%, which is commensurate with the large discount at which most of these instruments are currently trading in the secondary market.

OUTLOOK AND REVIEW STATUS

Moody´s has placed on review with direction uncertain Banco CEISS's E/caa3, reflecting the uncertainties involved with the merger of Unicaja and Banco CEISS. The rating of the combined entity might be higher than its current ratings or lower, depending on (1) the completion or termination of the merger process with Unicaja Banco; and (2) the impact of the restructuring plan that it has to undertake to cover its sizable capital deficit.

WHAT COULD MOVE THE RATINGS UP/DOWN

Downwards pressure on the bank's ratings might develop if (1) operating conditions worsen beyond Moody's current expectations, i.e., a broader economic recession beyond our current GDP decline forecasts of -1.7% for 2012 and -1% for 2013; especially given that this is likely to result in asset-quality deterioration exceeding Moody's current expectations; and/or (2) if pressures on market-funding intensify or central bank funding becomes more restrictive.

Upwards pressure on the ratings might develop upon the successful implementation of the government's plan to stabilise the banking system, to the extent that the bank's resilience to the challenging prevailing conditions improves. Likewise, any improvement in the standalone strength of the bank arising from stronger earnings, improved funding conditions or the work-out of asset-quality challenges could result in rating upgrades.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. 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 relevant 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 relevant 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 relevant 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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

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Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

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Maria Jose Mori
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 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 downgrades Banco CEISS to B3 from B1 and takes actions on its junior instruments
No Related Data.
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