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Rating Action:

Moody's downgrades Banco Popular's senior unsecured debt ratings to B1 and deposit ratings to Ba3; outlook negative

Global Credit Research - 21 Apr 2017

Standalone BCA downgraded to b3

Madrid, April 21, 2017 -- Moody's Investors Service today downgraded Banco Popular Espanol, S.A.'s (Banco Popular) long-term deposit ratings to Ba3 from Ba1 and the bank's and its supported entities' long-term senior unsecured debt ratings to B1 from Ba2 with a negative outlook. At the same time, the rating agency downgraded: (1) the bank's standalone baseline credit assessment (BCA) to b3 from b1; and (2) its counterparty risk assessment (CR Assessment) to Ba2(cr) from Baa3(cr).

Today's rating action follows the announcement on 3 April 2017 of needed adjustments to 2016 financials and reflects Moody's heightened concerns regarding Banco Popular's creditworthiness, namely its weakened solvency levels, which are rapidly deteriorating against the background of still very significant asset quality challenges. The rating agency notes that Banco Popular's capitalisation buffers have been further eroded since year-end 2016 and that the bank's total capital ratio (TCR) has come closer to its regulatory capital threshold. The rating agency's increasing concerns regarding Banco Popular's ability to comply with regulatory capital requirements on an ongoing basis have led to downgrade the bank's long-term ratings by two notches. Moody's believes that the bank is under increasing pressure to urgently improve its risk-absorption capacity and accelerate the execution of its de-risking strategy.

As part of today's rating action, Banco Popular's subordinated debt ratings were downgraded to Caa1 from B2 as well as various ratings of preference stock to Caa3(hyb) from Caa1(hyb), which are guaranteed by Banco Popular and issued by several issuing vehicles. The bank's short-term CRA was downgraded to Not Prime(cr) from Prime-3(cr). The bank's short-term debt and deposit ratings of Not Prime were unaffected.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE OF THE STANDALONE BCA

Today's downgrade by two notches of Banco Popular's standalone BCA and adjusted BCA to b3 reflects the bank's deteriorated solvency levels and eroded capital buffers towards regulatory capitalisation requirements as well as the rating agency's assessment that the bank's credit profile remains pressured by its persistently weak asset quality indicators.

Banco Popular's capital position significantly deteriorated in 2016, after the bank reported an EUR3.5 billion loss for the year, which amply exceeded the EUR2.5 billion capital raised by the bank in June. As a result, Banco Popular's phased-in Common Equity Tier 1 (CET1) ratio declined to 12.1% at the end of 2016 from 13.1% a year earlier, and its total capital ratio (TCR) to 13.1% from 13.8%.

In addition, Banco Popular announced on 3 April 2017 that an internal review had identified needed adjustments to its 2016 financial statements that have further eroded the bank's capital levels. Banco Popular estimates it will report a TCR of 11.70%-11.85% at end-March 2017, well below the 13.1% reported at year-end. Moody's also notes that this ratio is now closer to the bank's 2017 Pillar II supervisory review and evaluation process (SREP) total capital requirement of 11.375%. The bank now has a tight buffer of around 40 basis points against this regulatory capital ratio, equal to approximately €300 million.

Banco Popular is under significant pressure to enhance its risk-absorption capacity and accelerate the execution of its de-risking strategy. The rating agency acknowledges that the increase in coverage of non-performing assets (NPAs; defined as non-performing loans and real estate assets) in 2016 to 45% is supportive of the bank's efforts to reduce NPAs. However, this coverage level remains below that of its domestic peers (average for the system at 50%) and Moody's views that it will still be challenging for Banco Popular to sell parts of its NPA portfolios without additional haircuts.

Since the announcement of the revised strategic targets last year, Banco Popular has managed to make little progress in its assets disposal plan. The bank's NPA ratio stood at a very high 32% at the end of 2016, up from 30% a year earlier and largely exceeding the system average of around 15%. Furthermore, when aggregating refinanced loans which are not already captured in the NPA ratio, the overall ratio increases to 36%, indicating the magnitude of the existing balance-sheet pressures.

RATIONALE FOR THE DOWNGRADE OF THE LONG-TERM SENIOR RATINGS

The downgrade of Banco Popular's long-term deposit ratings to Ba3 from Ba1 and the bank and its supported entities' senior unsecured debt ratings to B1 from Ba2 reflect: (1) the downgrade of the bank's BCA and adjusted BCA to b3; (2) the result of the rating agency's Advanced Loss-Given Failure (LGF) analysis, which results in an unchanged two notches of uplift for the deposit ratings and one notch of uplift for the senior debt ratings; and (3) Moody's assessment of moderate probability of government support for Banco Popular, which results in an unchanged further one notch of uplift for both the deposit and the senior debt ratings.

The changes in Banco Popular's liability structure over the last year have narrowed the balance-sheet cushion for deposits and senior debt. These changes could exert downward pressure on the ratings of these instruments if the size of the balance-sheet is not reduced as expected, which would result in a higher loss given failure for these instruments.

RATIONALE FOR THE NEGATIVE OUTLOOK ON BANCO POPULAR'S RATINGS

The negative outlook on the long-term deposit and senior unsecured debt ratings captures the downward rating pressure that could develop if the bank fails to restore adequate solvency levels and reduce the very high stock of problematic assets, thereby raising questions about the future viability of the bank. A significant deterioration in the bank's liquidity position could also exert downward pressure on the ratings.

Banco Popular's negative outlook also reflects the downward pressure on the bank's ratings if it does not meet Moody's expectation regarding its liability structure and balance sheet deleveraging.

RATIONALE FOR DOWNGRADING THE CR ASSESSMENT

As part of today's rating actions, Moody's also downgraded the CR Assessment of Banco Popular to Ba2(cr)/Not Prime(cr) from Baa3(cr)/Prime-3(cr), four notches above the adjusted BCA of b3. The CR Assessment is driven by the bank's b3 adjusted BCA, the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 16% of tangible banking assets providing three notches of uplift and a moderate likelihood of systemic support, leading to another notch of uplift for the CR Assessment.

WHAT COULD CHANGE THE RATING UP/DOWN

An upgrade of Banco Popular's ratings is currently unlikely given the negative outlook. However, the bank's BCA could be upgraded as a consequence of: (1) a significant improvement of asset risk indicators coupled with a higher than expected improvement in the bank's risk-absorption capacity; and (2) a sustained recovery of recurrent profitability levels.

Downward pressure could be exerted on Banco Popular's BCA if: (1) the bank fails to improve its risk-absorption capacity due to continued asset quality weakening and/or additional provisioning efforts in excess of its organic and inorganic capital generation capacity; and/or (2) the bank's liquidity profile deteriorates significantly.

Any change to the BCA would likely also affect debt and deposit ratings, as they are linked to the BCA. Banco Popular's senior unsecured debt and deposit ratings could also change as a result of changes in the loss-given-failure faced by these securities. In particular, Banco Popular's senior debt and deposit ratings could be downgraded if the bank does not reduce the size of its balance-sheet as expected.

In addition, any changes to Moody's considerations of government support could trigger downward pressure on the bank's deposit and debt ratings.

LIST OF AFFECTED RATINGS

Downgrades:

Issuer: Banco Popular Espanol, S.A.

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Ba3 from Ba1, Outlook Remains Negative

....Subordinate, Downgraded to Caa1 from B2

....Senior Unsecured MTN Program, Downgraded to (P)B1 from (P)Ba2

....Subordinate MTN Program, Downgraded to (P)Caa1 from (P)B2

....Pref. Stock Non-cumulative, Downgraded to Caa3(hyb) from Caa1(hyb)

....Adjusted Baseline Credit Assessment, Downgraded to b3 from b1

....Baseline Credit Assessment, Downgraded to b3 from b1

....LT Counterparty Risk Assessment, Downgraded to Ba2(cr) from Baa3(cr)

....ST Counterparty Risk Assessment, Downgraded to NP(cr) from P-3(cr)

Issuer: BPE Finance International Limited

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to B1 from Ba2, Outlook Remains Negative

Issuer: BPE Financiaciones, S.A.

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to B1 from Ba2, Outlook Remains Negative

....BACKED Subordinate, Downgraded to Caa1 from B2

....BACKED Senior Unsecured MTN Program, Downgraded to (P)B1 from (P)Ba2

....BACKED Subordinate MTN Program, Downgraded to (P)Caa1 from (P)B2

Issuer: Banco Pastor, S.A.

....Subordinate, Downgraded to Caa1 from B2, (assumed by Banco Popular Espanol, S.A.)

Issuer: Pastor Particip. Preferent., S.A. Unipersonal

....BACKED Pref. Stock Non-cumulative, Downgraded to Caa3(hyb) from Caa1(hyb)

Issuer: Popular Capital, S.A.

....BACKED Pref. Stock Non-cumulative, Downgraded to Caa3(hyb) from Caa1(hyb)

Outlook Actions:

Issuer: Banco Popular Espanol, S.A.

....Outlook, Remains Negative

Issuer: BPE Finance International Limited

....Outlook, Remains Negative

Issuer: BPE Financiaciones, S.A.

....Outlook, Remains Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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 Vinuela
Asst Vice President - 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

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

No Related Data.
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