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Rating Action:

Moody's downgrades Banif to Caa1 from B2; negative outlook assigned

15 Apr 2013

Madrid, April 15, 2013 -- Moody's Investors Service has today downgraded by two notches the debt and deposit ratings of Banif-Banco Internacional do Funchal, S.A. to Caa1/Not Prime from B2/Not Prime, following the lowering of the bank's baseline credit assessment (BCA) to ca from caa2, within the E standalone bank financial strength rating (BFSR) category. The long-term debt and deposit ratings now carry a negative outlook.

The downgrade reflects Moody's view that the bank is highly likely to require further external support to remain a going concern, because of the significant pressures on (1) the bank's profitability, with minimal short-term prospects for an improvement; and (2) asset quality, with very high levels of non-performing loans (NPLs) exceeding the system's average, against the backdrop of Portugal's very weak economic conditions, with a 2% GDP contraction expected for 2013.

The rating downgrade also reflects Moody's assessment of the insufficient recapitalisation plan approved by the Portuguese government on 31 December 2012. Despite the broad public-sector support package of EUR1.1 billion that has been delivered to the bank, the rating agency believes that there is a very high likelihood that further government support will be needed to ensure the bank's future financial viability.

Today's rating action concludes the review with direction uncertain initiated on 4 December 2012 (please see "Moody's takes actions on three Portuguese banks: BCP, Banif and CGD").

In addition, Moody's has today downgraded Banif's senior subordinated debt ratings to C from Caa3, and the junior subordinated debt ratings to C from Ca, both of which carry no outlook. The preference shares have been affirmed at C (hyb), with no outlook.

RATINGS RATIONALE

--- LOWERING OF THE BCA

The lowering of Banif's BCA to ca from caa2 reflects Moody's assessment of a very high likelihood that further public support will be needed to recapitalise the bank in light of the very negative trends of its credit fundamentals. In particular, Moody's is concerned that the recessionary economic environment expected for 2013 in Portugal will exert significant pressure on the bank's already very weak profitability and asset-quality indicators, leading to an erosion of Banif's recently replenished capital base below minimum regulatory solvency thresholds.

While Moody's acknowledges that public-sector support has positively affected the bank's solvency, the very adverse operating environment may also challenge the achievement of the deleveraging targets contemplated in the restructuring plan.

On December 31, 2012, Portugal's Ministry of Finance formally announced the approval of Banif Group's recapitalisation process, entailing a total of EUR1.1 billion of public-sector support (EUR400 million in the form of CoCos and EUR700 million of preferred shares). The state aid was delivered in January 2013 and allowed Banif to comply with Bank of Portugal's minimum regulatory core Tier I ratio of 10% by year-end 2012.

By year-end 2012, Banif undertook a significant organisational restructuring, entailing the merger of Banif SGPS -- its former parent -- into Banif, with the latter now acting as head of the group. This has resulted in a significantly simplified organisational structure and will continue to contribute to the reduction of intra-group funding and lending. Furthermore, as part of its recapitalisation plan, Banif will have to undertake significant balance-sheet deleveraging over five years.

Moody's lowering of the bank's BCA therefore captures the improvements in corporate governance and the longer-term benefits of deleveraging, which do not offset the risks associated with Banif's fragile risk-absorption capacity; the rating agency expects that this capacity will be further pressured by Banif's negative profitability and asset-quality trends.

At the E/ca rating level, the standalone BFSR carries no outlook.

--- DOWNGRADE OF DEBT RATINGS AND SUPPORT ASSUMPTIONS

The two-notch downgrade of Banif's senior debt and deposit ratings to Caa1/NP from B2/NP reflects the lowering of the bank's BCA. The Portuguese government has provided support to Banif and Moody's expects that further support is likely in case of need. The government's fully funded Bank Solvency Support Facility would be the likely source of further support because it still has a capacity of around EUR6 billion to be dispersed into the banking system. On this basis, Moody's believes that there is a high probability of systemic support from the Portuguese government for Banif, which results in three notches of rating uplift incorporated in Banif's debt and deposit ratings from the BCA.

The debt ratings have a negative outlook reflecting ongoing pressures from the operating environment, the negative outlook of the Portuguese government's Ba3 bond rating, as well as the evolving systemic support environment.

SUBORDINATED DEBT AND HYBRID RATINGS

Moody's has today downgraded the senior subordinated debt ratings of Banif to C from Caa3 and the junior subordinated debt ratings to C from Ca, with no outlook, in line with the lowering of the bank's BCA. In addition, Moody's has affirmed Banif's preference shares ratings at C (hyb) with no outlook.

WHAT COULD MOVE THE RATING UP/DOWN

An upgrade of Banif's standalone BFSR is currently unlikely, given today's downgrade. An improvement of Banif's BCA could be driven by (1) a sustainable improvement in its loss-absorption capacity and its capital levels, with the fulfilment of the targets in its restructuring plan; (2) a recovery in its profitability indicators, with the bank returning to profit; (3) the work-out of its asset-quality challenges; and (4) sustainable and normalised access to capital markets.

Downwards pressure on Banif's BCA would develop if the bank was put into liquidation or into an orderly wind-down.

Negative pressure on the bank's debt and deposit ratings could result from (1) a further downgrade of the sovereign's rating (currently at Ba3, with a negative outlook); (2) a lowering of Banif's BCA; (3) and/or if Moody's assumes a lower likelihood of systemic support for Banif.

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 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.

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
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 downgrades Banif to Caa1 from B2; negative outlook assigned
No Related Data.
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