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Rating Action:

Moody's downgrades Bankia's ratings

07 Feb 2012

Madrid, February 07, 2012 -- Moody's Investors Service has today downgraded Bankia's senior debt and deposit ratings to Baa3/Prime-3 from Baa2/Prime-2 and its standalone bank financial strength rating (BFSR) to D- from D+. The D- standalone BSFR maps to Ba3 on the long-term scale.

In a related rating action, Moody's also downgraded to Ba3 from Ba2 the long-term issuer rating of Banco Financiero y de Ahorro (BFA) -- Bankia's holding company -- and the ratings of its hybrid instruments, namely, its subordinated debt to Caa1 from B2, the ratings on junior subordinated debt to Caa2 (hyb) from B3 (hyb) and the ratings on its preferred shares to Ca(hyb) from Caa2(hyb).

All of Bankia's and BFA's ratings have a negative outlook.

Today's action concludes the rating review initiated on 12 December 2011.

RATINGS RATIONALE

DOWNGRADE OF BANKIA'S BFSR

Moody's decision to downgrade Bankia's standalone BFSR to D- from D+ reflects the bank's weak risk absorption capacity under various scenarios of further real estate asset quality deterioration. The magnitude of the capital shortfall (benchmarked against the required regulatory 8% minimum core tier 1 ratio) that Bankia would experience, after incorporating its ability to generate capital, is more consistent with a stand-alone rating in the low-end of the D category. Moody's has applied a range of scenarios using commercial real estate impairments seen at some Spanish banks that have been intervened and had been subject to a clean-up exercise by the Spanish regulator such as Banco CAM, but also incorporating some of the scenarios applied in other countries with similar commercial real estate sector dynamics such as Ireland.

The above analysis also incorporates our reviewed forecasts for a substantial deterioration of the country's macroeconomic indicators which will further reduce the earning (and thus capital) generation capacity of Spanish banks and which are likely to depress asset quality further. Moreover, the new provisioning requirements recently approved by the Spanish government will add further pressure on banks' already weakened earnings capacity and capital levels.

The downgrade also reflects Bankia's sizeable debt maturities for the current year -- amounting to around € 20 billion -- against a background of restricted access to capital markets for most Spanish banks. The bank expects to address these outflows primarily through deleveraging but also by increasing its reliance on ECB funding which we think increasingly exposes the bank to concentration and political risks. Moreover, Bankia's sizeable activity in repo markets makes it vulnerable to margin call risks adding pressure on the bank's liquidity management in times of stress.

The negative outlook on Bankia's rating is consistent with the negative outlook on the Spanish financial system which continues to provide a challenging backdrop for Bankia's operations.

DOWNGRADE OF BANKIA´S DEBT RATINGS

In today's action Moody's has also downgraded Bankia's debt and deposit ratings to Baa3 Prime-3. Following the downgrade of the bank's BFSR, Moody's has broadened the uplift from its standalone rating to three notches (from 2), to reflect our assessment of very high likelihood of systemic support.

The outlook on the senior debt and deposit ratings is negative, reflecting the negative outlook on Bankia's standalone credit profile.

DOWNGRADE OF BFA'S RATINGS

The downgrade of BFA's issuer ratings to Ba3 together with its subordinated debt and preferred ratings is triggered by the downgrade of Bankia, its operating company. The ratings of BFA are positioned three notches below those of its operating companies.

Although BFA has maintained its current legal status of a commercial bank, it neither takes deposits nor carries out any banking activities . This structure produces a structural subordination of BFA's current creditors to those of the operating bank as the payment of BFA's debt will be largely dependent on the dividends upstreamed from Bankia, which will be BFA's most significant source of revenues (together with other revenues arising from equity holdings).

In addition to structural subordination, the three notch rating differential between Bankia and BFA reflects primarily two additional factors that shape the risk profile of BFA: (i) the risk stemming from BFA's portfolio of foreclosed land as well as doubtful and substandard loans related to land development, which had not been transferred to Bankia and which could be subject to additional impairments (ii) the weak profitability outlook for BFA, which is also likely to be impacted by further potential impairments of these assets, which could exceed the value of expected dividends in Moody's stress scenarios.

The negative outlook on BFA's rating follows Moody's decision of assigning a negative outlook to the rating of Bankia.

POTENTIAL TRIGGERS OF A DOWNGRADE/UPGRADE

Any upward pressure on Bankia's BFSR would require (i) stronger Tier 1 and tangible common equity (TCE) ratios to offset estimated credit losses under our scenarios, (ii) a stronger credit profile with materially lower credit risk concentration, both by borrower and to the real estate sector; (iii) a sustained recovery of asset quality indicators; and (iv) a stronger internal capital generation underpinned by a more stable earnings stream coupled with an improvement in risk-weighted recurring profitability indicators.

We note that an upgrade of Bankia's BFSR and long-term ratings is unlikely in the near term, given our negative outlook. Furthermore, Moody's expects that the currently challenging domestic operating environment will continue to subdue growth and exert downward pressure on margins resulting from the high level of non-earning assets and increased funding costs. This is likely to limit internal capital generation from recurrent sources.

The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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.

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Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

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

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Maria Cabanyes
Senior Vice President
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 Bankia's ratings
No Related Data.
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