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Rating Action:

Moody's downgrades Liberbank's debt ratings to B1 and upgrades standalone credit assessment to b2; negative outlook assigned

11 Jul 2013

Madrid, July 11, 2013 -- Moody's Investors Service has today downgraded by one notch the debt and deposit ratings of Liberbank to B1 from Ba3, with a negative outlook. The bank's short-term ratings remain at Not Prime. The B1 debt and deposit ratings are now one notch above the bank's baseline credit assessment (BCA) of b2, which Moody's has raised from caa1. The one-notch uplift for the debt and deposit ratings is based on Moody's typical support assumptions for banks of that size, market share, complexity and systemic relevance in Spain. The BFSR now carries a negative outlook.

The raising of the bank's BCA reflects Liberbank's improved credit-risk profile following the recapitalisation plan that it has recently implemented to offset the capital deficit (EUR1.2 billion) identified under Oliver Wyman's stress test on 28 September 2012. The recapitalisation plan encompassed public-sector support, a mandatory burden-sharing exercise on its junior instruments and asset sales.

The downgrade of the bank's debt and deposit ratings has been prompted by the normalization of support assumptions by Moody's. The rating agency had previously taken into consideration the availability of extraordinary government support for senior debt stemming from the government's decision in 2012 to request funding from the European Stability Mechanism of up to EUR100 billion to recapitalize any banks that required additional capital. This availability of government support had to a great extent offset the bank's intrinsic weakness and the uncertainty to what degree Liberbank would require government support and how its credit profile would emerge from the restructuring. With the restructuring of Liberbank now being implemented, and with only conditional access to the rest of the EUR 100 billion ESM capital, Moody's is of the view that the Spanish government (Baa3 negative) is likely to find itself increasingly constrained in providing further support for institutions such as Liberbank, which have already received public support.

This rating action concludes the review for downgrade initiated on 24 October 2012 (please see "Moody's downgrades Liberbank to Ba3, maintains review for downgrade of Ibercaja Banco, following merger break-up").

For additional insight about our broader view on the Spanish banking system, please refer to http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_155899 "Credit profiles of many Spanish banks continue to deteriorate given weakness of domestic economy".

RATINGS RATIONALE

--- DOWNGRADE OF THE SENIOR DEBT AND DEPOSIT RATINGS

The one-notch downgrade of Liberbank's senior debt and deposit ratings reflects Moody's assessment of a lower level of systemic support for the bank, once the recapitalisation plan, encompassing public-sector support, has been implemented. The restructuring of Liberbank was approved by the European Commission on 20 December 2012 and is now being implemented. However, with only restricted and conditional further access to the rest of the EUR 100 billion European Stability Mechanism (ESM) capital, the three-notch reduction in systemic support uplift reflects Moody's view that the Spanish government is likely to find itself increasingly constrained in providing further support for Spanish banks, including those such as Liberbank that have already received public support. While the rating agency continues to reflect the potential for support to Liberbank in the one notch uplift from b2 BCA to the B1 debt rating, Moody's believes the probability has risen that the bank will meet further shortfalls (at least partly) through burden-sharing.

--- RAISING OF THE STANDALONE CREDIT ASSESMENT

Moody's decision to raise Liberbank's standalone credit assessment to E+/b2 from E/caa1 is primarily driven by the bank's (1) improved risk-absorption capacity following the implementation of several capital reinforcement measures as part of its recapitalisation plan; (2) improved asset-quality indicators and credit-risk profile after the transfer of real-estate-related assets to SAREB (Spain's so-called "bad bank"), which were amongst the most seriously impaired assets of this bank; and (3) adequate liquidity position, despite restricted market access for most Spanish banks.

The stress test performed by Oliver Wyman on 28 September 2012 revealed a capital shortfall for Liberbank of EUR1.2 billion under its adverse scenario. As part of the recapitalization plan approved by the European Commission, Liberbank transferred on 26 February 2013 EUR6.7 billion of real-estate-related assets (in gross terms) to SAREB, which implied a drastic reduction of its exposure to this sector: to 3% of total lending as of end-March 2013 from 24% at end-December 2011. Liberbank also received a capital injection by the Spanish Fund for the Orderly Resolution of the Banking System (FROB) on 12 March 2013, for an amount of EUR124 million in the form of contingent convertible bonds. Furthermore, the bank completed a burden-sharing on its junior instruments in April 2013 and asset sales, which have enabled it to comply with minimum regulatory core capital threshold of 9%.

Following the transfer of real estate assets to SAREB, Liberbank's standalone credit assessment is now underpinned by the bank's better-than-average -- albeit still deteriorating -- asset-quality indicators, with an overall problem loan ratio of 7.5% at end-March 2013, comparing favourably with the 10.5% system average. Moody's acknowledges the bank's modest refinancing requirements over the next 12 months and improved funding position, aided by the ongoing deleveraging and increased liquid assets after receiving the bonds guaranteed by the Spanish sovereign (government bond rating Baa3 negative), associated with the transfer of real-estate-related assets to SAREB. Furthermore, Moody's positively notes Liberbank's enhanced access to private capital sources after becoming a publicly traded entity on 16 May 2013.

However, the standalone credit assessment is constrained by the bank's weak quality of capital, with Deferred Tax Assets (DTAs) net of deferred tax liabilities accounting for 85% of post-recapitalisation Tier 1 capital. Moody's recognises that the authorities have the option to provide further extraordinary support by transforming these assets into other forms such as direct government claims that can be more readily monetised.

The E+/b2 standalone profile is also constrained by the execution risks associated with Liberbank's restructuring plan in light of Spain's current recessionary environment. The bank's restructuring plan aims to further reinforce solvency levels, well above the 9.3% core capital ratio reported at end-March 2013. The success of this plan hinges on Liberbank's capacity to improve profitability metrics, maintaining its cost of risk at low levels and achieving significant cost-efficiency gains arising from a reduction of its cost base.

Furthermore, Moody's expects asset quality to deteriorate further across asset classes, based on its view that any signs of a modest economic recovery at this stage are only being generated by the export sector, while still-weak domestic demand is likely to cause further contraction in domestic growth into 2014 as unemployment remains at very high levels.

RATIONALE FOR THE OUTLOOKS

The negative outlook on Liberbank's debt and deposit ratings reflect both the current negative outlook on the Spanish government's Baa3 bond rating and the negative outlook on the standalone BFSR.

Liberbank's standalone BFSR has a negative outlook to reflect the bank's vulnerability to a further weakening of its credit profile in light of the weak outlook for the Spanish economy.

WHAT COULD MOVE THE RATINGS UP/DOWN

A further upgrade of Liberbank's standalone BFSR is currently unlikely, given the negative outlook. However, an improvement of the standalone BFSR could be driven by (1) the successful work-out of its asset-quality challenges; (2) a sustainable recovery in its profitability indicators; (3) sustainable access to market funding and capital; and (4) a successful execution of the restructuring plan.

Downward pressure would be exerted on Liberbank's standalone credit strength if (1) the weak quality of the bank's capital is not addressed; (2) operating conditions worsen, i.e., a broader economic recession beyond Moody's current expectations of a forecasted GDP decline of -1.4% for 2013; (3) the bank´s liquidity position deteriorates significantly; and/or (4) its franchise weakens.

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.

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 Liberbank's debt ratings to B1 and upgrades standalone credit assessment to b2; negative outlook assigned
No Related Data.
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