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Rating Action:

Moody's downgrades Pohjola Bank, OP-Pohjola Group and Pohjola Insurance

Global Credit Research - 30 May 2012

Actions conclude the review extended on 15 February 2012

London, 30 May 2012 -- Moody's Investors Service has today downgraded Pohjola Bank's debt and deposit ratings to Aa3 from Aa2; confirmed Pohjola Bank's Prime-1 short-term ratings and C- bank financial strength rating (BFSR); and lowered Pohjola Bank's standalone credit assessment within the C- BFSR range to baa2 from baa1.

Moody's has also downgraded OP-Pohjola Group's standalone BFSR to C/a3 from B-/a1 and downgraded the insurance financial strength rating (IFSR) of Pohjola Insurance Limited (PIL) to A3 from A2.

Today's actions conclude the review initially announced on 10 August 2011 and extended on 15 February 2012.

Moody's says that the downgrade of Pohjola Bank's and the cooperative OP-Pohjola Group's standalone ratings reflects (i) both entities' reliance on market funding; (ii) high sector concentration risks, mainly related to real estate; and (iii) weakened earnings capacity compared with the pre-crisis period. Moody's expects that earnings will be vulnerable to increased funding costs as a result of pressures stemming from the ongoing euro area crisis.

The downgrade of Pohjola Bank's debt and deposit ratings and PIL's insurance financial strength rating reflects the downgrade of OP-Pohjola Group's BFSR.

In addition to the above rating actions, Moody's has downgraded Pohjola Bank's non-cumulative Tier 1 securities to Baa3 (hyb) from Baa1 (hyb), prompted by the downgrade of the standalone rating of the OP-Pohjola Group that acts as a cooperative support provider for the bank. Moody's has also downgraded Pohjola Bank's subordinated and junior subordinated debt ratings by four and three notches, to Baa1 and Baa1 (hyb) respectively. All ratings carry a stable outlook.

Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142299 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

For additional information on bank ratings, please refer to the webpage containing Moody's related announcements http://www.moodys.com/bankratings2012.

RATINGS RATIONALE

The lowering of OP-Pohjola Group's and Pohjola Bank's standalone ratings was primarily driven by the following rating drivers.

FIRST DRIVER --- RELIANCE ON WHOLESALE FUNDING

OP-Pohjola Group's funding profile is reliant on market funds; around 35% of its funding stems from non-deposit funding, including covered bonds and interbank placements. At year-end 2011, 57% of its total market funding was short-term (maturing within one year). The reliance on market funding is more pronounced for Pohjola Bank, for which 73% of funding relates to market-based sources. Despite the bank's recent good access to capital markets -- and recent maturity extensions -- Moody's regards reliance on wholesale funding as credit negative, due to the confidence-sensitive nature of these funding sources and the potential for the availability and cost of market-based funding to change unexpectedly.

SECOND DRIVER --- REAL ESTATE RELATED EXPOSURE

Real-estate-related exposures, including construction, remain material at 13% of total OP-Pohjola Group's exposures at end-2011 from 12% at end-2007, and at 33% of total Pohjola Bank exposures from 29% at end-2007.

Moody's recognises that around 50% of total real-estate exposure relates to the renting and operating of residential real estate, which overall has seen lower levels of problem loans compared with other sectors. Around 23% of these exposures also benefit from guarantees from public-sector entities. However, Moody's views this sizeable exposure to real estate and construction as a potential vulnerability, as these sectors are typically more susceptible to economic downturns.

THIRD DRIVER --- WEAKENED PROFITABILITY

OP-Pohjola Group's pre-provision income has fallen to 0.7% of average total assets in 2011 from 1.4% and 1.6% in 2006 and 2007, respectively, and net interest margins to 1.2% of average earning assets in 2011 from 1.5% and 1.7% in 2006 and 2007, respectively. Moody's expects that the intense competition for Finnish household lending will continue to exert pressure on margins although regulatory changes have already led to some increase in margins of new loans. Additionally, Moody's believes that increased pressure on funding margins and extending funding maturities may exert additional pressure on Pohjola Bank's and the OP-Pohjola Group's margins, specifically in the currently more volatile bank funding markets, as a result of the ongoing crisis in the euro area.

MITIGATING FACTORS

Moody's notes several mitigating factors that have limited the extent of today's downgrades. OP-Pohjola Group's primary exposure remains to Finland and specifically to Finnish households, at two-thirds of total lending, which continue to show substantially lower indebtedness compared with other Nordic economies. The Finnish economy has also rebounded strongly after a contraction in 2009, and the Group's relatively good asset quality performance reflects this operating environment. In addition, Pohjola Bank has demonstrated through recent debt issuances that it continues to benefit from access to a wide investor base. The bank has also recently extended its debt maturities and increased its liquidity buffer.

RATINGS RATIONALE -- DEBT & DEPOSIT RATINGS

The downgrade of Pohjola Bank's debt and deposit ratings reflects (i) the lowering of the bank's standalone credit assessment to baa2 from baa1; (ii) the downgrade of the BFSR of the OP-Pohjola Group to C/a3 from B-/a1; and (iii) Moody's assessment of a very high probability of systemic support from the Finnish sovereign (Aaa, outlook stable).

RATIONALE FOR SUBORDINATED DEBT AND JUNIOR SUBORDINATED DEBT DOWNGRADES

The downgrade of Pohjola Bank's subordinated and junior subordinated debt ratings to Baa1 and Baa1 (hyb) respectively (one notch below the bank's a3 adjusted baseline credit assessment (BCA), which takes into account cooperative group support) reflects Moody's view that systemic support is less likely to be extended to subordinated instruments as well as the specific features of these instruments.

Pohjola Bank's junior subordinated debt has an interest deferral option if the bank's capitalisation falls below the regulatory minimum. However, in a liquidation scenario, junior subordinated debt is structured so that it would not be in a junior position relative to plain-vanilla subordinated debt. Therefore, the notching of these two debt instruments and resulting credit rating is the same.

The downgrade of Pohjola Bank's non-cumulative Tier 1 securities' ratings to Baa3 (hyb) from Baa1 (hyb) follows the reduction in the adjusted BCA to a3 from a1 which was lowered as a result of the downgrade of the OP-Pohjola Group. These Tier 1 securities are rated three notches below Pohjola Bank's adjusted BCA.

RATIONALE FOR THE DOWNGRADE OF POHJOLA INSURANCE LIMITED

The downgrade of PIL's insurance financial strength rating (IFSR) to A3 with a stable outlook reflects the rating action on the wider OP-Pohjola Group, despite the continued healthy standalone financial fundamentals and strong market position of the insurance operations. As a result of this rating action, PIL's IFSR is now in line with the a3 adjusted BCA of Pohjola Bank. This reflects a combination of (i) structural subordination if PIL were to issue debt (i.e., senior debt issued by PIL would likely be rated one notch below the a3 adjusted BCA of Pohjola Bank); and (ii) the fact that PIL is outside of the Group's joint and several liability agreement.

TODAY'S ACTIONS FOLLOW REVIEW ANNOUNCEMENTS ON 15 FEBRUARY 2012 AND EARLIER

Today's rating actions follow Moody's decision to review for downgrade the ratings for 114 European financial institutions (see "Moody's reviews Ratings for European Banks", 15 February 2012 (http://www.moodys.com/research/Moodys-Reviews-Ratings-for-European-Banks--PR_237914). Moody's downgrade of OP-Pohjola Group's subordinated and junior subordinated debt ratings concludes the review of those ratings initiated on 29 November 2011 (see Moody's reviews European banks' subordinated, junior and Tier 3 debt for downgrade - http://www.moodys.com/research/Moodys-reviews-European-banks-subordinated-junior-and-Tier-3-debt--PR_231957).

WHAT COULD MOVE THE RATINGS UP/DOWN

An upgrade is unlikely in the near term, given today's negative rating actions. However, Moody's says that in the medium term, upwards pressure on the ratings could develop following (i) an improvement in the group's profitability levels, without increasing its risk profile; (ii) a further sustained extension in its funding maturity profile combined with an increasing share of deposit funding; and/or (iii) a sustained reduction in its concentration risk, particularly related to real estate.

Moody's says that the current rating levels incorporate a degree of expected further deterioration in the group's financial metrics and operating environment. However, the ratings could be lowered further if (i) Moody's considers that financing conditions are likely to deteriorate; or (ii) that a macroeconomic slowdown and/or a worse-than-expected deterioration in the bank's financial fundamentals are below the levels commensurate with the Group's current rating level.

In particular, the bank's BFSR could be downgraded if (i) OP-Pohjola Group's funding conditions become more difficult and/or costly; (ii) its asset-quality deteriorates more than Moody's expects; and/or (iii) its profitability deteriorates further, or its risk profile increases, for example as a result of increased exposures to more volatile sectors.

The principle methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology, published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: Global Methodology, published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Helsinki, Finland, Pohjola Bank reported consolidated assets of EUR42.6 billion at the end of March 2012. OP-Pohjola Group reported consolidated assets of EUR94.1 billion.

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 rating of rated entity Pohjola Insurance Ltd was initiated by Moody's and was not requested by the rated entity.

Rated entity Pohjola Insurance Ltd or its agent(s) participated in the rating process. This rated entity or its agent(s)provided Moody's access to the books, records and other relevant internal documents of the rated entity.

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

Information sources used to prepare the ratings are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings 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 considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their 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.

The below contact information is provided for information purposes only. Please see the issuer page on www.moodys.com for Moody's regulatory disclosure of the name of the lead analyst and the office that has issued the credit rating.

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.

Simon Harris
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Gregory?Winans?Bauer
MD - Global Banking
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Pohjola Bank, OP-Pohjola Group and Pohjola Insurance
No Related Data.

 

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