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Rating Action:

Moody's downgrades ratings of BFA/Bankia, Catalunya Banc and NCG Banco

02 Jul 2013

Madrid, July 02, 2013 -- Moody's Investors Service has downgraded the ratings of the three Spanish banking groups owned by the Fund for the Orderly Resolution of the Banking System (FROB). The debt and deposit ratings of Bankia were downgraded by two notches to B1 with a negative outlook. The debt and deposit ratings of the other two banks, Catalunya Banc S.A. (Catalunya Banc) and NCG Banco S.A. (NCG Banco) were both downgraded by two notches to B3 from B1 with a negative outlook.

This rating action concludes the review for downgrade initiated on 24 October 2012 (please see "Moody's concludes rating reviews on majority of Spanish banks after sovereign rating confirmation").

The actions on the banks' debt and deposit ratings were prompted by Moody's downgrades of their standalone credit assessments (Baseline Credit Assessments, BCA). Moody's has downgraded by three notches the standalone credit assessment of Catalunya Banc and NCG Banco and by one notch the standalone credit assessment of Bankia. The downgrade of the standalone BCAs reflects the remaining vulnerabilities of these banks' credit profiles even after receiving extensive public-sector support packages. This is largely due to (i) their continuing very weak asset quality; (ii) weak profitability levels; and (iii) very challenging restructuring requirements.

At the same time, Moody's has downgraded the long term issuer rating of Banco Financiero y de Ahorros (BFA; the parent of Bankia) to Caa1 from B2 with a negative outlook.

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

RATING ACTIONS OVERVIEW

-- Bankia: The Bank Financial Strength Rating (BFSR) was confirmed at E+, the standalone credit assessment was lowered to b3 from b2 and the debt and deposit ratings were downgraded to B1/Not Prime from Ba2/Not Prime. All ratings except the junior instruments (which continue to be rated C) have a negative outlook.

-- Banco Financiero de Ahorros (BFA): the bank's long-term issuer rating was downgraded to Caa1 from B2. The rating now carries a negative outlook.

-- Catalunya Banc: The standalone credit assessment was downgraded to E/caa2 from E+/b2 and the debt and deposit ratings were downgraded to B3/Not Prime from B1/Not Prime. The long-term debt and deposit ratings have a negative outlook, while the BFSR has a stable outlook. The junior instruments continue to be rated at C with no outlook.

--NCG Banco: The standalone credit assessment was downgraded to E/caa2 from E+/b2 and the debt and deposit ratings were downgraded to B3/Not Prime from B1/Not Prime. The long-term debt and deposit ratings have a negative outlook, while the BFSR has a stable outlook. The junior instruments continue to be rated at C with no outlook.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADES OF STANDALONE CREDIT ASSESSMENTS

In downgrading the standalone credit assessment of Bankia, Catalunya Banc and NCG Banco, Moody's has taken into account the benefits of the extensive public sector support delivered to the three banks, which included (1) the transfer of real estate-related assets to SAREB (Spain's so-called "bad bank"), which were amongst the most seriously impaired assets at these banks; and (2) the public capital injection from the European Stability Mechanism (ESM) in December 2012 and the mandatory burden-sharing exercises on the banks' junior instruments. Moody's has also taken into account the banks' improved funding and liquidity positions, albeit challenged by the continued lack of access to market funding.

Moody's has also taken into consideration the slightly more benign economic outlook of its current baseline scenario (which is in line with the Bank of Spain or the International Monetary Fund - IMF -). In this central scenario, Moody's expects the current economic contraction in Spain to bottom out in the third or fourth quarter of 2013, with flat or slightly positive growth from then onwards. Moody's cautions however that banks may not fully benefit from this primarily export-driven (very modest) economic recovery, as domestic demand is set to remain subdued and unemployment elevated. Bank assets related to the non-exporting sector are therefore expected to remain under pressure.

Against this background, Moody's is concerned that the credit profiles of these three banks' remain very vulnerable, primarily due to the following three factors:

1) Asset quality of all three banks remains weak both in absolute terms and relative to the system notwithstanding actions described above. Further credit deterioration is likely especially in the non-export oriented corporate segment and more broadly over the next twelve to eighteen months as asset quality improvements are likely to lag well behind the expected modest economic recovery.

2) Moody's also believes that profitability will continue to be subdued: The banks' ongoing balance-sheet deleveraging, low interest rates and sizeable non-earning assets have significantly diminished their capacity to generate recurring earnings, which, combined with the very modest expected economic growth, will continue to weigh on their profitability. Though we expect 2013 results to improve from the record losses recorded in 2012, bottom-line profitability will also remain pressured by the need to increase provisions against weakening assets, reducing their internal capital generation capacity.

(3) Restructuring and deleveraging plans: The deleveraging goals required in the restructuring plans approved by European Commission (EC) for the three banks are challenging as they have to significantly reduce their branch network and staffing, and in the case of Catalunya Banc and NCG Banco to restrict their geographical footprint to their home regions of Catalunya and Galicia. The ability to execute a drastic restructuring of these banks' operations, while important to ensuring their long-term financial viability, presents further risk to franchises that have already been subject to an extended period of government ownership.

The successful completion of the restructuring plans is particularly relevant for Catalunya Banc and NCG Banco, as the FROB is required to sell the two banks before year-end 2016. If the FROB fails to find a buyer for Catalunya Banc and/or NCG Banco it will have to present a resolution plan for the banks according to the royal decree RD 9/2012.

Moody's also notes all three banks' weak quality of capital, with Deferred Tax Assets (DTAs) net of deferred tax liabilities, equalling 77% of post-recapitalization Tier 1 capital at Bankia, 50% at Catalunya Banc, and 61% at NCG Banco. The rating agency recognises that the authorities have the option to provide further extraordinary support by transforming these assets into other forms which can be more readily monetised.

RATIONALE FOR STANDALONE CREDIT ASSESSMENTS BY BANK

BANKIA

The downgrade by one notch of Bankia's standalone credit assessment to E+/b3 reflects Bankia's weak credit profile even after receiving extensive public support, together with the execution risks associated to its restructuring plan against a backdrop of a weak operating environment and very low interest rates that will continue to put pressure on the bank's modest recurring earning power. The rating action also reflects Bankia's high level of non-earning assets that persists despite the transfer of real estate related assets to SAREB at end-December 2012.

Non-Performing loans stood at 12.9% of total loans at the end of December 2012 (13.03% at end-March 2013), compared to the system average of 10.44% (10.47% as of March 2013). Including real estate assets the bank has acquired over the last years, this ratio increases to 15.88%. Furthermore, Moody's notes the high percentage of refinanced loans at Bankia (13.33% of total loans). The aggregation of refinanced loans (that are not already captured in the Non-Performing Loan ratio) to the overall problem-loan ratio (rising to 22.8%) indicates the magnitude of the existing balance sheet pressures for Bankia, even before considering any possible further deterioration of the loan book.

Moody's notes positively that, in contrast to the deteriorating trend growth in NPLs for most other Spanish banks in Q1 2013, Bankia's NPL ratio was flat for the same period. And, as part of its restructuring plan, Bankia has significantly increased its reserves for problem loans. The bank's resulting coverage ratio (defined as loan loss reserves/ non-performing loans) of 62% at end-March 2013 remains below the system-wide average of 70.4%, but the rating agency noted that the difference is partly offset by Bankia's substantially reduced real estate exposures. Despite the improvement in its reserves, Bankia continues to carry a high level of problematic assets (broadly defined to include NPLs plus real estate assets plus refinanced loans) that in aggregate total 150% of the bank's shareholders equity and loss reserves.

Bankia's restructuring plan aims to achieve a 10% ROE and ? 2.2 billion in pre-provision profits in 2015, and requires a headcount reduction of 28% and a reduction of its national branch network by 39% over the 2012-2015 period. The success of this plan hinges on Bankia's capacity to improve the profitability of its SME loan book, maintaining its cost of risk at low levels and achieving significant cost efficiency gains arising from the expected 26% reduction of its cost base. Given Spain's current recessionary environment and the weak economic growth expected for 2014, with risks to the downside, Moody's thinks execution risks are sizeable.

Bankia's standalone credit assessment has a negative outlook to reflect the bank's vulnerability to a further weakening of its credit profile in light of the anticipated modest economic recovery of the Spanish economy.

CATALUNYA BANC

The three notch downgrade of Catalunya Banc's standalone credit assessment to E/caa2, was prompted by Moody's view that the bank's credit fundamentals are very weak despite recent public sector support. Catalunya Banc displays a very weak loss absorption capacity, as reflected by the bank's (1) very modest profitability indicators (at end-March 2013 the bank reported a net loss of ?18.5 million and a decline of more than 90% in the pre-provision income relative to end-March 2012), and (2) severe asset quality weaknesses across broad categories beyond those assets transferred to SAREB (i.e., residential mortgages, other household debt, the commercial real estate exposures which has remained on the bank's books, and non-real-estate corporate exposures) which show no signs of abating.

In the context of severe deleveraging imposed as part of its restructuring plan, weak loan demand and the ongoing low interest-rate environment, Moody's believes that achieving a recovery of Catalunya Banc's earnings capacity will be very challenging. The rating agency notes that the bank's pre-provision income should benefit from the significant reduction in operating costs expected following the drastic restructuring plan approved for the bank, but also believes that it will be a challenge for the bank to preserve a viable franchise, and hence maintain adequate profitability, in the face of such far-reaching restructuring over a relatively short period of time.

Catalunya Banc's NPL ratio stood at 17.4% at end-March 2013, compared to 16.4% at end-December 2012. Despite the positive impact of the transfer of the bank's real estate related assets to SAREB, its NPL ratio remains high compared with the average for the Spanish system (10.5% at end-March 2013), reflecting weakness in the other asset classes that have remained on its balance sheet and have experienced further deterioration in performance.

Despite the benefits of the capital reinforcement measures (public-sector support and burden-sharing on its junior instruments), Moody's notes that Catalunya Banc displays significant downside risks to the country's negative macroeconomic scenario that are likely to put additional pressure on its capital and pose significant challenges to the achievement of the deleveraging goals contemplated in the restructuring plan approved by the EC. In such an event, the rating agency believes that there is a very high likelihood that further public-sector support will be needed to ensure that the sale process by the FROB is successfully completed in due time.

At the E/caa2 rating level, the standalone BFSR carries a stable outlook.

NCG BANCO

The downgrade by three notches of NCG Banco's standalone credit assessment to E/caa2 is a reflection of its weak revenue generation capacity, with earnings expected to remain low given the bank's ongoing deleveraging, the high level of non-earning assets retained on balance sheet even following the transfer of toxic assets to SAREB, and the impact of the very low interest rates on asset re-pricing rates, which will not be offset by the bank's declining funding costs and operating expenses.

Moody's also notes that despite the transfer of real-estate related assets to SAREB, the continuing deterioration in NCG Banco's NPL ratio signals ongoing asset-quality challenges: it increased to 14.9% at-end March 2013 from 13.9% at end-December 2012. In the poor economic environment expected to persist through 2013 and beyond, the performance of loans to households (mortgages and unsecured lending to individuals) and to the non-real-estate corporate segment is likely to continue to deteriorate, which we expect will translate into a further increase of NPLs across these asset classes for NCG Banco.

Moody's downgrade reflects the risks to creditors associated with these pressures, notwithstanding the enhancement to capital ratios following the public capital injection from the ESM and the mandatory burden-sharing exercise on the bank's junior instruments. Similar to Catalunya Banc, Moody's is concerned that these risks will pose substantial hurdles to achieve the severe restructuring targets imposed by the EC as well as to the successful completion of the sale process by the FROB, increasing the likelihood that further public sector support will be required for NCG Banco.

At the E/caa2 rating level, the standalone BFSR carries a stable outlook.

RATIONALE FOR DEBT RATINGS AND SUPPORT ASSUMPTIONS

The two-notch downgrade of Bankia's senior debt and deposit ratings partly reflects the one notch downgrade of its standalone credit assessment to b3, as discussed above. In addition, the one 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 which have already received public support. While we continue to reflect the potential for support given Bankia's size and systemic importance, in the two notch uplift from BCA to debt rating, we believe that the probability of further shortfalls being met at least partly through burden-sharing has risen.

The two-notch downgrades of Catalunya Banc's and NCG Banco's senior debt and deposit ratings reflect the further deterioration of their standalone credit profiles, as discussed above, as well as Moody's current expectation of a certain likelihood of support by the Spanish government for the banks in case of need. As with Bankia, the rating uplift is limited by the rising risk of burden-sharing in the event that further support is required.

The negative outlook on the three banks debt and deposit ratings reflect both the currently negative outlook on the Spanish government's Baa3 bond rating and, in the case of Bankia, the negative outlook on its standalone credit assessment.

RATIONALE FOR DOWNGRADE OF BFA

BFA's (holding company of Bankia) issuer ratings have been downgraded by two notches to Caa1 from B2 reflecting the two-notch downgrade of Bankia's long-term debt and deposit ratings to B1 from Ba2.

Although we recognize the improved risk profile of BFA underpinned by the transfer to SAREB of the bulk of the bank's real estate exposure and the positive impact on its liquidity from the recapitalization exercise, we have maintained the existing three-notch difference with the rating of Bankia to reflect the uncertainties associated to the impact of the currently open arbitration process affecting BFA's hybrid instruments on the bank's credit fundamentals.

WHAT COULD MOVE THE RATING UP/DOWN

An upgrade of the banks' standalone rating is currently unlikely, given the negative outlook. An improvement of their standalone ratings could be driven by (1) the work out of their asset-quality challenges; (2) a sustainable recovery in their profitability indicators; (3) sustainable access to market funding and capital; and (4) a successful execution of the restructuring plans.

Downward pressure would be exerted on the banks' standalone credit strength if (1) operating conditions worsen beyond Moody's current expectations, i.e., a broader economic recession beyond our current GDP decline forecasts of -1.4% for 2013; (2) the banks' liquidity position deteriorates significantly; and/or (3) their franchise weakens.

The principal methodology used in these ratings 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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?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?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 ratings of BFA/Bankia, Catalunya Banc and NCG Banco
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