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Rating Action:

Moody's downgrades the ratings of three Puerto Rican banks, outlooks stable

Global Credit Research - 20 Dec 2012

New York, December 20, 2012 -- Moody's Investors Service downgraded certain ratings of three Puerto Rican banks, including Banco Santander Puerto Rico, Banco Bilbao Vizcaya Argentaria Puerto Rico, and Popular, Inc. (see 'List of Affected Ratings' below). Today's downgrades reflect the adverse effects of Puerto Rico's ongoing recession on the island's banks, as well as the weak prospects for a sustainable recovery in the coming years. Following the downgrades, the outlooks on the banks' ratings are stable. These actions conclude the reviews for downgrade that were initiated on 10 April 2012.

LIST OF AFFECTED RATINGS:

Banco Santander Puerto Rico (BSPR):

- Standalone bank financial strength rating (BFSR)/baseline credit assessment (BCA) downgraded to D+/ba1 from C-/baa1

- All long- and short-term supported debt ratings confirmed (deposits at Baa1/Prime-2)

- Stable outlook assigned to all long-term ratings, including the standalone BFSR/BCA

Banco Bilbao Vizcaya Argentaria Puerto Rico (BBVAPR):

- Standalone BFSR/BCA downgraded to D/ba2 from C-/baa2

- All long- and short-term supported debt ratings confirmed (deposits at Baa2/Prime-2)

- Stable outlook assigned to all ratings, including the standalone BFSR/BCA

Banco Popular de Puerto Rico:

- Standalone BFSR/BCA downgraded to D/ba2 from D+/baa3

- Deposit ratings downgraded to Ba2/Not-Prime from Baa3/Prime-3; issuer rating downgraded to Ba3 from Baa3

- Stable outlook assigned to all long-term ratings, including the standalone BFSR/BCA

Popular, Inc.:

- Senior unsecured MTN program rating downgraded to (P)B1 from (P)Ba1; subordinate MTN program rating downgraded to (P)B2 from (P)Ba2; junior subordinate shelf rating downgraded to (P)B3 from (P)B1; non-cumulative preferred stock rating downgraded to Caa1 (hyb) from B2 (hyb)

- Stable outlook assigned to all long-term debt ratings

Popular North America, Inc.:

- Senior unsecured debt rating downgraded to B1 from Ba1; subordinate debt rating downgraded to (P)B2 from (P)Ba2

- Stable outlook assigned to all long-term debt ratings

Popular Capital Trust I, Popular Capital Trust II, BanPonce Trust I, and Popular North America Capital Trust I:

- Preferred stock ratings downgraded to B3 (hyb) from B1 (hyb)

- Stable outlook assigned to all long-term debt ratings

Popular Capital Trust III:

- Preferred stock rating downgraded to (P)B3 from (P)B1

- Stable outlook assigned to all long-term debt ratings

RATINGS RATIONALE

Moody's said the downgrades of the banks' standalone ratings were driven by Puerto Rico's difficult operating environment. The island is in the midst of a deep, protracted recession that began in 2006. Moreover, the prospects for a sustainable recovery are constrained by the commonwealth's poor finances, which are characterized by a severely underfunded retirement system and an increasingly heavy debt load.

Actions to address these issues in the coming years will likely put additional stress on Puerto Rico's already weak economy, which is characterized by high unemployment, a declining population and a lack of clear growth drivers. This will continue to threaten the banks' asset quality. The banks' problem assets remain extremely high relative to US mainland banks, which could lead to significant losses if the recession continues. This would negatively affect the banks' profitability and capital.

Puerto Rico's economic challenges were reflected in Moody's recent downgrade of the commonwealth's general obligation rating to Baa3 from Baa1 (see press release "Moody's downgrades Puerto Rico general obligation and related bonds to Baa3 from Baa1 and certain notched bonds to Ba1," dated 13 December 2012 and available on moodys.com). Following that downgrade, the outlook on Puerto Rico's general obligation rating remains negative, reflecting the stress that the commonwealth will face in the next few years as it attempts to address the underfunded retirement system from an already weak financial and economic position.

The multi-notch downgrades of the banks' standalone BCAs reflect Moody's current views on the health of the Puerto Rico economy and the weak prospects for improvement. Moody's recent two-notch downgrade of Puerto Rico's general obligation rating was an important reference point.

Moody's noted that BSPR's ba1 standalone BCA remains the highest of the Puerto Rican banks. BSPR's rating is supported by the bank's strong capital position and its improved funding profile, both of which have benefited from BSPR's strategy to deleverage in recent years. At the same time, BSPR's asset quality has been consistently better than the other banks on the island. Popular's and BBVAPR's standalone BCAs are both ba2, one notch below BSPR. Popular's rating is underpinned by the bank's leading deposit market position in Puerto Rico, which results in a stronger funding profile than BBVAPR. However, BBVAPR has experienced less asset quality volatility than Popular in recent years. Moody's added that both banks have relatively high capital ratios.

Moody's confirmed BSPR's and BBVAPR's deposit and debt ratings despite the downgrades of the banks' standalone ratings because both banks have higher-rated affiliates in the US mainland. Moody's believes that within a US banking family, the deposit ratings of affiliates should be equalized because of regulatory powers afforded by the cross-indemnification provisions of the Federal Deposit Insurance Act. Moody's explained that the cross-indemnification provisions require any affiliate insured by the Federal Deposit Insurance Corporation (FDIC) to cover losses incurred by the FDIC in protecting depositors of any other FDIC-insured affiliate. In Moody's opinion, these provisions, together with the Federal Reserve's source of strength doctrine, provide a strong incentive for the Spanish parents of these banks to support their Puerto Rican subsidiaries to the same degree as they would their US mainland subsidiaries.

Following today's actions, Moody's assigned stable outlooks to the banks' long-term ratings, including their standalone BFSR/BCAs. The stable outlooks are supported by the banks' relatively high capital ratios, which should enable them to withstand a stressful economic environment in the near- to medium-term.

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

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

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.

Information sources used to prepare each of the ratings 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 entities, obligations or credits satisfactory for the purposes of issuing these ratings.

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.

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.

Joseph B Pucella
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades the ratings of three Puerto Rican banks, outlooks stable
No Related Data.
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