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Rating Action:

Moody's lowers hybrid securities ratings in Portugal

22 Apr 2010

Approximately €4 billion of securities affected

Madrid, April 22, 2010 -- Moody's Investors Service downgraded its ratings on certain Portuguese hybrid securities, in line with its revised Guidelines for Rating Bank Hybrids and Subordinated Debt, published in November 2009. This concludes the review for possible downgrade on these ratings initiated on 18 November 2009. A full list of the individual securities affected can be accessed through this link:

http://v3.moodys.com/page/viewresearchdoc.aspx?docid=PBC_123396

Prior to the global financial crisis, Moody's had incorporated into its ratings an assumption that support provided by national governments and central banks to shore up a troubled bank would, to a large extent, benefit the subordinated debt holders as well as the senior creditors. However, during the crisis, systemic support for these instruments has not been forthcoming in many cases. The revised methodology has therefore largely removed previous assumptions regarding systemic support, resulting in today's rating action. In addition, the revised methodology generally widens the notching on a hybrid's rating that is based on the instrument's features.

RATING ACTION IN DETAIL

The starting point in Moody's revised approach to rating hybrid securities is the Adjusted Baseline Credit Assessment (Adjusted BCA). The Adjusted BCA reflects a bank's standalone credit strength, including parental and/or cooperative support, if applicable. The Adjusted BCA excludes any expectation of systemic support.

The characteristics of rated Portuguese junior subordinated debt instruments, non-cumulative preference shares and perpetual subordinated securities with conditional coupons are fairly standardised:

• The loss absorption for rated junior subordinated debt while the issuer remains a going concern stems from the principal write-down feature and the cumulative deferral feature of its coupon. Coupon deferral is both mandatory, with a solvency trigger, and optional, at the discretion of the issuer. Together with the junior subordinated claim in liquidation, this means that, unless stated otherwise, these instruments are rated one notch below the Adjusted BCA.

• The loss absorption for rated Perpetual Subordinated Securities With Conditional Coupons while the issuer remains a going concern stems from the principal write-down feature and the non-cumulative coupon suspension feature. Coupon skip is both mandatory, with a minimum regulatory capital and availability of distributable funds (balance sheet loss) triggers, and optional, at the discretion of the issuer. Together with their deeply subordinated claim in liquidation, this means that, unless stated otherwise, these instruments are rated three notches below the Adjusted BCA.

• The loss absorption for non-cumulative preferred securities while the issuer remains a going concern stems from the non-cumulative coupon suspension feature. Coupon skip is both mandatory, with a minimum regulatory capital and availability of distributable funds (balance sheet loss) triggers, and optional, at the discretion of the issuer. Together with their deeply subordinated claim in liquidation, this means that, unless stated otherwise, these instruments are rated three notches below the Adjusted BCA.

The rating actions on each Portuguese bank are detailed below:

1) Banco BPI (BPI)

The Adjusted BCA for BPI is Baa2, which is the same level as its Baseline Credit Assessment (BCA).

The following securities issued by BPI and subsidiaries were affected by this rating action:

• Junior subordinated EMTN programme ratings (Upper Tier 2): Downgraded to Baa3 from A2.

• Non-cumulative preferred securities: Downgraded to Ba2 from Baa1. This instrument was issued by BPI Capital Finance Limited, a subsidiary of BPI, guaranteed by BPI.

The outlook for all the affected instruments is negative, in line with the negative outlook for BPI's C- BFSR and corresponding Baa2 BCA.

2) Banco Comercial Portugues (BCP)

The Adjusted BCA for BCP is Baa3, which is the same level as its BCA.

The following securities issued by BCP and subsidiaries were affected by this rating action:

• Non-cumulative preferred securities: Downgraded to Ba3 from Baa1. These instruments were issued by BCP Finance Company, a subsidiary of BCP, guaranteed by BCP.

• Perpetual subordinated securities with conditional coupons: Downgraded to Ba3 from Baa1.

The outlook for all the affected instruments is negative, in line with the negative outlook for BCP's D+ BFSR and corresponding Baa3 BCA.

3) Banco Espírito Santo (BES)

The Adjusted BCA for BES is Baa1, which is the same level as its BCA.

The following securities issued by BES and subsidiaries were affected by this rating action:

• Junior subordinated debt and junior subordinated EMTN programme ratings (Upper Tier 2): Downgraded to Baa2 from A2. The instruments were issued by BES Finance Limited, a subsidiary of BES, guaranteed by BES.

• Non-cumulative preferred securities: Downgraded to Ba1 from A3. This instrument was issued by BES Finance Limited, a subsidiary of BES, guaranteed by BES.

The outlook for all the affected instruments is stable, in line with the stable outlook for BES's C- BFSR and corresponding Baa1 BCA.

4) Espírito Santo Financial Group (ESFG)

The Adjusted BCA for ESFG is Baa2, one notch below BES's Adjusted BCA, as ESFG's obligations are structurally subordinated to the direct obligations of BES, which is ESFG's main operating subsidiary.

The following securities issued by ESFG's subsidiaries were affected by this rating action:

• Non-cumulative preferred securities: Downgraded to Ba2 from Baa2. This instrument was issued by ESFG International Limited, a subsidiary of ESFG, guaranteed by ESFG.

The outlook for the affected instrument is stable, in line with the stable outlook on BES's C- BFSR.

5) Banco Santander Totta (BST)

The Adjusted BCA for BST is A2, which is one notch higher than its BCA of A3, due to parental support from Banco Santander, which is rated Aa2 for long-term deposits, and with a BFSR of B- corresponding to a BCA of A1.

The following programme issued by BST was affected by this rating action:

• Junior subordinated EMTN programme ratings (Upper Tier 2): Downgraded to A3 from A1.

The outlook for all the affected instruments is negative, in line with the negative outlook for BST's C BFSR and corresponding A3 BCA.

6) Caixa Geral de Depósitos (CGD)

The Adjusted BCA used to notch CGD hybrid securities is A3, which is two notches higher than its BCA of Baa2, due to its government ownership. The bank's senior unsecured ratings are currently aligned with the government's own ratings due to its 100% ownership by the government and the strong role it plays in the Portuguese banking system. However, the interdependence and interconnection with the government is not perceived to be so strong that we assign the same support likelihood for hybrid capital instruments. As a scenario of selective burden-sharing with hybrid investors has become more likely across many countries during this financial crisis, the adjusted BCA reflects CGD's standalone credit strengths and more moderate parental support from the government for these instruments. .

The following securities issued by CGD and subsidiaries were affected by this rating action:

• Junior subordinated debt and junior subordinated EMTN programme ratings (Upper Tier 2): Downgraded to Baa1 from Aa3. The instruments were issued by Caixa Geral de Depósitos acting through its Paris Branch and Caixa Geral de Depósitos Finance, a subsidiary of CGD.

• Non-cumulative preferred securities: Downgraded to Baa3 from A1. These instruments were issued by Caixa Geral Finance Limited, a subsidiary of CGD, guaranteed by CGD.

The outlook for all the affected instruments is negative, in line with the negative outlook for CGD's C- BFSR and corresponding Baa2 BCA.

7) Banif -- Banco Internacional do Funchal

The Adjusted BCA for Banif is Ba3, which is the same level as its BCA.

The following securities issued by Banif and subsidiaries were affected by this rating action:

• Junior subordinated debt and junior subordinated EMTN programme ratings (Upper Tier 2): Downgraded to B1 from Baa3. The instrument was issued by Banif Finance Limited, a subsidiary of Banif, guaranteed by Banif External Financial Branch.

• Non-cumulative preferred securities: Downgraded to B3 from Ba1. This instrument was issued by Banif Finance Limited, a subsidiary of Banif, guaranteed by Banif.

The outlook for all the affected instruments is negative, in line with the negative outlook for Banif's D- BFSR and corresponding Ba3 BCA.

8) Caixa Económica Montepio Geral (Montepio)

The Adjusted BCA for Montepio is Ba2, which is the same level as its BCA.

The following programme issued by Montepio was affected by this rating action:

• Junior subordinated EMTN programme ratings (Upper Tier 2): Downgraded to Ba3 from Baa3.

The outlook for all the affected instruments is negative, in line with the negative outlook for Montepio's D BFSR and corresponding Ba2 BCA.

9) Banco Itaú Europa

The Adjusted BCA for Itaú Europa is Baa2, which is the same level as its BCA.

The following programme issued by Itaú Europa was affected by this rating action:

• Junior subordinated EMTN programme ratings (Upper Tier 2): Downgraded to Baa3 from Baa2.

The outlook for all the affected instruments is negative, in line with the negative outlook for Itaú Europa's C- BFSR and corresponding Baa2 BCA.

The principal methodology used in these rating actions was Moody's Guidelines for Rating Hybrid Securities and Subordinated Debt, published in November 2009.

The last rating action on BPI was on 18 November 2009, when the bank's junior subordinated debt programme and preference shares ratings were placed on review for possible downgrade.

BPI is headquartered in Lisbon, Portugal. At 31 December 2009 it had total unaudited assets of EUR 47.5 billion.

The last rating action on BCP was on 18 November 2009, when the bank's preference shares and perpetual subordinated securities with conditional coupons ratings were placed on review for possible downgrade.

BCP is headquartered in Oporto, Portugal. At 31 December 2009 it had total assets of EUR 95.6 billion.

The last rating action on BES was on 18 November 2009, when the bank's junior subordinated debt and preference shares ratings were placed on review for possible downgrade.

BES is headquartered in Lisbon, Portugal. At 31 December 2009 it had total assets of EUR 82.3 billion.

The last rating action on ESFG was on 18 November 2009, when the bank's preference shares rating was placed on review for possible downgrade.

ESFG is headquartered in Luxembourg. At 31 December 2009 it had total assets of EUR 85.3 billion.

The last rating action on BST was on 18 November 2009, when the bank's junior subordinated debt programme was placed on review for possible downgrade.

BST is headquartered in Lisbon, Portugal. At 30 June 2009 it had total unaudited assets of EUR 43.5 billion.

The last rating action on CGD was on 18 November 2009, when the bank's junior subordinated debt and preference shares ratings were placed on review for possible downgrade.

CGD is headquartered in Lisbon, Portugal. At 31 December 2009 it had total assets of EUR 120.9 billion.

The last rating action on Banif was on 18 November 2009, when the bank's junior subordinated debt and preference shares ratings were placed on review for possible downgrade.

Banif is headquartered in Funchal, Portugal. At 30 September 2009 it had total unaudited assets of EUR 11.1 billion.

The last rating action on Montepio was on 18 November 2009, when the bank's junior subordinated debt programme was placed on review for possible downgrade.

Montepio is headquartered in Lisbon, Portugal. At 31 December 2009 it had total assets of EUR 17.2 billion.

The last rating action on Itaú Europa was on 18 November 2009, when the bank's junior subordinated debt programme was placed on review for possible downgrade.

Itaú Europa is headquartered in Lisbon, Portugal. At 30 September 2009 it had total unaudited assets of EUR 5.1 billion.

Please visit www.moodys.com to access the following documents for additional information:

Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt -- November 17, 2009

Frequently Asked Questions: Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt -- November 17, 2009

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Madrid
Olga Cerqueira
AVP - Analyst
Financial Institutions Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's lowers hybrid securities ratings in Portugal
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