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Rating Action:

Moody's places all ratings of Bilbao Bizkaia Kutxa on review for possible downgrade

21 Jul 2010

Madrid, July 21, 2010 -- Moody's Investors Service has today placed on review for possible downgrade the A1 long-term deposit and debt ratings, the A2 subordinated debt rating and the C+ bank financial strength rating (BFSR) of Bilbao Bizkaia Kutxa (BBK). The Prime-1 short-term deposit and debt ratings were also placed on review for possible downgrade.

Today's rating actions were triggered by BBK's proposed offer, announced on 16 July 2010, to acquire Cajasur (not rated), the Cordoba-based Spanish savings bank which had been put under the administration of the Fondo de Restructuración Ordenada Bancaria (FROB, or Spain's fund for orderly bank restructuring) in May 2010.

"Our decision to place the ratings under review is driven by our concern that the integration of Cajasur will lead to a deterioration in BBK's credit worthiness" said Maria Jose Mori, Assistant Vice President and lead analyst for BBK at Moody's. Indeed, if the compensation (see below) received by the FROB is not sufficient to offset the higher risk profile of Cajasur, this could result in a multi-notch downgrade of BBK's standalone rating, which currently is at C+ (mapping to an A2 on the long-term rating scale). While systemic support is expected to remain high, the weakening of the standalone credit profile would most likely also result in a downgrade of the bank's debt and deposit ratings by one and probably not more than two notches.

The restructuring plan of Cajasur, which was drafted by the FROB, contemplates the transfer of all Cajasur's assets and liabilities to BBK. As part of the public tender for Cajasur, the FROB considered BBK's offer to be the most competitive, and has submitted the restructuring plan of Cajasur to the Bank of Spain for approval.

As part of the offer, BBK has requested an asset-protection scheme (a so-called "EPA") for a pre-determined asset portfolio of Cajasur. The FROB will assume the losses from this asset portfolio for five years, for a maximum of EUR392 million. This amount will be transferred to BBK when the transaction is formalized. The deal is conditional on the relevant European Union authorities and the Spanish Ministry of Finance approving the transaction.

The FROB has administered Cajasur since 21 May 2010, following the Bank of Spain's intervention. The Spanish regulator decided to take control of Cajasur because Cajasur had a very weak financial profile, which did not comply with minimum regulatory solvency ratios, and after the failure of the proposed merger with Unicaja (Aa3/Prime-1/C+).

Moody's notes that Cajasur's very weak financial fundamentals are due to: (i) capital ratios that are below the minimum regulatory threshold of 8% (total capital was 3.67% as of year-end 2009); (ii) reported net losses of EUR596 million (as of year-end 2009); (iii) a very high problem loan (PL) ratio of 10.2% in 2009; and (iv) its significant exposure to real estate. Moody's believes that this last factor will continue to challenge Cajasur's provisioning needs, given that sector's continued weakness in Spain.

Moody's acknowledges that BBK displays strong financial fundamentals, as reflected by its Tier 1 ratio of 14.6% (as of December 2009) and sound asset quality indicators (a PL ratio of 2.5% and PL coverage by loan-loss reserves exceeding 100% as of December 2009). However, the relative size of Cajasur -- with total assets of EUR19 billion in 2009 compared with BBK at EUR29.8 billion, making this quite a substantial acquisition which will significantly alter the profile of the combined entity -- together with its very weak financial profile will negatively impact BBK's ratings.

In analysing the effect that the potential integration of Cajasur would have on BBK's financial strength, Moody's will focus on the resulting risk-absorption capacity of the combined entity, which will be determined by its capital adequacy and risk profile of the loan portfolio (exposures to real estate, asset-quality indicators, credit-risk concentration, among others). The support that the combined entity is expected to receive from the FROB (the announced EUR392 million) should help to mitigate the pressure on the combined entity's ratings. However, Moody's will evaluate whether the FROB's support sufficiently compensates for the incremental expected losses that the combined entity will incur due to the integration of Cajasur, and assess the impact that it will have on BBK's creditworthiness in the medium term.

Specifically, Moody's review of BBK's ratings will focus on the following aspects:

- An assessment of the expected losses in the resulting entity's risk assets. This will provide a key input to the determination of capital adequacy through a capital replenishment exercise. It will also assess the new entity's ability to withstand deterioration in its loan book, and its capacity to generate capital through stressed core earnings and other capital-growth initiatives.

- The credit risk concentration (by borrower and industry) as a percentage of Tier-1 and pre-provision income of the combined entity.

- The ability to address debt maturities -- including interbank and domestic commercial paper placed with retail and institutional investors -- in light of the persistent system-wide liquidity constraints.

- The pro-forma risk-adjusted recurring profitability and cost efficiency indicators of the combined entity.

- The combined entity's corporate governance (i.e., related-party lending as a percentage of its Tier-1 capital).

In addition, the rating agency notes that the integration might also pose challenges in terms of managerial capabilities and resources, which could result in a more protracted integration process.

The previous rating action on BBK was implemented on 19 May 2009, when Moody's affirmed the A1/Prime-1/C+ ratings of BBK (all with a negative outlook), following the review of all Spanish rated financial institutions as part of the rating recalibration exercise.

The principal methodologies used in rating these issuers are Moody's "Bank Financial Strength Ratings: Global Methodology", published in February 2007, "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", published in March 2007, and "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt", published in November 2009, which are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Bilbao, Spain, BBK reported total consolidated assets of EUR29.8 billion as of 31 December 2009.

Headquartered in Córdoba, Spain, Cajasur reported total consolidated assets of EUR19 billion as of 31 December 2009.

On Review for Possible Downgrade:

..Issuer: Bilbao Bizkaia Kutxa

....Bank Financial Strength Rating, Placed on Review for Possible Downgrade, currently C+

....Issuer Rating, Placed on Review for Possible Downgrade, currently A1

....Deposit Rating, Placed on Review for Possible Downgrade, currently P-1

....Subordinate Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently A2

....Senior Unsecured Deposit Rating, Placed on Review for Possible Downgrade, currently A1

Outlook Actions:

..Issuer: Bilbao Bizkaia Kutxa

....Outlook, Changed To Rating Under Review From Negative

û

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

Madrid
Maria Jose Mori
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places all ratings of Bilbao Bizkaia Kutxa on review for possible downgrade
No Related Data.
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