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Rating Action:

Moody's takes rating actions on Caixa Catalunya and Caixa Manresa ahead of merger

18 May 2010

New York, May 18, 2010 -- Moody's Investors Service has today announced the following rating actions on Caixa d'Estalvis de Catalunya (Caixa Catalunya, rated A3/Prime-2/D-; total assets as of 12/2009: EUR 65 bn) and Caixa d'Estalvis de Manresa (Caixa Manresa, rated Baa1/Prime-2/D+; EUR 6.8 bn) in response to the announcement that a merger has been agreed by the boards of the two Spanish savings banks as well as that of the unrated Caixa d'Estalvis de Tarragona (EUR 9.8 bn):

i) The A3/P-2 senior and the Baa1 subordinated debt/deposit ratings of Caixa Catalunya have been affirmed maintaining the existing negative outlook, the D- BFSR and B3 preference share rating have been placed under review for possible upgrade.

ii) The Baa1 long-term senior and Baa2 subordinated debt rating of Caixa Manresa has been placed under review for possible upgrade, while its D+ BFSR has been placed under review for downgrade, and the P-2 rating has been affirmed.

The review of the various ratings will focus on any changes to the current merger plans which are still subject to approval by the regional government of Catalonia. Absent any such changes, Moody's said that the combined entity would likely be rated A3/P-2/D upon closure of the merger, which is expected for July 1st, 2010.

The merger will result in a new entity -- to be called Caixa d'Estalvis de Catalunya, Tarragona i Manresa -- which will be operative as of 1 July 2010. Caixa Catalunya, Caixa Tarragona and Caixa Manresa will then cease to exist as independent legal entities and the ratings for two of the banks will therefore be withdrawn. The merger is dependent on approval from the regional government (or "Generalitat") of Catalonia.

Maria Cabanyes, Senior Vice President and responsible for the coverage of Spanish banks at Moody's, commented: "Overall we see this merger as a credit positive: The restructuring and streamlining of the new entity's regional presence, much improved provisioning levels against non --performing assets and the capital injection from the FROB are all contributing to strengthening the credit profile of this new combined entity, which is largely dominated by Caixa Catalunya as this bank represents approx. 80% of total assets. Upon closing of the merger on July 1st we therefore expect that the intrinsic rating of the new entity (its Bank Financial Strength Rating -- "BFSR") should be above the current rating of Caixa Catalunya, most likely at D mapped to the long term scale of Ba2 whereas the overall debt rating is expected to be aligned with Caixa Catalunya's current A3/P-2 ratings, which already benefits from significant exceptional systemic support given the bank's role and importance in the regional catalan market."

Maria Cabanyes continued: "The significant increase in loan loss reserves and other provisions against its real estate portfolio should help to stabilize asset quality of the combined new entity. At the same time, cost cuttings and expected efficiency gains should improve its earnings power, whereas the EUR 1,250 billion in preferred shares received from the Frob underpin the new entity's capitalization. However, at this point in time we see further positive rating pressure constrained by the overall moderate degree of capitalization even after the capital injection from the Frob (Tier 1 capital is expected to be at 7.3% at FYE 2010), and in this context note the required repayment of the Frob funds by 2015, as well as the high coupon payment of 7.75% on the Frob preference shares, both of which may have prevented the bank from seeking a more substantial recapitalization.

DETAILS OF THE MERGER AND RESTRUCTURING TRANSACTION

According to Moody's, the review of the two banks' BFSRs will focus on the assessment of the creditworthiness of the resulting merged entity, which the rating agency expects to be stronger than the sum of its parts.

The new entity will receive public funds from the Fondo de Restructuración Bancaria (FROB, or Spain's fund for orderly bank restructuring) amounting to EUR1,250 million, or equivalent to 2.37% of its risk-weighted assets. The solvency of the new entity will be further strengthened by several actions taken by management, the most significant being the sale of 50% of its insurance business -- which has already generated capital gains close to EUR300 million -- thereby adding to the loan loss provisioning effort and write-offs carried out by the three entities over the recent past.

The new entity will also benefit from the significant cost savings that will arise from the restructuring plan that has been approved by the three existing savings banks and whose implementation will be closely followed by Bank of Spain. The mentioned plan entails a 15% reduction of the new group's combined workforce as well as branch closures that will affect 25% of its existing networks.

RATIONALE FOR THE BFSR OF THE NEW GROUP

Notwithstanding the clear benefits of the above-mentioned actions, Moody's believes that the new group faces challenges that will have to be borne with a modest core capital ratio of around 6.4%. Although the EUR1,250 million funds from the FROB are estimated to cover the bulk of loan loss provisioning requirements for the following years, the rating agency notes that internal capital generation from recurrent sources will be limited by a very challenging domestic operating environment of subdued growth, downward pressure on margins -- on the back of low interest rates and relatively high non-earning assets and the coupon-payment on the FROB's preferred shares -- as well as by the ongoing restructuring of the real estate sector. In addition, the more stringent capital requirements associated with Basel III could exert additional pressure on the new group's solvency. As a result, Moody's cautions that the BFSR of the resulting entity could be limited to the D range.

RATING ACTIONS ON DEBT RATINGS

In affirming Caixa Catalunya's debt ratings at A3/Prime-2, Moody's has incorporated (i) the low execution risks deemed acceptable given the leading role that the savings bank will play in the merger process, and the fact that it will represent around 80% of the new entity's total assets; (ii) the review for upgrade of its BFSR; as well as (iii) the maintenance of ongoing exceptional systemic support. In this respect, Moody's believes that the Spanish government is both willing and able to support its banking system, if and when required, and that the banking system's potential capital requirements in and of themselves should not put undue pressure on the government's financial flexibility.

In addition, the review for upgrade of Caixa Manresa's Baa1 debt ratings anticipates Moody's long- term view as part of its ongoing stance to "look through" the current crisis to the specific franchise characteristics of the new group as it emerges out of this environment. As a result, the new entity's default risk is likely to be in the low single-A category.

The negative outlook -- which is consistent with the outlook that Moody's has assigned to most Spanish banks and saving banks at this time -- is based on the challenging operating environment in Spain that will continue to exert pressure on the new entity's credit fundamentals, combined with the expectation that the exceptional systemic support may be weakening in the medium to long-term. Moody's will closely monitor the accomplishment of the financial plan that has been presented following the merger announcement. Any deviation from the business programme could exert downward pressure on the BFSR and thus on its debt ratings.

The previous rating action on Caixa Catalunya was implemented on 22 February 2010, when Moody's downgraded the banks' hybrid securities following revisions to Moody's hybrids methodology.

The previous rating action on Caixa Manresa was implemented on 15 June 2009, when Moody's downgraded the BFSR to D+ (mapping to a BCA of Baa3) from C, changing the outlook to negative; while also downgrading the bank's long-term debt and deposit rating to Baa1 from A2, changing their outlook to negative; downgrading the senior subordinated debt to Baa2 from A3, changing its outlook to negative; and downgrading the short-term debt and deposit rating to P-2 from P-1.

The previous rating action on Caixa Tarragona was implemented on 29 May 2009, when Moody's withdrew for business reasons the Baa1/Prime-2 deposit ratings and the C- bank financial strength rating, which had previously been on review for possible downgrade.

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 Barcelona, Spain, Caixa Catalunya reported total consolidated assets of EUR64 billion as at 31 December 2009.

Headquartered in Tarragona, Spain, Caixa Tarragona reported total assets of EUR 11 billion as at 31 December 2009.

Headquartered in Manresa, Spain, Caixa Manresa reported it had total assets of EUR7 billion as at 31 December 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
Maria Cabanyes
Senior Vice President
Financial Institutions Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's takes rating actions on Caixa Catalunya and Caixa Manresa ahead of merger
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