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Rating Action:

Moody's takes rating actions on Portuguese banks further to sovereign downgrade

15 Jul 2011

Madrid, July 15, 2011 -- Moody's Investors Service has today downgraded the debt ratings of seven Portuguese banks.

Today's rating actions were triggered by the downgrade of the rating of the Republic of Portugal to Ba2 from Baa1 last week.

The following banks have been downgraded:

(i) Caixa Geral de Depositos ("CGD"): long-and short-term senior unsecured debt and deposit ratings were downgraded to Ba1/Not-Prime from Baa1/Prime-2.

(ii) Banco Espirito Santo ("BES"): downgraded to Ba1/NP from Baa2/P-2.

(iii) Espirito Santo Financial Group ("ESFG"): downgraded to Ba2/NP from Baa1/P-2.

(iv) Banco Comercial Portugues ("BCP"): downgraded to Ba1/NP from Baa3/P-3.

(v) Banco BPI ("BPI"): downgraded to Baa3/P-3 from Baa2/P-2.

(vi) Banco Santander Totta ("BST"): downgraded to Baa1/P-2 from A3/P-2; BST's standalone BFSR downgraded to D+/Baa3 from C-/Baa2.

(vii) Caixa Economica Montepio Geral ("Montepio"): downgraded to Ba2/NP from Ba1/NP.

At the same time, the downgrade of the banks' debt ratings also triggered a downgrade of most of the banks' dated and junior subordinated debt and preference share ratings.

All these banks' debt, standalone and prime short-term ratings remain on review for possible downgrade, pending the finalisation of their deleveraging plans which they are currently discussing with Portuguese and European authorities.

A full list of affected ratings can be found on this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_134410

Separately, the ratings of the following three banks are unaffected by today's rating action:

- Banco Itau BBA International ("Itau"), rated Baa2/P-2/D+ (mapping to Baa3 on the long-term scale).

- Banco Internacional do Funchal ("Banif"), rated Ba2/NP/D- (mapping to Ba3 on the long-term scale).

- Banco Portugues de Negocios ("BPN"), rated B1/NP/E (mapping to Caa1 on the long-term scale)

Itau's ratings are not under review for possible downgrade, whereas the review for possible downgrade continues for Banif.

RATIONALE FOR DOWNGRADES OF DEBT AND FINANCIAL STRENGTH RATINGS

Today's rating action on Portuguese banks has been driven by the downgrade of the Republic of Portugal on July 5, 2011. (Please see "Moody's downgrades Portugal to Ba2 with a negative outlook from Baa1").

Moody's downgrade of the Republic of Portugal to Ba2 implies a weakened ability of the Portuguese government to support its banking system. Moody's therefore assumes that the possibility of support from the government could not take a bank's rating to more than one notch above the government rating of Ba2, and that only banks with a standalone financial strength rating at or below the Republic of Portugal's Ba2 rating could therefore benefit from ongoing government support.

The banks whose debt ratings are affected by this are:

- CGD, BCP and BES (and indirectly ESFG, its holding company), whose debt ratings have been downgraded to Ba1 (Ba2 for ESFG reflecting structural subordination to its operating company BES).

- BPI, which has been downgraded to Baa3, the same level as its standalone rating (D+/Baa3).

- Montepio, whose downgrade to Ba2 is a reflection of both its lower standalone rating at D/Ba2 and of its lower systemic importance in Moody's view, as compared to CGD, BES and BCP.

Only Banif retains its current level of support, which is providing uplift for its debt rating to Ba2 from its standalone rating of D-/Ba3.

Moody's has also downgraded the BFSR of Banco Santander Totta by one notch to D+/Baa3 from C-/Baa2. While the review for downgrade referred to below will assess the wider implications of the sovereign downgrade for Portuguese banks' standalone strength, Moody's is of the opinion that the rising pressures on asset quality, profitability, liquidity and capital levels that Moody's sees as likely consequences of the government austerity measures, are limiting the standalone strength of banks to be not more than two notches above the sovereign rating of Ba2. Banco Santander Totta's debt ratings continue to incorporate two notches of support from its parent, Banco Santander S.A., (rated Aa2/ B- mapping to A1 on the long-term rating scale; negative outlook).

RATIONALE FOR CONTINUED REVIEW FOR DOWNGRADE OF DEBT AND FINANCIAL STRENGTH RATINGS

All the above standalone financial strength and long-term debt ratings (including the ratings of Banif and the Prime short-term ratings of BPI and BST) remain under review for downgrade until the review of these banks' standalone financial strength rating can be concluded.

The ongoing review on all banks' standalone financial strength ratings will focus on the deleveraging plans currently under discussion between the banks and Portuguese and EU authorities and will be key to determining the banks' capital and funding strategies over the short to medium term. Moody's expects these plans to be finalised over the next couple of months, which should allow the rating agency to conclude the reviews in the first half of September.

Moody's review will also take into account the following factors, as previously highlighted in its press release of 7 July 2011: (i) the magnitude of banks' direct exposure to government debt; (ii) their exposure to risk factors that are interrelated with the sovereign's credit risk, such as market confidence and access to market funding; (iii) the high degree of correlation between the macroeconomic factors that affect financial institutions' asset quality and the sovereign's financial health, which can be partly mitigated by geographical diversification.

The review will incorporate any further news regarding the support that is likely to be available to Portuguese banks from either the Portuguese government or other European authorities.

The ratings of BPN will be reviewed separately, once the privatisation process of the bank has been concluded. BPN's weak standalone profile at E/Caa1 already reflects very weak credit fundamentals and is unlikely to drop further, provided that the government maintains its ongoing support for this fully government-owned entity.

RATING RATIONALE FOR DOWNGRADE OF SENIOR SUBORDINATED DEBT

Moody's has downgraded the senior subordinated debt ratings of seven banks in line with the downgrade of these banks' senior unsecured debt ratings. Moody's has not yet removed systemic support for the senior subordinated debt issuances in Portugal, but expects to also assess this during the current review. If, at that point, Moody's assessment results in the partial or full removal of systemic support for subordinated debt, then the rating agency would consider further downgrades of this type of debt.

RATING RATIONALE FOR THE DOWNGRADE OF HYBRID INSTRUMENTS

The one notch downgrade of junior subordinated debt of BES, BPI, Totta and Montepio -- for which no systemic support is incorporated -- to one notch below the dated subordinated debt reflects the risk differentiation between junior subordinated debt and dated subordinated debt due to the legal subordination of junior subordinated debt.

In the case of CGD, the junior subordinated debt and preference share ratings have been affected by the downgrade of the Portuguese sovereign, since Moody's incorporates support from the sovereign for all classes of debt instruments due to the parental role of the Portuguese government. They are now notched off the Ba1 rating of CGD.

All of these ratings also remain on review for possible downgrade

METHODOLOGIES USED

The principal methodologies used in this rating were 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. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Lisbon, Portugal, CGD reported total unaudited consolidated assets of EUR123.5 billion as of 31 March 2011.

Headquartered in Lisbon, Portugal, BES reported total unaudited consolidated assets of EUR80.7 billion as of 31 March 2011.

Headquartered in Oporto, Portugal, BCP reported total unaudited consolidated assets of EUR96.6 billion as of 31 March 2011.

Headquartered in Lisbon, Portugal, BPI reported total unaudited consolidated assets of EUR44.2 billion as of 31 March 2011.

Headquartered in Lisbon, Portugal, BST reported total unaudited consolidated assets of EUR48.8 billion as of 31 March 2011.

Headquartered in Funchal, Portugal, Banif reported total audited consolidated assets of EUR12.4 billion as of 31 December 2010.

Headquartered in Lisbon, Portugal, Montepio reported total audited consolidated assets of EUR18.2 billion as of 31 December 2010.

Headquartered in Luxembourg, ESFG reported total unaudited consolidated assets of EUR84.1 billion as of 31 March 2011.

Headquartered in Lisbon, Portugal, Itau reported total unaudited consolidated assets of EUR5.2 billion as of 31 March 2011.

Headquartered in Lisbon, Portugal, BPN reported total audited consolidated assets of EUR7.0 billion as of 31 December 2010.

REGULATORY DISCLOSURES

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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating 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 entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating 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.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the credit rating action. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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

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

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 takes rating actions on Portuguese banks further to sovereign downgrade
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