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Rating Action:

Moody's takes rating actions on Portuguese banks; outlook negative

07 Oct 2011

Concludes review for downgrade initiated on 15 July 2011

Madrid, October 07, 2011 -- Moody's Investors Service has today taken rating actions on Portuguese banks, involving downgrades by one or two notches of the senior debt and deposit ratings of nine banks and downgrades by one or two notches of the standalone ratings of six of these banks. All of the banks' ratings carry a negative outlook with the exception of Banco Portugues de Negocios (BPN), which has a developing outlook on all of its ratings.

Today's rating actions conclude the review for downgrade initiated on 15 July 2011, following the downgrade of the Republic of Portugal to Ba2, outlook negative, from Baa1.

The key driver for the downgrades of most banks' debt and deposit ratings is Moody's assessment of the deterioration of their unsupported financial strength as a consequence of the following factors:

(i) The increased asset risk as a direct consequence of the banks' holdings of Portuguese government debt and the sovereign's downgraded rating;

(ii) The expected further deterioration of the banks' domestic asset quality as a consequence of the weak outlook for economic growth in the context of the government's austerity measures;

(iii) The liquidity strains of the banks that currently lack access to wholesale funding.

The six banks which experienced downgrades of both their standalone ratings and their debt and deposit ratings are Caixa Geral de Depositos (CGD), Banco Comercial Portugues (BCP), Banco Espirito Santo (BES), Banco BPI (BPI), Banco Santander Totta (BST), and Caixa Economica Montepio Geral (Montepio).

Banco Internacional do Funchal (Banif SA) and Banco Portugues de Negocios (BPN) had their debt and deposit rating downgraded as a consequence of the weaker Portuguese sovereign, resulting in a lower rating uplift for these banks' debt ratings. The debt ratings of Espirito Santo Financial Group (ESFG) follow the lower rating of its operating company, BES.

At the same time, the downgrades of banks' standalone ratings and debt ratings also triggered downgrades of their dated subordinated debt, junior subordinated debt, and preference share ratings. In those cases where the banks' standalone ratings are no longer higher than the government's ratings, their government-guaranteed debt has also been downgraded.

Please refer to the end of this press release for a list of the affected ratings.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADE OF STANDALONE RATINGS

The standalone ratings of all rated Portuguese banks (except Banif SA and BPN and the holding company of BES, ESFG) have been downgraded by one notch as a result of the above listed factors, i.e., the increased asset risk from the banks' holding of Portuguese government debt, the expected further deterioration of the banks' domestic asset quality and the banks' liquidity strains.

In addition, the standalone ratings of BES, BCP and BPI have each been downgraded by an additional notch to reflect the following idiosyncratic risks:

(i) The two-notch downgrade of BES's standalone ratings to Ba3 on the long-term scale (equivalent to a Bank Financial Strength Rating (BFSR) of D-) from D+/Ba1 incorporates Moody's concern that BES's business model may be particularly affected by Portuguese banks' loss of market access: BES has traditionally been the most active Portuguese bank in the capital markets as well as a wholesale-oriented bank displaying a high reliance on market-sensitive funding.

(ii) The two-notch downgrade of BCP's standalone ratings to B1 on the long term scale (equivalent to the BFSR of E+) from D/Ba2 reflects concerns over the bank's particularly vulnerable funding profile due to its high reliance on wholesale funds; the weaker than average asset quality of its domestic assets; its exposure to Greece via its Greek subsidiary; and weak profitability that provides it with little financial flexibility to manage these challenges.

(iii) The two-notch downgrade of BPI's standalone ratings to Ba2 from Baa3 on the long-term scale (mapping to a downgrade on the BFSR scale from D+ to D) was caused by its direct exposure to Greece. Furthermore, Moody's is concerned that - despite its relatively strong liquidity, asset quality performance and management throughout the crisis so far - it will be challenging for BPI to immunise itself against the pressures within the Portuguese banking sector that stem from the above described causes, resulting in a standalone rating at the same level as the Portuguese government.

The standalone ratings of Banif SA at D-/Ba3 have been confirmed and BPN at E/Caa1 have been affirmed; although they share similar vulnerabilities as the other banks, these risks were already incorporated into their relatively low standalone ratings.

Moody's acknowledges that the recapitalisation and deleveraging plans imposed by the regulator in conjunction with the European Union, the European Central Bank and the IMF (the "Troika") as part of their support package for Portugal should, if successful, help to restore confidence in the banking system. However, Moody's believes that these plans face significant implementation risks. For example, deleveraging plans would be threatened should market conditions remain fragile, and any material growth in retail deposits would rely in part on an upturn in the economic environment. Today's rating action incorporates those implementation risks.

All Portuguese banks' standalone ratings have a negative outlook (with the exception of BPN), reflecting the very challenging operating environment in the country, which will continue exerting negative pressure on the banks.

RATIONALE FOR DOWNGRADE OF DEBT RATINGS

In the case of six banks (CGD, BCP, BES, BPI, BST and Montepio), the downgrades in long term debt ratings reflect the downgrades of the banks' standalone ratings. Banif SA's and BPN's debt ratings were respectively reduced by one and two notches to reflect the weakened position of the Portuguese sovereign.

In addition, ESFG's (holding company of BES) debt ratings have been downgraded by two notches to B1/Not Prime from Ba2/Not Prime reflecting the two-notch downgrade of BES' standalone BFSR to D- (mapping to Ba3 on the long-term scale) from D+ (Ba1). The ratings of ESFG reflect the structural subordination to its operating company BES.

Banco Santander Totta has higher ratings at Baa2 based on its higher standalone rating at D+/Ba1 and on Moody's assessment of parental support from Banco Santander S.A., rated Aa2/B-. All banks' debt ratings carry a negative outlook reflecting the current negative outlook of the Portuguese Republic's Ba2 bond rating and the negative outlook on the banks' standalone BFSR.

RATIONALE FOR DOWNGRADE OF SUBORDINATED DEBT RATINGS

Moody's has downgraded the senior subordinated debt ratings of eight Portuguese banks in line with the downgrade of these banks' senior unsecured debt ratings. This rating approach implies that if a bank's senior debt rating benefits from an assumption of systemic support, its subordinated debt will benefit similarly. Moody's does, however, intend to reassess its systemic support assumptions for subordinated debt in Portugal , alongside other European countries, during the remainder of this year in response to prospective European banking legislation. This reassessment is not captured in today's rating actions.

RATIONALE FOR DOWNGRADE OF HYBRID INSTRUMENTS

Today's downgrade of six banks' junior subordinated debt and of five banks' preference shares ratings -- for which Moody's does not assume any systemic support -- follows the downgrade of these banks' standalone ratings. All of these instruments' ratings have a negative outlook, in line with the outlook on the banks' standalone ratings.

RATIONALE FOR DOWNGRADE OF GOVERNMENT-GUARANTEED DEBT

Moody's has today downgraded the government guaranteed debt of two banks, CGD and BES. The rating action has been triggered by the downgrade of these banks' BFSRs to Ba2/Ba3 from Ba1. Moody's rates Portuguese government-guaranteed debt at either the sovereign rating or the bank's standalone rating, depending on which is higher. Following the downgrade of CGD's and BES's BFSRs, their standalone rating assessments are now Ba2 and Ba3, respectively, in line (or below) the sovereign's rating. The outlook on the banks' government- guaranteed debt is negative in line with the negative outlook of the Portuguese Republic's Ba2 bond rating.

RATING ACTIONS

(i) Caixa Geral de Depositos (CGD): the BFSR was downgraded to D (mapping to Ba2 on the long term scale) from D+ (Ba1) and the debt and deposit ratings were downgraded to Ba2/Not Prime from Ba1/Not Prime.

(ii) Banco Comercial Portugues (BCP): the BFSR was downgraded to E+ (B1) from D (Ba2) and the debt and deposit ratings were downgraded to Ba3/Not Prime from Ba1/Not Prime.

(iii) Banco Espirito Santo (BES): the BFSR was downgraded to D- (Ba3) from D+ (Ba1) and the debt and deposit ratings were downgraded to Ba2/Not Prime from Ba1/Not Prime.

(iv) Banco BPI (BPI): the BFSR was downgraded to D (Ba2) from D+ (Baa3) and the debt and deposit ratings were downgraded to Ba2/Not prime from Baa3/Prime-3.

(v) Banco Santander Totta (BST): the BFSR was confirmed at D+, the baseline credit assessment (BCA) was downgraded to Ba1 from Baa3 and the debt and deposit ratings were downgraded to Baa2/Prime-2 from Baa1/Prime-2.

(vi) Caixa Economica Montepio Geral (Montepio): the BFSR was downgraded to D- (Ba3) from D (Ba2) and the debt and deposit ratings were downgraded to Ba3/Not Prime from Ba2/Not Prime.

(vii) Banco Internacional do Funchal (Banif SA): the BFSR was confirmed at D- (Ba3) and the debt and deposit ratings were downgraded to Ba3/Not Prime from Ba2/Not Prime.

(viii) Espirito Santo Financial Group (ESFG): the debt ratings were downgraded to B1/Not Prime from Ba2/Not Prime.

(ix) Banco Portugues de Negocios (BPN): the BFSR was affirmed at E (Caa1) and the deposit ratings were downgraded to B3/Not Prime from B1/Not Prime. The outlook on all of the bank's ratings is developing.

A full list of affected ratings can be found on this link: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_136393

THE METHODOLOGIES USED

The 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 EUR123.7 billion as of 30 June 2011.

Headquartered in Oporto, Portugal, BCP reported total unaudited consolidated assets of EUR99.7 billion as of 30 June 2011.

Headquartered in Lisbon, Portugal, BES reported total unaudited consolidated assets of EUR80.2 billion as of 30 June 2011.

Headquartered in Lisbon, Portugal, BPI reported total unaudited consolidated assets of EUR43.2 billion as of 30 June 2011.

Headquartered in Lisbon, Portugal, BST reported total audited consolidated assets of EUR38.8 billion as of 30 June 2011.

Headquartered in Funchal, Portugal, Banif SA reported total audited assets of EUR17.5 billion as of 30 June 2011.

Headquartered in Lisbon, Portugal, Montepio reported total audited consolidated assets of EUR21.7 billion as of 30 June 2011.

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

Headquartered in Luxembourg, ESFG reported total audited consolidated assets of EUR83.8 billion as of 30 June 2011.

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/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 special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on 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.

Maria Jose Mori
Vice President - Senior Analyst
Financial Institutions Group
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

Johannes Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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; outlook negative
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