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Rating Action:

Moody's takes rating actions on Portuguese banks

06 Apr 2011

Madrid, April 06, 2011 -- Moody's Investors Service has today taken multiple rating actions on Portuguese banks, including downgrades by one or more notches of the senior debt and deposit ratings of seven banks and downgrades of the standalone credit assessment for five of these banks.

The rating actions follow the downgrade of Portugal's debt ratings and also reflect the weakened standalone credit profile of most Portuguese banks.

The key drivers for today's rating actions are:

(i) The weakened standalone financial strength of most banks;

(ii) The sovereign's reduced financial strength, which raises the probability that the government may limit its future support for banks; and

(iii) The sovereign faces harder choices, at a time when the support environment for smaller banks is weakening across Europe.

The following rating actions have been taken:

(i) The senior unsecured debt and deposit ratings for seven banks have been downgraded, including a single-notch revision for one (Caixa Economica Montepio Geral) and downgrades of two or more notches of six banks (Caixa Geral de Depositos, Banco Comercial Português, Banco Espirito Santo, Banco BPI, Banco Santander Totta and Banco Português de Negocios).

(ii) The short-term senior debt and deposit ratings of these seven banks have been downgraded by one notch.

(iii) The standalone credit assessments of five banks have been downgraded by one or two notches. The standalone credit assessments for two banks remain unchanged.

(iv) The senior subordinated debt ratings of six banks have been downgraded by one to three notches.

(v) The junior subordinated debt and preference share ratings of five banks have been downgraded by one or two notches, in line with the downgrade of the standalone credit assessments.

(vi) The government-backed rated senior debt of four institutions has been downgraded to Baa1, and kept under review for possible downgrade.

Today's rating actions conclude the review of most Portuguese banks' standalone bank financial strength ratings (BFSRs), which Moody's initiated on 9 December 2010. The outlook is negative on most banks' standalone credit profiles, given the challenging operating environment in Portugal. The ratings on most banks' senior debt and deposits remain on review for possible further downgrade, reflecting the ongoing review for possible downgrade of the sovereign's rating.

The review of Itau BBA International and Espirito Santo Financial Group ratings will be concluded in the next weeks, in separate rating actions, as the sovereign rating action does not have a direct impact on these institutions. Moreover, Moody's will continue its analysis of Banif and expects to conclude its pending review on the ratings separately.

Additional information on today's rating action will be published in a Special Comment "Key Drivers of Moody's Rating Action on Portuguese Banks" on www.moodys.com.

A full list of affected ratings can be found at this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_132272

RATINGS RATIONALE

The different rating actions announced today are best understood as two separate analytical processes, each following a relatively straightforward rationale: (i) the downgrades of the standalone credit profiles and (ii) our lower government support assumptions due to the sovereign's reduced financial strength.

RATIONALE FOR THE DOWNGRADE OF THE STANDALONE CREDIT ASSESSMENTS

In Moody's view, the standalone credit assessments of most Portuguese banks have weakened due to reduced funding flexibility, weakening profitability and asset-quality deterioration. The weakening credit strength of Portuguese banks is driven by the challenging operating environment and a loss of market confidence that is closely correlated with the sovereign's credit challenges.

These weakening financial fundamentals have led to one or two-notch downgrades of the standalone credit assessments for five Portuguese banks (leading to a decline in the average, un-weighted standalone credit strength of Portuguese banks to D/Ba2 from D+/Ba1), while the standalone BFSRs for two banks remain unchanged for reasons discussed below.

Moody's has taken differentiated actions for the BFSRs of the following banks:

(i) Downgraded the standalone credit assessments for Banco Espírito Santo (BES), Banco Comercial Português (BCP) and Banco Santander Totta (BST) by two notches, reflecting:

• High dependence on wholesale funding, resulting in a high reliance on ECB funding whilst access to wholesale markets remains restricted

• For BST, its relatively high standalone BFSR (previously at C/A3) had been based on its intrinsic strengths. However, with the challenges in the operating environment and the negative pressure on liquidity, asset quality and earnings, BST's intrinsic strengths may no longer be sufficient to fully offset these pressures at the high rating level of C. Moody's continues to view this bank as having the strongest standalone creditworthiness. However, as a reflection of these pressures, Moody's has lowered the BFSR by one notch to C- (now translating into Baa2 on the long-term scale) two notches below the previous standalone credit assessment.

• For BCP, its low financial flexibility -- as evidenced by its high reliance on ECB funding (at 14% of total assets) -- as well as its sharp deterioration in asset quality, with a NPL ratio at the end of 2010 of 4.5% (110bp above the system average, according to Bank of Portugal criteria) and the ongoing pressures from its Greek subsidiary, Millennium Bank. We have lowered the BFSR by one notch to D from D+, now translating into a Ba2, two notches below the previous standalone credit assessment of Baa3.

• For BES, its higher exposure to international capital markets activities -- and its high reliance on market funds, particularly short-term funding -- heighten its vulnerability to an extended period of a lack of confidence in Portugal. We have lowered its BFSR by one notch to D+ from C-, now translating into Ba1, two notches below the previous standalone credit assessment of Baa2.

(ii) Downgraded the standalone credit assessments for CGD and BPI by one notch. This reflects their lower transition risk to a more severe economic environment and their relatively better flexibility compared to other Portuguese banks to withstand restricted access to capital markets.

(iii) Moody's has left unchanged its standalone credit assessments for Montepio and BPN:

• Montepio benefits from a better-than-average liquidity position, a retail deposit-oriented funding profile, and continued profitability despite high provisioning levels. Its stable franchise provides a level of protection against the challenging environment, particularly against disruption in the wholesale funding markets. These sources of strength underpin the stable standalone credit profile at D/Ba2.

• BPN's weak standalone profile at E/Caa1 already reflects very weak credit fundamentals and is unlikely to drop further, provided that the government provides ongoing support to this fully government-owned entity.

RATIONALE FOR THE LOWER SUPPORT ASSUMPTIONS AND THE DOWNGRADE OF THE SENIOR DEBT AND DEPOSIT RATINGS

Moody's has reduced the level of government support embedded in its ratings of Portuguese banks. The key drivers for today's rating actions are:

(i) The reduced financial strength of the sovereign -- the Portuguese government was recently downgraded across two separate rating actions to Baa1 from A1, with the rating remaining on review for further downgrade -- raises the probability that the government may be unable to provide future support for banks. All other variables being equal, the sovereign is less able to support the banking sector-- a factor reflected one for one in a one-notch reduction in support across the sector, including the largest banks.

(ii) The sovereign faces harder choices, at a time when the support environment for smaller banks is weakening across Europe. The increased pressure on the government's financial strength increases the likelihood that it may need to make difficult choices in the coming months and years, balancing the desire to support the banks against the need to protect its own balance sheet. There is, more generally, increasing uncertainty regarding the willingness of authorities in Europe to continue to support senior creditors of institutions below the first tier in their domestic markets over the medium term. This uncertainty has further reduced Moody's systemic support assumptions for two Portuguese institutions with weaker market shares. In this respect, today's rating actions partly reflect the agency's recently-announced broader reassessment of authorities' willingness to support senior debt issued by smaller financial institutions in Europe. And the sovereign's loss of financial strength makes it hard to justify very high levels of support even for larger institutions.

Going forward, the rating agency is differentiating three groups of Portuguese banks in terms of how much "systemic uplift" (additional notches over their standalone credit strength) their ratings receive due to government support:

• Group 1: Caixa Geral de Depositos and Banco Portugues de Negocios (BPN) with three notches of systemic uplift. Caixa Geral de Depositos is fully government-owned with a dominating deposit share and has an exceptionally high likelihood of government support. Systemic support for Banco Portugues de Negocios (BPN) reflects the government's full ownership and role as caretaker of this failed bank

• Group 2: Banks with very high likelihood of support (two notches of uplift). Banks in this group -- Banco Espirito Santo and Banco Comercial Português --have national networks with strong deposit or loan shares.

• Group 3: Banks with high to moderate likelihood of support (one or no notches of uplift). This group -- Banco BPI, Banco Santander Totta (BST) and Caixa Economica Montepio Geral (Montepio) -- represents the second tier of Portuguese banks, with lower national market shares or a more regional presence. These banks receive one or no notches of systemic uplift.

For all Portuguese banks, the government support-driven uplift implied in their ratings has declined. This, combined with the reduced standalone credit strength, have been the major drivers of today's rating actions.

RATINGS RATIONALE FOR SENIOR SUBORDINATED DEBT

Moody's has downgraded the senior subordinated debt ratings of six banks in line with the downgrade of these banks' senior unsecured debt ratings. Moody's has not yet removed systemic support for subordinated debt issuances in Portugal, but expects to assess this during Q2 2011 alongside other European countries affected by European regulations and legislation. If at that time, Moody's assessment results in the partial or full removal of systemic support for subordinated debt, any further downgrades of subordinated debt would likely be limited to a maximum of three notches, given the reduction of the systemic support rating uplift discussed above.

RATINGS RATIONALE FOR THE DOWNGRADE OF HYBRID INSTRUMENTS

Moody's has downgraded the junior subordinated debt of four banks (two by one notch and two by two notches), as well as the preferred shares of four banks (two by one notch and two by two notches). In 2010, Moody's removed all systemic support from the ratings of junior subordinated debt and other hybrids in Portugal and rated these instruments in view of the banks' standalone financial strength, but incorporated support from parents or co-operatives and similar groups.

GOVERNMENT GUARANTEED DEBT

Moody's has downgraded the government-backed rated senior debt of four institutions to Baa1, and has kept them under review for possible downgrade. This action follows the downgrade to Baa1 (on review for possible downgrade) of the Portuguese government bond ratings, announced on 5 April 2011. The government-backed Baa1 ratings assigned are based on the unconditional guarantee from the Portuguese government.

WHAT COULD CHANGE THE RATINGS - UP

An improvement in the banks' standalone BFSRs could exert upward pressure on the banks' debt and deposit ratings. This could be driven by a more favorable operating environment that would have a positive impact on the banks' fundamentals. In this case, Moody's would expect to see improvements in asset quality, profitability and liquidity metrics, banks regaining access to market funding and solvency levels improving.

WHAT COULD CHANGE THE RATINGS - DOWN

All domestic banks' debt and deposit ratings continue to benefit from systemic support and therefore remain dependent on the creditworthiness of the Portuguese government and our support assumptions. A reduction in parental support for BST could exert downward pressure on its debt ratings. There could be negative rating actions on BFSRs, if the operating environment in Portugal deteriorates much more than currently anticipated by the Portuguese and international authorities.

The following ratings have been affected:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_132272

PREVIOUS RATING ACTION AND METHODOLOGY

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.

Previous rating actions on Portuguese banks took place on 9 and 21 December 2010, when Moody's placed on review for possible downgrade the deposit, senior debt and subordinated debt ratings of all Portuguese banks and the standalone BFSRs and hybrids of most Portuguese banks.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

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

On our website www.moodys.com, you can find further information and any updates on the Lead Analyst to a specific Credit Rating, and the office from which the credit rating was issued.

In addition to the above general contact information please find, for each of the Credit Ratings affected, Moody's regulatory disclosures on the lead analyst and the Moody's office that has issued the Credit Rating on the ratings tab of the issuer page at www.moodys.com.

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 www.moodys.com/disclosures on our website for further information.

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 www.moodys.com/disclosures on our website for further information.

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

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Madrid
Olga Cerqueira
Asst Vice President - 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.
Barbara de Braganza, 2
Madrid 28004
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's takes rating actions on Portuguese banks
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