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Rating Action:

Moody's upgrades Abanca's deposit ratings to B2; outlook positive

27 Jun 2016

Madrid, June 27, 2016 -- Moody's Investors Service has today upgraded ABANCA Corporacion Bancaria, S.A.'s (Abanca) long-term deposit ratings to B2 from Caa1 . The rating agency has also upgraded the bank's baseline credit assessment (BCA) and adjusted BCA to b2 from b3. The bank's CR Assessment has been upgraded to Ba3(cr) from B2(cr). The outlook on the long-term deposit ratings remains positive.

Abanca's Not-Prime short-term deposit ratings were unaffected by today's rating action as well as the short-term CR Assessment of Not-Prime(cr).

This rating action reflects the improvement of Abanca's credit fundamentals, primarily in terms of asset risk, capital and liquidity metrics, as well as the result of Moody's Advanced Loss Given Failure analysis, which indicates a lower loss-given-failure to be faced by deposits in light of the bank's deleveraging and deposit growth.

The positive outlook on Abanca's long-term deposit ratings reflects the positive pressure that could develop on its ratings if the improving trend observed on the bank's credit fundamentals consolidates over the next 12-18 months.

A list of affected ratings can be found at the end of the press release.

RATINGS RATIONALE

---RATIONALE FOR UPGRADING THE BCA

The upgrade of Abanca's BCA to b2 from b3 is driven by improvements in the bank's asset risk, capital and liquidity. In 2015, Abanca materially reduced the volume of non-performing loans (NPLs), which translated into a decline in the NPL ratio to 9.6% in December 2015 from 13.4% in December 2014. Although the improvement did not translate to the volume of repossessed real estate assets, which even increased throughout the year, the bank's non-earning asset ratio (which combines NPLs and real estate assets) still reduced to 13.9% from 16.6% over the period.

In terms of capital, Moody's calculated Tangible Common Equity (TCE) ratio improved by 86 basis points to 8.8% at end-December 2015 from 7.9% at end-December 2014. The improvement was due to internal capital generation and the lower risk weighted assets that Moody's assigns to the bank's sovereign exposure, following the disposal of a large part of the sovereign debt portfolio in the year. Moreover, the improvement has been more visible in terms of leverage, given the decline in total assets after the portfolio sale. Moody's calculated leverage ratio improved to 5.8% at end 2015 from 4.8% at end 2014. From a regulatory standpoint, Abanca's Common Equity Tier 1 ratio stood at 14.8% at end 2015, above the system average of 12.6% as of the same date.

Similarly, Abanca's liquidity position materially improved throughout 2015, as the bank was able to grow deposits which, at the end of 2015, represented 71% of total funding compared to 59% a year ago. The sale of the sovereign debt portfolio also translated into lower reliance on short-term funding, with interbank and repos with customers representing less than 6% of total funding at the end of 2015.

Despite the mentioned improvements, Abanca's BCA of b2 also reflects the entity's weak recurring profitability, with net interest income declining by 25% in 2015 and a pre-provision income highly reliant on non-recurrent capital gains. At the same time, we note the still very high volume of problematic exposures (measured as the addition of NPLs, foreclosed real estate assets and refinanced loans classified as performing), which accounted for 96% of the bank's shareholder equity plus loan loss reserves as of end-December 2015.

---RATIONALE FOR UPGRADING THE DEPOSIT RATINGS

The two-notch upgrade of Abanca's long-term deposit ratings to B2 from Caa1 reflects: (1) The upgrade of the bank's adjusted BCA to b2 from b3; and (2) the result from the rating agency's updated Advanced Loss-Given Failure (LGF) analysis, which provides a more favorable outcome as a consequence of the decline in total assets and the growth in deposits observed in 2015. Moody's updated LGF analysis indicates a moderate loss-given-failure for deposits which translates into a one notch of uplift, compared to a high loss-given-failure and one notch of negative uplift previously. The B2 long-term deposit ratings also take into account Moody's assessment of a low probability of government support, which results in no uplift.

---RATIONALE FOR UPGRADING THE CR ASSESSMENT

As part of today's rating action, Moody's has also upgraded by two notches the CR Assessment of Abanca to Ba3(cr) from B2(cr), two notches above the adjusted BCA of b2. The CR Assessment is driven by the banks' adjusted BCA, low likelihood of government support and by the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 8.5% of tangible banking assets.

---RATIONALE FOR THE POSITIVE OUTLOOK

The outlook on Abanca's long-term deposit ratings is positive, reflecting the positive pressure that could develop on its ratings if the improving trend observed on the bank's credit fundamentals consolidates over the next 12-18 months.

WHAT COULD CHANGE THE RATING - UP

An upgrade of Abanca's deposit ratings could arise as a result of changes in the liability structure, which indicates a lower loss-given-failure to be faced by deposits.

In terms of BCA, the ratings could be upgraded primarily as a consequence of: (1) A sustained improvement of recurrent profitability; (2) a further decline in the volume of problematic assets; and/or (3) stronger capital and leverage ratios.

WHAT COULD CHANGE THE RATING - DOWN

Given the positive outlook, Abanca's ratings show limited downward pressure. Nevertheless, Abanca ratings could be downgraded as a result of: (1) A reversal in current asset risk trends translating into an increase in the volume of problematic assets; (2) a weakening of the bank's risk-absorption capacity as a result of subdued profitability levels; and/or (3) any worsening, beyond our current expectations, in operating conditions in the Spanish operating environment, particularly in the region of Galicia.

Abanca's deposit ratings could also change as a result of changes in the liability structure, which would indicate a higher loss-given-failure to be faced by deposits.

LIST OF AFFECTED RATINGS

Issuer: ABANCA Corporacion Bancaria, S.A.

..Upgrades:

....Adjusted Baseline Credit Assessment, upgraded to b2 from b3

....Baseline Credit Assessment, upgraded to b2 from b3

....Long-term Counterparty Risk Assessment, upgraded to Ba3(cr) from B2(cr)

....Long-term Deposit Ratings, upgraded to B2 from Caa1 , outlook remains Positive

..Outlook Actions:

....Outlook remains Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

This rating was not initiated or not maintained at the request of the rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis, the rated entity or its agent(s) is considered to be a non-participating entity. The rated entity or its agent(s) generally does not provide Moody's with information for the purposes of its ratings process.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alberto Postigo
VP - Senior Credit Officer
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

Carola Schuler
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 upgrades Abanca's deposit ratings to B2; outlook positive
No Related Data.
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