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Rating Action:

Moody's upgrades Abanca's deposit ratings to Ba1; outlook positive

01 Oct 2019

Madrid, October 01, 2019 -- Moody's Investors Service has today upgraded ABANCA Corporacion Bancaria, S.A.'s (Abanca) long-term deposit ratings to Ba1 from Ba2. The outlook on the long-term deposit ratings remains positive. The rating agency has also upgraded the bank's (1) Baseline Credit Assessment (BCA) and Adjusted BCA to ba1 from ba2; (2) subordinated debt rating to Ba2 from Ba3; (3) Counterparty Risk Assessments (CR Assessment) to Baa1(cr)/Prime-2(cr) from Baa3(cr)/Prime-3(cr); and (4) Counterparty Risk Ratings (CRR) to Baa2/Prime-2 from Ba1/Not Prime. Abanca's short-term deposit ratings have been affirmed at Not Prime.

The upgrade of the long-term deposit ratings was prompted by Moody's assessment of Abanca's further materially strengthened financial profile primarily from the bank's improving asset risk, a trend that Moody's expects to continue supported by Spain's positive economic performance. The positive outlook on the long-term deposit ratings reflects anticipated changes in Abanca's balance sheet structure, whereby deposits could benefit from a higher protection against losses according to Moody's Advanced Loss Given Failure (LGF) analysis.

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

RATINGS RATIONALE

---RATIONALE FOR UPGRADING THE BCA

The upgrade of Abanca's BCA to ba1 from ba2 reflects the bank's improved credit profile, primarily in terms of asset risk. Since year-end 2013, Abanca has materially reduced the volume of non-performing loans (NPLs), with an accumulated decline of 80% (around €4 billion) as of the end of June 2019. Although asset risk improvement was more significant at the onset of the recovery period, since year-end 2017 the bank has still been able to reduce the NPL ratio to 3.2% (as of end-June 2019) from 5.1%. In upgrading Abanca's BCA to ba1, Moody's has incorporated its expectation of a further improvement in the bank's asset risk, on the back of Spain's positive economic performance (the rating agency expects GDP to grow by 2.2% in 2019).

Although asset risk improvement has been less material in terms of repossessed real estate assets, the bank's broader non-performing asset (NPA, which combines NPLs and real estate assets) ratio still reduced to 6.4% from 9.2% over the period. Moreover, a large share of the bank's real estate assets (around 35% of the total stock) are under rental agreements, which are not subject to provisioning requirements and provide a stable source of revenue to the bank.

Moody's asset risk assessment incorporates the recent integration of the retail unit of Deutsche Bank (Portugal) S.A. (DB Portugal) and that of Banco Caixa Geral, S.A. (BCG), expected to be closed in 4Q 2019. In Moody's view, the acquisitions will have a limited impact on Abanca's asset risk given the relatively small size of the units acquired, which moreover show NPL ratios which are close to that of Abanca (3.3% for DB Portugal as of June 2019 and 3.1% for BCG as of end-2018, latest data point available). Positively, both DB Portugal and BCG show a negligible exposure to real estate assets.

The upgrade of Abanca's BCA also reflects the bank's improved profitability, with recurrent earnings (defined as a combination of net interest income and fee and commission income) growing since 2017 after a material drop in the precedent years. Despite the improvement, Abanca's profitability remains modest, with bottom-line earnings largely supported by non-recurrent capital gains and a very low cost of credit. Abanca's BCA of ba1 is also supported by the bank's improved liquidity profile, with a large retail deposit base covering an increasing share of the bank's funding needs (78% as of end-June 2019). Moody's expects the bank to continue funding its business primarily through customer deposits and, despite the issuance of Minimum Requirement for own funds and Eligible Liabilities (MREL)-eligible securities, to maintain a low reliance on market funding.

Despite the mentioned improvements, Abanca shows a weak capital position, which is a key rating constraint. Moody's key capital metric Tangible Common Equity stood at a low 8.7% of risk-weighted assets as of end-June 2019. The bank has a large exposure to deferred tax assets (which represented 76% of the common equity tier 1 capital as of end-June 2019) that Moody's considers a low-quality form of asset and which weighs on the bank's capital assessment. From a regulatory perspective, Abanca shows a more comfortable capital position, with a Common Equity Tier 1 ratio of 14.7% as of end-June 2019. Moody's capital assessment incorporates the upcoming integration of BCG, which will reduce the TCE ratio by between 60 and 70 basis points.

Although Abanca's concentrated ownership structure entail key-man risk, Moody's does not apply any corporate behaviour adjustment to the bank. In the rating agency's view, the risk is largely mitigated by the composition of the board with a majority of independent directors and Spain's developed institutional framework, further supported by the track record of recovery of the bank's financial fundamentals over the past years.

---RATIONALE FOR UPGRADING THE DEPOSIT RATINGS WITH A POSITIVE OUTLOOK

The upgrade of Abanca's long-term deposit ratings to Ba1 from Ba2 reflects: (1) The upgrade of the bank's BCA and adjusted BCA to ba1 from ba2; (2) the outcome of Moody's Advanced Loss-Given Failure (LGF) analysis which results in unchanged no uplift; and (3) Moody's assessment of low probability of government support for Abanca, which results in no rating uplift.

The positive outlook on the long-term deposit ratings reflects changes in Abanca's balance sheet structure, whereby deposits could benefit from a higher protection against losses. A lower level of loss given failure faced by deposits could arise from a further increase in the volume of non-preferred deposits (which qualify as bail-in-able under the EU Bank Recovery and Resolution Directive (BRRD)), after they have materially increased in recent years, as well as from the further issuance of bail-in-able debt in order to meet the gap between its liability structure and MREL requirement, which the bank, based on June 2019 data, estimated at around €1.1 billion. Under Moody's Advanced LGF analysis, any issuance of senior or subordinated debt, or an increase in the volume of non-preferred deposits, would reduce the level of loss given failure faced by deposits, eventually translating into a higher LGF uplift for Abanca's deposit ratings.

WHAT COULD CHANGE THE RATING - UP

Abanca's BCA could be upgraded primarily as a consequence of (1) a further reduction in the stock of problematic assets, which translates into a further material decline in the NPA ratio; (2) a sustained improvement in recurrent profitability; and/or (3) stronger capital and leverage ratios.

As the bank's deposit ratings are linked to the BCA, a positive change in the bank's BCA would be likely to benefit the deposit ratings. The deposit ratings could also be upgraded upon changes to the bank's current liability structure, indicating a lower loss given failure to be faced by deposits.

WHAT COULD CHANGE THE RATING - DOWN

Abanca's ratings could be downgraded as a result of (1) a reversal in the current asset-risk trends, translating into an increase in the volume of NPAs, or (2) a weakening in the bank's risk-absorption capacity as a result of subdued profitability levels or weaker capital ratios.

Abanca's deposit ratings could also be affected by changes in the liability structure that indicate a higher loss given failure to be faced by deposits.

LIST OF AFFECTED RATINGS

Issuer: ABANCA Corporacion Bancaria, S.A.

..Upgrades:

....Long-term Counterparty Risk Rating, upgraded to Baa2 from Ba1

....Short-term Counterparty Risk Rating, upgraded to P-2 from NP

....Long-term Bank Deposits, upgraded to Ba1 from Ba2, outlook remains Positive

....Long-term Counterparty Risk Assessment, upgraded to Baa1(cr) from Baa3(cr)

....Short-term Counterparty Risk Assessment, upgraded to P-2(cr) from P-3(cr)

....Baseline Credit Assessment, upgraded to ba1 from ba2

....Adjusted Baseline Credit Assessment, upgraded to ba1 from ba2

....Subordinate Regular Bond/Debenture, upgraded to Ba2 from Ba3

..Affirmations:

....Short-term Bank Deposits, affirmed NP

..Outlook Action:

....Outlook remains Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

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
Client Service: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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