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Rating Action:

Moody's upgrades Banco Montepio's long-term deposit ratings to B1; outlook stable

09 Oct 2019

Long-term senior unsecured programme ratings downgraded to (P)Caa1

Madrid, October 09, 2019 -- Moody's Investors Service ("Moody's") has today upgraded Portugal's Caixa Economica Montepio Geral, caixa economica bancaria, S.A.'s (Banco Montepio) long-term deposit ratings to B1 from B3. At the same time, the rating agency has downgraded the bank's long-term senior unsecured programme rating to (P)Caa1 from (P)B3. The outlook on the long-term deposit ratings was changed to stable from rating under review. Concurrently, the rating agency has also upgraded (1) the bank´s Baseline Credit Assessment (BCA) and Adjusted BCA to b3 from caa1; (2) its subordinated debt and programme rating to Caa1 and (P)Caa1 from Caa2 and (P)Caa2; and (3) its junior subordinated programme rating to (P)Caa2 from (P)Caa3. The bank's Not-Prime short-term deposit ratings remain unaffected by today's rating action.

Further, Moody´s has also assigned a (P)Caa1 junior senior unsecured rating to the long-term senior non-preferred medium term note programme of Banco Montepio.

Today's rating action reflects the improved operating environment in Portugal, in combination with the progress Banco Montepio is making in terms of de-risking its balance-sheet as a result of its 2018-2021 transformation plan. In changing the deposit and senior unsecured programme ratings, the rating agency has also considered the new legal framework implemented in Portugal earlier this year, which establishes full depositor preference over senior unsecured debt instruments in the event of a bank resolution.

This rating action closes the review initiated on 24 July 2019 (please see https://www.moodys.com/research/--PR_405038). A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR UPGRADING THE BCA

The upgrade of Banco Montepio's BCA to b3 reflects: (1) the improvement of Portugal's Macro Profile to Moderate + from Moderate which was published on 24 July 2019; and (2) the mild improvements in Banco Montepio's credit fundamentals as a result of the implementation of its 2018-2021 transformation plan. Despite these improvements, Moody's notes that the bank's risk absorption capacity remains weak on the face of the bank's still significant asset quality challenges.

At end-June 2019, Banco Montepio reported a non-performing exposures (NPE) ratio (as per European Banking Authority definition) of 14.7%, down from 15.8% a year earlier. This was mainly the result of the disposal of an €239 million NPE portfolio and the write-off of €150 million NPEs. Additionally, the bank sold an €321 million portfolio of NPEs last July, which has resulted into a proforma NPE ratio of 12.9% as of June 2019. Moody's notes, however, that the organic reduction in NPEs over the last year has been relatively slow. Moreover, the bank also has other problematic exposures such as real estate assets which if included raise the bank's non-performing assets ratio (NPAs; NPEs plus real estate assets) to a pro-forma 20% considering the NPE sale.

Banco Montepio's capital levels have also improved over last years, although they remain modest. Moody's preferred capital measure, tangible common equity (TCE)/risk-weighted assets (RWAs), stood at 9.9% as of the end of June 2019. These strengthened capital levels have allowed the bank to comply with regulatory capital requirements. The bank's fully-loaded CET1 ratio stood at 11.9% as of the same date.

Despite the enhanced solvency levels, the rating agency notes that Banco Montepio's loss-absorption capacity remains weak when measured as the ratio of NPAs to balance-sheet cushions. This ratio stood at around 115% as of the end of June 2019, down from 118% a year earlier. This is mainly the result of Banco Montepio's high stock of problematic assets and low coverage levels, which stood at 50% for NPEs and 36% for NPAs.

Banco Montepio's profitability remains weak. At end-June 2019, the bank reported a small profit of €5 million (compared to €18 million a year earlier), which is equivalent to a net income to tangible assets ratio of 0.05%. A sustained recovery in the bank's recurring revenue-generation capacity is challenging given the ongoing asset-quality challenges, subdued business volumes and the low interest rate environment. Moody's acknowledges the bank's efforts to undertake a restructuring of its operations, but the long-term benefits of such restructuring measures will take some time to materialize.

On 16 March 2018, the General Meeting of Banco Montepio elected new members for its corporate bodies. The new management team will have a mandate for the period 2018-2021. Moody's does not apply any corporate behaviour adjustment to the bank. Nonetheless, corporate governance remains a key credit consideration and requires ongoing monitoring.

-- RATIONALE FOR THE LONG-TERM DEPOSIT AND SENIOR UNSECURED PROGRAMME RATINGS

Banco Montepio's long term deposit ratings and long-term senior unsecured programme rating of B1/(P)Caa1 reflect: (1) the upgrade of the bank's BCA and Adjusted BCA to b3 from caa1; (2) Moody's Advanced LGF analysis, which now results in a two-notch uplift for deposit ratings and a negative notch for senior debt from the bank's Adjusted BCA (from previous one notch of uplift for both); and (3) Moody's unchanged assumption of low probability of government support, resulting in no uplift.

On 14 March 2019, the Portuguese government transposed into national legislation the European Union's (EU) Directive 2017/2399 and modified the priority of claims laid out in Portuguese insolvency law. The new insolvency hierarchy in Portugal gives preference to all bank depositors over other unsecured creditors in a bank insolvency or resolution, including junior depositors such as financial institutions, public authorities and large corporates. This new framework increases the protection from which junior deposits benefit as they no longer rank pari passu with senior unsecured liabilities, thereby reducing expected loss-given-failure for rated deposits. By the same token, the volume of loss-absorbing liabilities that would rank alongside senior unsecured debt would be reduced and therefore the loss rates for senior creditors in the event of failure would increase.

In upgrading the deposit ratings and downgrading the senior unsecured programme ratings, Moody's has considered the impact in its Advanced LGF analysis of this new framework, which results into a lower loss given failure for deposits and a higher loss given failure for senior debt.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook of Banco Montepio's long-term deposit ratings reflects Moody's view that the expected improvement in Banco Montepio's financial fundamentals over the outlook period is already captured in the bank's current rating levels.

RATIONALE FOR THE ASSIGNMENT OF JUNIOR SENIOR UNSECURED PROGRAMME RATING

By assigning a (P)Caa1 rating to the junior senior unsecured programme, the rating agency has incorporated the results from its Advanced LGF analysis, which indicates likely high loss severity for these instruments in the event of the bank's failure, leading to positioning the programme rating one notch below the bank's b3 Adjusted BCA.

Senior non-preferred notes, which are referred to as "junior senior" unsecured notes by Moody's, may be issued under Banco Montepio's EUR6 billion Euro Medium Term Note (EMTN) programme. As per the Portuguese Law 23/2019, published on 13 March 2019, such securities must have an original maturity of one year or more, cannot have derivative features, and the related issuance documents must incorporate a contractual subordination clause. As such, in resolution and insolvency, they would rank junior to other senior obligations, including senior unsecured debt, and senior to subordinated debt.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on Banco Montepio's BCA could be driven by any clear evidence of a significant improvement in the bank's risk absorption capacity, along with a sustainable recovery in its asset-risk profile and recurring earnings.

Downward pressure could be exerted on Banco Montepio's BCA if (1) the bank fails to improve its risk-absorption capacity owing to continued asset-quality weakness or additional provisioning efforts in excess of its capital-generation capacity; or (2) the bank's liquidity profile deteriorates.

In addition, any changes to the bank's BCA would also likely affect its debt and deposit ratings because they are linked to its standalone BCA. Banco Montepio's senior unsecured debt and deposit ratings could also change as a result of changes in the loss given failure faced by these securities.

LIST OF AFFECTED RATINGS

..Issuer: Caixa Economica Montepio Geral, CEB, S.A.

Downgrades:

....Senior Unsecured MTN, Downgraded to (P)Caa1 from (P)B3

Upgrades:

.... Adjusted Baseline Credit Assessment, Upgraded to b3 from caa1

.... Baseline Credit Assessment, Upgraded to b3 from caa1

.... Long-term Counterparty Risk Assessment, Upgraded to Ba3(cr) from B1(cr)

.... Long-term Counterparty Risk Rating, Upgraded to Ba3 from B1

....Junior Subordinate MTN, Upgraded to (P)Caa2 from (P)Caa3

....Subordinate MTN, Upgraded to (P)Caa1 from (P)Caa2

....Subordinate, Upgraded to Caa1 from Caa2

....Long-term Bank Deposit Ratings, Upgraded to B1 Stable from B3 Rating under Review

Assignments:

....Junior Senior Unsecured MTN Program (Local Currency), Assigned (P)Caa1

Outlook Actions:

....Outlook, Changed To Stable From Rating Under Review

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.

Maria Vinuela
VP-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
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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