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Rating Action:

Moody's upgrades Banco Santander to Baa1; maintains stable outlook

04 Mar 2014

Madrid, March 04, 2014 -- Moody's Investors Service has today upgraded to Baa1 from Baa2 the debt and deposit ratings of Banco Santander S.A. (Spain) and maintained the stable outlook. At the same time, Moody's affirmed Banco Santander's standalone Bank Financial Strength Rating (BFSR) at C- and raised the equivalent baseline credit assessment (BCA) to baa1 from baa2. The outlook on the bank's BFSR remains stable and the bank's short-term ratings were affirmed at Prime-2.

The rating actions reflect (1) the improvement in the Spanish government's creditworthiness, reflected in Moody's upgrade of Spain's government bond rating to Baa2 from Baa3 and the concurrent change of the outlook on Spain's rating to positive from stable on 21 February 2014. For full details, please refer to the sovereign press release (https://www.moodys.com/research/Moodys-upgrades-Spains-government-bond-rating-to-Baa2-assigns-positive--PR_292078); and (2) Moody's view that the group's risk-absorption capacity remains resilient despite ongoing asset-quality pressures in its Spanish operations.

RATINGS RATIONALE

--- RATIONALE FOR UPGRADING THE DEBT RATING

The upgrade of Banco Santander's debt and deposit ratings follow the raising of the bank's standalone BCA to baa1 from baa2.

--- RATIONALE FOR RAISING THE BCA

The upgrade of Banco Santander's standalone BCA follows the upgrade of Spain's sovereign rating to Baa2, positive outlook. Banco Santander's BCA is higher than Spain's rating because its high degree of geographical diversification limits credit linkages to sovereign risk. However, this difference has been limited to one notch which in the past has prevented Banco Santander's BCA from being higher than Spain when the country was rated Baa3. At the baa1 BCA level, the current ratings fully reflect Banco Santander's credit profile and are no longer constrained by Spain's Baa2 rating.

Today's rating action also incorporates Moody's view that the group's risk-absorption capacity remains resilient despite ongoing asset-quality pressures. At end-December 2013, Santander's problem-loan ratio increased to 5.64% (end-December 2012: 4.54%), mainly driven by the increased level of problem loans in Spain. Despite the negative credit trends in the domestic market, Santander has been able to cope with increased provisioning efforts while maintaining very high pre-provision profitability metrics compared with international peers. At around 72% of shareholders equity and loan loss reserves, the group's broadly defined problematic exposures (measured as NPLs, real-estate assets and refinanced loans) are nevertheless high, a key factor constraining the current standalone BCA.

Santander's standalone BCA also incorporates the rating agency's expectation that bottom line profitability will start benefiting from a lower level of loan-loss provisions. Moody's expects that the pace of deterioration of the domestic loan book is likely to decelerate in line with the expected stabilisation of the Spanish economy (i.e., Moody's announced on 4 December 2013 its forecast of 0.7% GDP growth in 2014 for Spain). Moody's notes the weakening trend in pre-provision income during 2013, a function of the low interest rates and subdued business growth in the group's mature markets.

Moody's acknowledges Santander's ability to strengthen its capital ratios despite the group's strong provisioning effort. This highlights its capacity to reinforce its solvency both through retained profits and the monetisation of capital gains from investments in its subsidiaries, and underpins its resilience to ongoing asset-quality pressures. At end-December 2013, Santander's core capital ratio (on a consolidated basis) increased to 11.71% up from 10.33% at end-2012.

Moody's views of Banco Santander's resilient creditworthiness were already reflected in the rating action published on 11 February 2014, when we stabilized the outlook (https://www.moodys.com/research/Moodys-changes-outlook-on-Banco-Santanders-Baa2-ratings-to-stable--PR_292265). At that time, however, the bank's BCA was capped by the rating of the Spanish government.

--- RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on the bank's standalone BFSR reflects Moody's view that the downside risks to the bank's credit profile have substantially decreased because of the gradual economic improvement in Spain. Moody's takes comfort from Santander's strong earnings diversification, which will continue to offset expected ongoing negative asset-quality trends, as well as from the group's improved capitalisation levels and its ability to generate capital in times of stress. This should make Santander's credit profile sufficiently resilient against any further asset-quality pressures.

The stable outlook on Banco Santander's debt and deposit ratings reflects the stable outlook on its standalone BFSR.

--- SUBORDINATED DEBT AND HYBRID RATINGS

In line with the upgrade of Banco Santander's BCA, Moody's has today upgraded the bank's senior subordinated debt ratings to Baa2 from Baa3, its junior subordinated debt ratings to Baa3 (hyb) from Ba1(hyb) and its preference shares ratings to Ba2 (hyb) from Ba3 (hyb). The outlook on these ratings remains stable.

WHAT COULD MOVE THE RATING UP/DOWN

Any upward pressure on Santander's ratings is unlikely as long as the Spanish government's bond rating remains Baa2, because the bank is already rated one notch above Spain's government bond rating. However, even if the sovereign were to be upgraded, Santander's standalone BCA would need to balance (1) the positive rating momentum from its strong and relatively resilient earnings generation of its international activities; with (2) the continuing pressure stemming from its high stock of non-performing loans (including real-estate and refinanced loans) and weakened domestic profitability.

Downward pressure on Santander's BCA could develop following (1) inadequate risk-absorption capacity (i.e., recurring earnings, excess capital and loan loss reserves) compared with Moody's estimated credit losses; (2) failure to withstand Moody's liquidity stress test; (3) a lower share of recurring earnings; or (4) increased exposure to its domestic market (including sovereign exposure) that would no longer justify the current credit de-linkage with Spain's rating. The ratings could also come under pressure if Spain's economy falls back into recession and/or its international activities perform weaker than anticipated.

The bank's debt and deposit ratings are linked to the standalone BCA; as such, any change to the BCA would likely also affect these ratings.

The outlooks for the following issuers are maintained at Stable:

..Issuer: Banco Santander S.A. (Spain)

..Issuer: Banco Santander, S.A., London Branch

..Issuer: Banesto Banco de Emisiones, S.A.

..Issuer: Banesto Financial Products PLC

..Issuer: Banesto Holdings, Ltd.

..Issuer: Santander Central Hispano Fin. Serv. Ltd

..Issuer: Santander Central Hispano International Ltd

..Issuer: Santander Central Hispano Issuances Ltd.

..Issuer: Santander Finance Capital, S.A. Unipersonal

..Issuer: Santander Finance Preferred, S.A. Unipersonal

..Issuer: Santander International Preferred, S.A.U.

..Issuer: Santander Int'l Debt, S.A. Unipersonal

..Issuer: Santander Issuances S.A. Unipersonal

..Issuer: Santander Perpetual, S.A. Unipersonal

..Issuer: Santander US Debt, S.A. Unipersonal

Upgrades:

..Issuer: Banco Espanol de Credito, S.A. (Banesto)

....Pref. Stock Non-cumulative Preferred Stock, Upgraded to Ba2 (hyb) from Ba3 (hyb)

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2

..Issuer: Banco Santander S.A. (Spain)

.... Adjusted Baseline Credit Assessment, Upgraded to baa1 from baa2

.... Baseline Credit Assessment, Upgraded to baa1 from baa2

.... Issuer Rating, Upgraded to Baa1 from Baa2

....Multiple Seniority Medium-Term Note Program, Upgraded to (P)Baa2 from (P)Baa3

....Multiple Seniority Medium-Term Note Program, Upgraded to (P)Baa1 from (P)Baa2

....Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

....Senior Unsecured Deposit Rating, Upgraded to Baa1 from Baa2

..Issuer: Banco Santander, S.A., London Branch

....Senior Unsecured Deposit Program, Upgraded to (P)Baa1 from (P)Baa2

..Issuer: Banesto Banco de Emisiones, S.A.

....Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

..Issuer: Banesto Financial Products PLC

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2

..Issuer: Banesto Holdings, Ltd.

....Pref. Stock Non-cumulative Preferred Stock, Upgraded to Ba2 (hyb) from Ba3 (hyb)

..Issuer: Santander Central Hispano Fin. Serv. Ltd

....Junior Subordinated Regular Bond/Debenture, Upgraded to Baa3 (hyb) from Ba1 (hyb)

..Issuer: Santander Central Hispano International Ltd

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)Baa1 from (P)Baa2

..Issuer: Santander Central Hispano Issuances Ltd.

....Multiple Seniority Medium-Term Note Program, Upgraded to (P)Baa2 from (P)Baa3

....Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

....Subordinate Shelf, Upgraded to (P)Baa2 from (P)Baa3

..Issuer: Santander Finance Capital, S.A. Unipersonal

....Pref. Stock Preferred Stock, Upgraded to Ba2 (hyb) from Ba3 (hyb)

....Pref. Stock Non-cumulative Preferred Stock, Upgraded to Ba2 (hyb) from Ba3 (hyb)

..Issuer: Santander Finance Preferred, S.A. Unipersonal

....Pref. Stock Non-cumulative Preferred Stock, Upgraded to Ba2 (hyb) from Ba3 (hyb)

..Issuer: Santander International Preferred, S.A.U.

....Pref. Stock Non-cumulative Preferred Stock, Upgraded to Ba2 (hyb) from Ba3 (hyb)

..Issuer: Santander Int'l Debt, S.A. Unipersonal

....Multiple Seniority Medium-Term Note Program, Upgraded to (P)Baa1 from (P)Baa2

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)Baa1 from (P)Baa2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2

..Issuer: Santander Issuances S.A. Unipersonal

....Subordinate Medium-Term Note Program, Upgraded to (P)Baa2 from (P)Baa3

....Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

..Issuer: Santander Perpetual, S.A. Unipersonal

....Junior Subordinated Regular Bond/Debenture, Upgraded to Baa3 (hyb) from Ba1 (hyb)

..Issuer: Santander US Debt, S.A. Unipersonal

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2

Affirmations:

..Issuer: Banco Santander S.A. (Spain)

.... Bank Financial Strength Rating, Affirmed C-

.... Deposit Rating, Affirmed P-2

..Issuer: Banco Santander, S.A., London Branch

....Senior Unsecured Deposit Program, Affirmed (P)P-2

..Issuer: Banesto Financial Products PLC

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Santander Central Hispano International Ltd

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)P-2

..Issuer: Santander Commercial Paper, S.A. Unipersonal

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Santander Int'l Debt, S.A. Unipersonal

....Multiple Seniority Medium-Term Note Program, Affirmed (P)P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)P-2

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy 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 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 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 rating action, and whose ratings may change as a result of this 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 Cabanyes
Senior Vice President
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 Felix 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 upgrades Banco Santander to Baa1; maintains stable outlook
No Related Data.
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