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Rating Action:

Moody's upgrades Bankoa's deposit ratings to Baa1; outlook stable

04 Jun 2018

Madrid, June 04, 2018 -- Moody's Investors Service has today upgraded Bankoa, S.A's (Bankoa) long-term deposit ratings to Baa1 from Baa2. The rating agency has also upgraded: (1) the bank's baseline credit assessment (BCA) to baa3 from ba1; (2) the bank's adjusted BCA to baa1 from baa2; and (3) the bank's long-term Counterparty Risk Assessment (CR Assessment) to A3(cr) from Baa1(cr). The bank's short-term deposit ratings and short-term CR Assessment have been affirmed at Prime-2 and Prime-2(cr) respectively. The outlook on the long-term deposit ratings is stable.

Today's rating action was prompted by Moody's assessment of the institution's improved asset risk, while its profitability, although modest, remains remarkably stable and resilient to pressures stemming from the low interest rate environment.

RATINGS RATIONALE

---RATIONALE FOR UPGRADING THE BCA

The upgrade of Bankoa's BCA to baa3 from ba1 reflects the bank's improved credit profile, primarily in terms of asset risk, while the bank's profitability remains resilient despite ongoing profitability headwinds.

Although Bankoa has traditionally shown very strong asset risk indicators compared to Spanish peers, the bank has still been able to further reduce its nonperforming loans (NPLs) in 2017. As of end-December 2017, the bank's NPL ratio stood at 2.9%, down from 3.7% a year before and comparing very positively with a system average of 7.4% as of the same date. Moreover, the bank has very low exposure to repossessed real estate assets, representing 50 basis points of the loan book (as of year-end 2017) compared to a system average that we estimate at around 6.5% of total loans.

The upgrade of the BCA is also underpinned by the improvement in the risk absorption capacity of the bank, with nonperforming assets (non-performing loans + repossessed real estate assets) as a percentage of shareholders equity and provisions declining to 32% at end-December 2017 from 37% a year earlier. On top of this improvement, Bankoa has significantly reinforced provisions following the adoption of the IFRS 9 accounting standard on 1 January 2018, leading to an increase in the loan-loss coverage ratio (loan-loss reserves over NPLs) of approximately 10 percentage points. The strong risk absorption capacity is further reinforced by the guarantee provided by its parent company, French Caisse Regionale de Credit Agricole Mutuel Pyrenees Gascogne ((CRCAM Pyrenees-Gascogne (A1/(P)A1, stable), in turn a member of Groupe Credit Agricole (GCA; unrated) and therefore benefitting from a statutory strong mutualist solidarity mechanism) over part of Bankoa's NPLs, whereby the portion guaranteed is exempt from provisioning requirements.

Although Bankoa has a modest profitability, on upgrading the bank's BCA Moody's gets comfort from the stability of its earnings. Bankoa's retail banking model ensures a high degree of predictability and earnings recurrence, with net interest income and fee and commission income adding up to almost the totality of the bank's operating income. The bank's net income over tangible assets ratio has consistently remained between 0.3% and 0.4% over the last years, characterized by a low cost of credit and very low reliance on less recurrent earning sources (e.g. trading income).

Despite some improvements on Bankoa's liquidity profile, it remains a BCA constraint. Although the bank has been able to grow deposits over the last few years, it still shows a high reliance on market funding (28.7% of tangible banking assets as of year-end 2017) and a loan-to-deposit ratio which, at 132%, is materially higher than that of its domestic peers. Moreover, Bankoa's market funding shows a limited diversification of funding sources, with the majority of funds being provided by its parent company.

--- RATIONALE FOR UPGRADING THE ADJUSTED BCA

The upgrade of Bankoa's adjusted BCA to baa1 from baa2 is driven by the one-notch upgrade of the bank's BCA. Moody's maintains its assessment of a very high probability of support from Bankoa's ownership by GCA, which, at the current BCA level, results in a one-notch affiliate support uplift.

---RATIONALE FOR UPGRADING THE DEPOSIT RATINGS

The upgrade of Bankoa's long-term deposit ratings to Baa1 from Baa2 reflects: (1) The upgrade of the bank's adjusted BCA to baa1 from baa2; (2) the result from the rating agency's Advanced Loss-Given Failure (LGF) analysis which results in an unchanged no uplift for the deposit ratings; and (3) Moody's assessment of a low probability of government support, which results in no uplift. The short-term deposit ratings have been affirmed at Prime-2.

---RATIONALE FOR THE CR ASSESSMENT

As part of today's rating action, Moody's has also upgraded the long-term CR Assessment of Bankoa to A3(cr) from Baa1(cr), one notch above the adjusted BCA of baa1. The short-term CR Assessment has been affirmed at Prime-2(cr). The CR Assessment is driven by the bank's 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, which translates into a two-notch uplift from the adjusted BCA. However, at the current level, Bankoa's CR Assessment is constrained by Spain's sovereign rating (Baa1, stable). Under Moody's methodology, the CR Assessment will not typically exceed the sovereign's own rating by more than one notch.

---RATIONALE FOR THE STABLE OUTLOOK

The outlook on Bankoa's deposit ratings is stable, reflecting Moody's view that all anticipated trends in the bank's financial fundamentals are captured within the current credit ratings.

WHAT COULD CHANGE THE RATING - UP

The bank's BCA could come under upward pressure as a consequence of: (1) an improvement in the level of recurring profitability and pricing power; and/or (2) a further strengthening of its funding position, with a proven ability to access market funding as well as to replace parental funding with other sustainable funding sources.

An upgrade of Bankoa's BCA would likely result in the convergence of Moody's assessment of the bank's standalone creditworthiness with its adjusted baa1 BCA, which incorporates affiliate support. As a result, upward pressure on the standalone BCA is unlikely to translate into an upgrade of the deposit ratings.

The deposit ratings could nevertheless be upgraded due to changes in the liability structure, which indicates a lower loss-given-failure to be faced by deposits.

WHAT COULD CHANGE THE RATING - DOWN

Downward pressure on Bankoa's ratings could ultimately result from: (1) a failure to maintain its positive asset-quality indicators; (2) any weakening of its customer deposit base that would increase reliance on the parent's ongoing liquidity support; or (3) Moody's assessment of a lower probability of parental support, or if GCA's creditworthiness weakens.

The deposit ratings could also be downgraded due to changes in the liability structure, which would indicate a higher loss-given-failure to be faced by deposits.

LIST OF AFFECTED RATINGS

Issuer: Bankoa, S.A

Upgrades:

....LT Bank Deposits, Upgraded to Baa1 from Baa2, Outlook remains Stable

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

....Baseline Credit Assessment, Upgraded to baa3 from ba1

....LT Counterparty Risk Assessment, Upgraded to A3(cr) from Baa1(cr)

Affirmations:

....ST Bank Deposits, Affirmed P-2

....ST Counterparty Risk Assessment, Affirmed P-2(cr)

Outlook Actions:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in April 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 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.

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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