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Rating Action:

Moody's upgrades Bankoa's deposit ratings to Baa2; outlook stable

06 May 2016

Madrid, May 06, 2016 -- Moody's Investors Service has today upgraded Bankoa, S.A's deposit ratings to Baa2/Prime-2 from Baa3/Prime-3. The rating agency has also upgraded: (1) the bank's baseline credit assessment (BCA) to ba1 from ba2; (2) the bank's adjusted BCA to baa2 from baa3; and (3) the bank's long-term Counterparty Risk Assessment (CR Assessment) to Baa1(cr) from Baa2(cr). The bank's short-term CR Assessment has been affirmed at Prime-2(cr). The outlook on the long-term deposit ratings is stable.

This rating action stems primarily from the institution's improved solvency, which is visible in the bank's improved loan loss coverage ratio and recurrent profitability, as well as its solid asset risk performance.

RATINGS RATIONALE

---RATIONALE FOR UPGRADING THE BCA

The upgrade of Bankoa's BCA is driven by Moody's assessment of a stronger solvency position by the bank, indicated by a stronger risk absorption capacity measured as a combination of loan-loss reserves and pre-provision earnings. During 2015, Bankoa was able to grow loan loss reserves in parallel with a reduction in non-performing loans, resulting in a substantial increase in the coverage of problem loans by loan loss reserves. The coverage ratio improved to 52% as of the end of 2015 from 42% the year before. Although the 52% coverage ratio is below the system average of 57%, Moody's notes that part of the bank's doubtful loans -- those for which the borrower exceeds certain exposure limits -- are guaranteed by its parent company, French Caisse Regionale de Credit Agricole Mutuel Pyrenees Gascogne (CRCAM Pyrenees-Gascogne (A2/(P)A2, positive), in turn a member of Groupe Credit Agricole (GCA; unrated) and therefore benefitting from a statutory strong mutualist solidarity mechanism) and exempted from provisioning requirements.

Bankoa's profitability is also improving, more significantly in terms of recurrent earnings. The bank was able to grow its net interest income by 3% in 2015 despite challenging low interest rates, and its fee and commission income also performed well, growing by 6% in 2015. The bank reported a net income over tangible assets ratio of 0.4% as of the end of 2015, up from 0.3% at year-end 2014.

In terms of asset risk, Bankoa's loan portfolio shows one of the strongest credit performances among Spanish banks, with asset quality indicators which outperform the Spanish banking system average. The bank's non-performing loan (NPL) ratio stood at 3.8% at end-December 2015, after declining by almost 100 basis points since the end of 2014, which compares with a system average of 10.1% as of the same date. Moreover, the bank has very low exposure to repossessed real estate assets, representing less than 100 basis points of the loan book (as of year-end 2015) compared to a system average that we estimate at almost 800 basis points.

--- RATIONALE FOR UPGRADING THE ADJUSTED BCA

The upgrade of Bankoa's adjusted BCA to baa2 from baa3 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 two-notch affiliate support uplift.

---RATIONALE FOR UPGRADING THE DEPOSIT RATINGS

The upgrade of Bankoa's deposit ratings to Baa2/Prime-2 from Baa3/Prime-3 reflects: (1) The upgrade of the bank's adjusted BCA to baa2 from baa3; (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.

---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 Baa1(cr) from Baa2(cr), one notch above the adjusted BCA of baa2. 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 amounting to 8% of tangible banking assets.

---RATIONALE FOR THE STABLE OUTLOOK

The outlook on Bankoa's deposit ratings is stable, reflecting Moody's expectations that Spain's improved operating conditions will help to preserve current trends in the bank's solvency metrics.

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 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 baa2 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.

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.

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 Bankoa's deposit ratings to Baa2; outlook stable
No Related Data.
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