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Rating Action:

Moody's upgrades Catalunya Banc's senior debt and deposit ratings to Ba2; outlook positive

22 Mar 2016

Madrid, March 22, 2016 -- Moody's Investors Service has today upgraded to Ba2 from B1 the long-term senior unsecured debt and deposit ratings of Catalunya Banc SA. The rating agency has also upgraded: (1) The bank's baseline credit assessment (BCA) to caa1 from caa2; (2) the bank's adjusted BCA to ba1 from b1; and (3) the bank's Counterparty Risk Assessment (CR Assessment) to Baa3(cr)/Prime-3(cr) from Ba2(cr)/NP(cr). The bank's short-term deposit and senior unsecured debt ratings have been affirmed at Not-Prime. The outlook on the long-term senior unsecured debt and deposit ratings remains positive.

This rating action reflects the improvement of Catalunya Bank's credit fundamentals, notably in terms of asset quality, capital and liquidity, as well as Moody's assessment of a higher probability of receiving financial support from its parent company Banco Bilbao Vizcaya Argentaria, S.A. (BBVA, A3/Baa1 stable, baa2) following progress in integrating the subsidiary, which was acquired in April 2015, into BBVA group.

RATINGS RATIONALE

---RATIONALE FOR UPGRADING THE BCA

The upgrade of Catalunya Banc's BCA to caa1 from caa2 is based on the bank's improved fundamentals, notably in terms of asset quality, capital and liquidity. The bank's problem loan ratio has improved to 14.8% at year-end 2015 from 24.2% a year earlier, and its loan-to-deposit ratio has reduced from 120% to 88% over the same period. At the same time, the bank's regulatory common equity tier 1 (CET1) ratio has improved from 15.1% to 17.5% over the same period, an improvement which is visible as well in Moody's tangible common equity (TCE) ratio which now stands at 9.4%, up from 6.6%.

Moody's notes that the bank's fundamentals have improved substantially since the segregation and sale to Blackstone Group of a EUR6.4 billion problematic loan portfolio in April 2015, and we expect this improvement to be sustained. This operation had notable positive effects in terms of: (1) asset quality, given that a large portion of the segregated loans were nonperforming, (2) liquidity, given that EUR4.2 billion of illiquid assets (net value of the mentioned portfolio) were replaced by cash (EUR3.6 billion, the purchase price paid by Blackstone) and a EUR572 million bond issued by the FROB; and (3) capital, because of the significant reduction in the volume of risk-weighted assets, while the difference between the portfolio's book value and its purchase price was covered by the FROB. Moody's believes that the improvement in fundamentals is sustainable, owing to the more favourable operating environment and the oversight of Catalunya Banc's operations by BBVA, which benefits from stronger risk management practices.

Despite the mentioned improvement, Moody's notes that Catalunya Bank continues to display a very weak credit profile, consistent with a BCA in the caa category. The bank's problem loan was still at a high 14.8% at the end of 2015, increasing to 26% if other problematic assets like repossessed real estate assets and performing, refinanced loans are added to problem loans to build-up a "non-earning" assets ratio. The bank was loss making in 2015 and, although the large loss before taxes reported was largely due to extraordinary provisions, the bank showed a very weak capacity to generate recurrent earnings.

---RATIONALE FOR UPGRADING THE ADJUSTED BCA

Moody's acknowledges that BBVA has taken significant steps in the integration of Catalunya Banc into BBVA group since it was acquired in April 2015. As a consequence, Moody's has increased the parental support uplift from four to six notches, bringing the bank's Adjusted BCA to ba1 from b1.

---RATIONALE FOR UPGRADING THE LONG-TERM DEPOSIT AND SENIOR UNSECURED DEBT RATINGS

Moody's upgrade of Catalunya Banc's long-term deposit and senior unsecured debt ratings by two notches is based on the three-notch upgrade of the bank's Adjusted BCA. As a negative offsetting factor, Moody's Advanced LGF analysis provides a more negative outcome for deposits and senior unsecured debt due to changes in the bank's liability structure. The updated LGF analysis indicates that deposits and senior unsecured debt are likely to face high loss-given-failure owing to the modest amount of junior deposits and outstanding senior unsecured debt, leading to a negative LGF notching of one notch for both instruments, from a zero-LGF notching according to the previous liability structure. This results in a Preliminary Rating Assessment (PRA) of ba2 for deposits and senior unsecured debt, one notch below the Adjusted BCA, and ultimately in Ba2 ratings for both instruments, whereby Moody's assumptions of a low likelihood of systemic support for Catalunya Banc does result in no further uplift to the bank's ratings.

---RATIONALE FOR UPGRADING THE CR ASSESSMENT

As part of today's rating action, Moody's also upgraded to Baa3(cr)/Prime-3(cr) from Ba2(cr)/Not-Prime(cr) the CR Assessment to Catalunya Banc, one notch above the adjusted BCA of ba1. The CR Assessment is driven by the banks' BCA, support provided by the parent 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 POSITIVE OUTLOOK

The outlook on Catalunya Banc's deposit and senior unsecured debt ratings is positive, reflecting our expectation of a full integration of the bank into BBVA, which would eventually lead to the convergence of both banks' ratings. Catalunya Banc would benefit from this integration owing to BBVA's oversight and experience in restructuring and integration.

WHAT COULD CHANGE THE RATING - UP

The bank's ratings could be upgraded as a consequence of: (1) A material improvement in its financial performance, primarily in terms of recurrent profitability and capital; (2) explicit financial support from BBVA; and/or (3) Moody's assessment of a higher probability of parental support, which would stem from a full integration into BBVA.

As the bank's senior unsecured debt and deposit ratings are linked to the bank's adjusted BCA, a positive change in the adjusted BCA would be likely to positively affect all ratings. The senior unsecured debt and deposit ratings could also be upgraded if the bank changes its current liability structure, which indicate a lower loss-given-failure to be faced by these securities, i.e., by issuing a material amount of debt securities.

WHAT COULD CHANGE THE RATING - DOWN

Downward rating pressure could materialise if the bank's asset quality show signs of further weakening or capital is eroded as a consequence of reporting losses, and with an absence of financial support provision from BBVA.

LIST OF AFFECTED RATINGS

Issuer: Catalunya Banc SA

..Upgrades:

.... Long-term Counterparty Risk Assessment, upgraded to Baa3(cr) from Ba2(cr)

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

.... Long-term Deposit Ratings, upgraded to Ba2 Positive from B1 Positive

.... Senior Unsecured Regular Bond/Debenture, upgraded to Ba2 Positive from B1 Positive

.... Adjusted Baseline Credit Assessment, upgraded to ba1 from b1

.... Baseline Credit Assessment, upgraded to caa1 from caa2

..Affirmations:

.... Short-term Deposit Ratings, affirmed NP

.... Short-term Deposit Note/CD Program, affirmed NP

..Outlook Actions:

....Outlook remains Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. 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
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 Catalunya Banc's senior debt and deposit ratings to Ba2; outlook positive
No Related Data.
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