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Rating Action:

Moody's upgrades Kutxabank's deposit and senior debt ratings to Ba1; outlook stable

28 Apr 2016

Madrid, April 28, 2016 -- Moody's Investors Service has today upgraded Kutxabank S.A.'s long-term deposit and senior debt ratings to Ba1 from Ba2. The rating agency has also upgraded: (1) The bank's baseline credit assessment (BCA) and adjusted BCA to ba1 from ba2; (2) the bank's subordinated programme ratings to (P)Ba2 from (P)Ba3; and (3) the bank's Counterparty Risk Assessment (CR Assessment) to Baa2(cr)/Prime-2(cr) from Baa3(cr)/Prime-3(cr). The outlook on the long-term deposit and senior debt ratings remains stable.

The bank's Not Prime short-term deposit rating was unaffected by today's rating action.

This rating action reflects the improvement of Kutxabank's credit fundamentals, notably in terms of asset risk and capital.

A list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

---RATIONALE FOR UPGRADING THE BCA

The upgrade of Kutxabank's BCA to ba1 from ba2 reflects the bank's improved credit fundamentals, notably in terms of asset risk and capital. Since 2014, Kutxabank has displayed a sustained improvement in its asset risk metrics, with the non-performing loan (NPL) ratio of Kutxabank declining to 8.7%, which stands below the system's average of 10.1%, and 208 bps below the 10.7% reported as at end-December 2014. Moody's also notes that Kutxabank has been able to reduce the level of problematic exposures (measured as NPLs + foreclosed real estate assets + performing refinanced loans), which accounted for 93.5% of the bank's shareholder equity and loss reserves as of end-December 2015. This ratio is well below the 121.7% reported at end-December 2014 and also compares favourably with the estimated system's average of 103% (as of June 2015, latest system data available). The improvement of the bank's asset risk indicators is explained partially by the sale of EUR873 million of problematic assets to a private investment fund in the first half of 2015 but also by the sound recovery of the Spanish economy.

In upgrading Kutxabank's ratings, Moody's has also taken into account the bank's improved capital buffers, which stand amongst the highest of Spanish banks, with the regulatory common equity tier 1 (CET1) ratio increasing to 14.6% at end-December 2015 from 12.7% a year earlier on a phased-in basis and its fully-loaded capital ratio that has increased to 14.3% from 12.5% during the same period. This positive trend is visible as well in Moody's tangible common equity (TCE) ratio, which now stands at 11.4%, up from 9.9%, driven by the bank's asset de-risking strategy, continued balance sheet deleveraging and increased retained profits. Moody's also acknowledges Kutxabank's capacity to increase capital in case of need through the various capital levers the bank displays (i.e. divestment of its large industrial portfolio and/or sale of non-core banking assets) and that unlike many of its domestic peers have not been used during the recent financial crisis.

Despite the mentioned improvements, Moody's notes that Kutxabank's ba1 BCA also reflects: (1) A still high level of problematic exposures in absolute terms and relative to capital buffers when compared to other European banks in the same BCA level; (2) pressures on top line revenues given the bank's focus on the mortgage segment (70% of total loans as of end-December 2015) and against a backdrop of very low interest rates and subdued business volumes in Spain; and (3) relevant contribution of dividends from the bank's large stake in the Spanish utility company Iberdrola S.A. (Baa1 positive), which represented 14.6% of Kutxabank's pre-provision income at end-December 2015.

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

The upgrade of Kutxabank's long-term deposit and senior debt ratings to Ba1 from Ba2 reflects: (1) The upgrade of the bank's BCA and adjusted BCA to ba1 from ba2; (2) the result from the rating agency's Advanced Loss-Given Failure (LGF) analysis which results in an unchanged no uplift for the deposits and senior debt ratings; and (3) Moody's assessment of low probability of government support for Kutxabank, which results in no uplift for the deposit and the senior debt ratings.

---RATIONALE FOR UPGRADING THE CR ASSESSMENT

As part of today's rating action, Moody's has also upgraded to Baa2(cr)/Prime-2 (cr) from Baa3(cr)/Prime-3(cr) the CR Assessment of Kutxabank, two notches above the adjusted BCA of ba1. The CR Assessment is driven by the banks' adjusted BCA, low likelihood of systemic 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 Kutxabank's deposit and senior debt ratings is stable, reflecting Moody's expectations that Spain's improved economic conditions will help to preserve current trends in the bank's credit fundamentals.

WHAT COULD CHANGE THE RATING - UP

The bank's ratings could be upgraded as a consequence of: (1) Further significant improvement of asset risk indicators, namely a material reduction of the stock of problematic assets; (2) stronger TCE levels; and (3) a sustained recovery of recurrent profitability levels.

Kutxabank's deposit and senior debt ratings could also change due to movements in the loss-given failure faced by these securities.

WHAT COULD CHANGE THE RATING - DOWN

Downward pressure on the bank's BCA could develop as a result of: (1) The reversal in current asset risk trends with an increase in the stock of NPLs and/or other problematic exposures; and (2) a weakening of Kutxabank's internal capital-generation and risk-absorption capacity as a result of subdued profitability levels.

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

Kutxabank's deposit and senior debt ratings could also change due to movements in the loss-given failure faced by these securities.

LIST OF AFFECTED RATINGS

Issuer: Kutxabank, S.A.

..Upgrades:

....Adjusted Baseline Credit Assessment, upgraded to ba1 from ba2

....Baseline Credit Assessment, upgraded to ba1 from ba2

....Short-term Counterparty Risk Assessment, upgraded to P-2(cr) from P-3(cr)

....Long-term Counterparty Risk Assessment, upgraded to Baa2(cr) from Baa3(cr)

....Subordinate Medium-Term Note Program , upgraded to (P)Ba2 from (P)Ba3

....Senior Unsecured Medium-Term Note Program, upgraded to (P)Ba1 from (P)Ba2

....Senior Unsecured Regular Bond/Debenture, upgraded to Ba1 Stable from Ba2 Stable

....Long-term Deposit Rating, upgraded to Ba1 Stable from Ba2 Stable

..Outlook Actions:

....Outlook remains Stable

Issuer: Caja Vital Finance B.V.

..Upgrades:

....Backed Senior Unsecured Medium-Term Note Program, upgraded to (P)Ba1 from (P)Ba2

....Backed Senior Unsecured Regular Bond/Debenture, upgraded to Ba1 Stable from Ba2 Stable

..Outlook Actions:

....Outlook remains Stable

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.

Maria Jose Mori
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 Kutxabank's deposit and senior debt ratings to Ba1; outlook stable
No Related Data.
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