Madrid, December 04, 2012 -- Moody's Investors Service has today taken actions on three Portuguese banks. The debt and deposit ratings of Banco Comercial Portugues (BCP) were downgraded by one notch to B1 with a negative outlook. The debt and deposit ratings of Banco Internacional do Funchal S.A. (Banif) were lowered by one notch to B2 from B1, and placed on review with direction uncertain. The debt and deposit ratings of Caixa Geral de Depositos (CGD) were affirmed at Ba3 with a negative outlook.
The actions on the banks' debt and deposit ratings were prompted by Moody's downgrades of their standalone credit assessments (Baseline Credit Assessments, BCA). Moody's has downgraded by three notches each the standalone credit assessments of BCP, Banif and CGD to reflect the expected further deterioration of the banks' risk absorption capacity given the more negative outlook for the Portuguese economy, with GDP forecasts having been revised downwards by Moody's to -3.3% expected for FY2012 and a further contraction of -1.2% for 2013, as opposed to the August forecasts which expected -3.6% for 2012 and -0.3% for 2013.
RATING ACTIONS OVERVIEW
-- Banco Comercial Portugues (BCP): The standalone credit assessment was downgraded to E/caa2 from E+/b2 and the debt and deposit ratings were downgraded to B1/Not Prime from at Ba3/Not Prime. The bank's subordinated debt and preference share ratings were downgraded to Caa3 and C(hyb) respectively. All ratings have a negative outlook.
-- Banco Internacional do Funchal (Banif): The standalone credit assessment was downgraded to E/caa2 from E+/b2 and the debt and deposit ratings were downgraded to B2/Not Prime from B1/Not Prime. The bank's subordinated, junior subordinated debt and preference share ratings were downgraded to Caa3, Ca(hyb) and C(hyb), from B3, Caa1(hyb) and Caa2(hyb) respectively. All ratings except the junior instruments are on review with direction uncertain.
-- Caixa Geral de Depositos (CGD): The standalone credit assessment was downgraded to E/caa1 from E+/b1 and the debt and deposit ratings were affirmed at Ba3/Not Prime. The bank's subordinated, junior subordinated debt and preference share ratings were downgraded to Caa2, Caa3(hyb) and Ca(hyb), from B2, B3(hyb) and Caa1(hyb) respectively. All ratings have a negative outlook.
A full list of affected ratings can be found at this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_147923
RATIONALE FOR DOWNGRADES OF STANDALONE CREDIT ASSESSMENTS
Throughout 2012 BCP, Banif and CGD have seen an increased portion of its pre-provision income absorbed by asset impairments. At the same time, the capacity of these banks to generate recurring earnings to offset these rising impairments has been significantly impacted by (i) higher funding costs (particularly of retail deposits), (ii) ongoing balance sheet deleveraging and (iii) increase in non-earning assets. Moody's is concerned that Portugal's prolonged economic recession will exacerbate the intense pressure on the already very weak risk absorption capacity of these three banks.
Moody's acknowledges the improved solvency levels for BCP and CGD following the recapitalization effort made by the Portuguese government in June 2012. Moody's also notes that Banif's current capital shortfall to comply with a regulatory core Tier 1 capital threshold of 10% will be compensated after the targeted public recapitalization materializes, which is expected to take place before year-end 2012. However, the rating agency is concerned that the very negative economic conditions for the Portuguese economy may challenge the achievement of the deleveraging goals contemplated in the recapitalization and funding plans approved by Bank of Portugal and the Troika for the three banks. Furthermore, the expected broader deterioration in profitability and asset quality will pressure the banks' capital base, which increases the likelihood that additional public support may be required to offset for the losses embedded in their balance sheets.
Funding profiles have improved throughout 2012 thanks to deleveraging efforts and resilient deposit bases. However, Moody's considers that additional risks pressuring the three banks' standalone credit assessment is the ongoing lack of access to long-term wholesale funding sources, which have led them to display high reliance on European Central Bank (ECB) funding. Heightened uncertainties on the health of the Portuguese economy as well as on the creditworthiness of the banking system will prevent banks to regain normalized access to private markets in the foreseeable future. In this regard, Moody's expects that BCP, Banif and CGD will remain reliant on ECB support for some time.
Consistent with Moody's definitions, the lower standalone credit assessment reflects the rating agency's view that BCP, Banif and CGD have speculative intrinsic, or standalone, financial strength and are subject to very high credit risk absent any possibility of extraordinary support from a third party or the government.
RATIONALE FOR STANDALONE CREDIT ASSESSMENTS BY BANK
BANCO COMERCIAL PORTUGUES (BCP)
BCP's E/caa2 standalone credit assessment, is a reflection of its very weak risk absorption capacity despite the recent public recapitalization, evidenced by 1) rapidly deteriorating profitability ratios, with a sharp decline in net interest income of 35.6% and a EUR796.3 million net loss reported at end-September 2012; 2) very high reported NPL ratio (credit at risk ratio as per Bank of Portugal's definition) of 13.4% (compared to the system's average of 10%) and 3) Moody's concerns in relation to BCP's exposure to Greece through its 100%-owned subsidiary Millennium Bank S.A (unrated).
BCP was required by the European Banking Authority (EBA) to reach a 9% core tier 1 ratio before end-June 2012. To comply with this regulatory capital threshold, the Portuguese government provided EUR3 billion of capital to BCP in the form of hybrid instruments and the bank made a EUR500 million capital increase subscribed by private investors. At end-September 2012 BCP reported core Tier I ratios of 11.9% (according to Bank of Portugal's definition) and 9.4% (as per EBA definition).
Despite the enhanced capital ratios, Moody's downgrade captures the significant downside risks of BCP's credit fundamentals to the country's very difficult operating environment. Moody's expects the bank's activity in Portugal to remain loss-making during 2013, due to the ongoing increase in non-earning assets and subdued business volumes. In addition, the rating agency cautions that BCP's risk absorption capacity could be further challenged in the event of a more negative scenario for its Greek operations.
BCP's standalone credit assessment has a negative outlook to reflect the bank's vulnerability to a further weakening of its credit profile in light of the very negative outlook for the Portuguese economy.
The downgrade of Banif's standalone credit assessment to E/caa2 reflects 1) the bank's rapidly deteriorating financial fundamentals, namely in terms of profitability and asset quality (the bank reported a net loss of EUR61 million and a NPL ratio of 13% at end-June 2012); 2) very modest internal capital generation capacity that has forced them to require public support from the Bank Solvency Support Facility to recapitalize.
Banif has recently undertaken an organizational restructuring as part of the required recapitalization plan, entailing the merger of Banif SGPS -- its former parent -- into Banif, with the latter now acting as head of the group. Moody's notes, however, that the merger is still subject to final registration, which is a prerequisite for Banif to receive public support. In addition, the bank expects to fulfil a drastic deleveraging of its balance sheet over the next five years, which is expected to ease funding requirements and reduce risk weighted assets.
Moody's notes that the review with direction uncertain of Banif's standalone ratings reflects the need of further clarity about the recapitalization plan, which will enable to assess the credit profile of Banif post public capital infusion as well as the impact of other initiatives that may be included in such plan. In addition, during the review period Moody's expects to analyze the impact of the organizational restructuring and also whether targeted improvements in corporate governance can have a material - and tangible - impact on the bank's credit profile. Downward pressure persists on Banif's standalone ratings as the bank will continue to operate under very challenging operating conditions, which will make it very difficult for management to achieve the goals set up in the recapitalization plan.
CAIXA GERAL DE DEPOSITOS (CGD)
The downgrade of CGD's standalone credit assessment to E/caa1 has been prompted by Moody's concerns that the bank's weak credit fundamentals are likely to be further challenged in 2013 in light of our expectations of a prolonged economic recession in Portugal. CGD displays a weak risk absorption capacity principally due to (i) its very modest profitability indicators (the bank reported a net loss of EUR102 million and a decline in net interest income of 15% as of end-September 2012), (ii) deteriorating asset quality (reported credit at risk ratio of 9.2% at end September 2012) and (iii) high direct exposure to Portuguese sovereign risk (almost 2.5x Tier 1 capital).
In downgrading the bank's standalone credit assessment, Moody's has taken into account CGD's recent capital reinforcement in order to comply with EBA's 9% core Tier I capital requirement by end-June 2012. The recapitalization was completed with a EUR900 million issue of hybrid financial instruments and a EUR750 million capital increase, both of which were fully subscribed by the Portuguese State. Despite the benefits of the capital improvement, Moody's notes that CGD displays significant downside risks to the country's negative macroeconomic scenario that are likely to put additional pressure on its capital.
In addition the bank has embarked on a deleveraging plan that encompasses significant divestments in the domestic market that could improve its capital position but may have a negative impact on its already very limited earnings generation capacity.
The outlook on CGD's standalone credit assessment is negative to reflect the above mentioned risks.
RATIONALE FOR DOWNGRADE OF DEBT RATINGS AND SUPPORT ASSUMPTIONS
The one-notch downgrade of BCP's and Banif's senior debt and deposit ratings reflect (i) the further deterioration of their standalone credit profile, as discussed above; and (ii) Moody's assessment of a very high probability of support by the Portuguese government for the banks in case of need.
The debt ratings of CGD were affirmed at Ba3, resulting in four notches of uplift from its standalone credit assessment of caa1, and based on Moody's assessment of a very high probability of support from the Portuguese government as CGD's unique shareholder.
The negative outlook on BCP's and CGD's debt and deposit ratings reflect both the currently negative outlook on the Portuguese government's Ba3 bond rating and the negative outlook on the bank's standalone credit assessment.
The review with direction uncertain of Banif's senior debt and deposit ratings is commensurate with the review status of the bank's standalone credit assessment.
SUBORDINATED DEBT AND HYBRID RATINGS
Moody's has downgraded the senior subordinated debt and hybrid ratings of BCP, Banif and CGD in line with the lowering of their standalone credit assessments. Moody's had previously removed government support assumptions from its ratings of subordinated debt and hybrid instruments of Portuguese banks on 28 March 2012, see "Moody's takes actions on seven Portuguese banks; Outlook negative".
Moody's review for downgrade on the junior instruments of Banif reflects the issuer's very weak credit profile and the increased risk of losses being imposed on these instruments in case of a broader deterioration of the bank's creditworthiness.
WHAT COULD MOVE THE RATING UP/DOWN
Downwards pressure on the banks' ratings might develop if operating conditions worsen beyond Moody's current expectations, i.e. a broader economic recession beyond our current GDP decline forecasts of -3.3% for 2012 and -1.2% for 2013; especially given that this is likely to result in asset-quality and profitability deterioration exceeding Moody's current expectations; and/or if pressures on market-funding intensify.
Upwards pressure on the banks' ratings may arise in case of an improved credit profile resulting from the work-out of asset quality challenges, a recovery of profitability indicators and sustained capitalization levels, as well as normalized access to wholesale funding markets.
The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.
The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.
Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.
In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
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.
Maria Jose Mori Vice President - Senior Analyst 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 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 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED,DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error negligent or otherwise or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations -- Corporate Governance -- Director and Shareholder Affiliation Policy."
Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.
Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moody's Japan K.K. ("MJKK") are MJKK's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, "MIS" in the foregoing statements shall be deemed to be replaced with "MJKK". MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO.
This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.