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Various Rating Actions Taken On Spanish BanksOn Prospect Of Reduced Economic Risks AndPotential For Government Support

Primary Credit Analyst:

Elena Iparraguirre, Madrid (34) 91-389-6963; [email protected]

Secondary Contacts:

Luigi Motti, Madrid (34) 91-788-7234; [email protected]

Carlos Cobo, Madrid +34 91 788 72 32; [email protected]

Fabio Mostacci, Madrid +34 91 788 72 09; [email protected]

Antonio Rizzo, Madrid +34 917 887 205; [email protected]

Angela Cruz, Madrid (34) 91-389-6945; [email protected]

OVERVIEW

• In our view, Spanish banks have absorbed most of the credit lossesassociated with the correction in the real estate market and thedouble-dip recession and we expect the property market to bottom-out in2014.

• We now have a positive view on the economic risk trend for the Spanishbanking industry.

• We consider that potential extraordinary government support for Europeanbanks will likely decrease as resolution frameworks are put in place.

• Based on these factors, combined with recent bank-specific developments,we are affirming most of our ratings on Spanish banks. Most outlooks areunchanged.

MADRID (Standard & Poor's) April 29, 2014--Standard & Poor's Ratings Servicestoday took various rating actions on 12 Spanish banks. Specifically, it:• Raised to 'B/B' from 'B-/C' its counterparty credit ratings on BancoFinanciero y de Ahorros S.A. (BFA), Bankia S.A.'s parent holding company.The outlook is negative.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2014 1

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• Revised to positive from stable the outlook on Cecabank S.A. and affirmedits 'BB+/B' counterparty credit ratings on the bank.

• Affirmed its 'BB/B' counterparty credit ratings on Bankinter S.A., with apositive outlook.

• Affirmed its 'BBB-/A-3' counterparty credit ratings on CaixaBank S.A. andits 'BB/B' counterparty credit ratings on Ibercaja Banco S.A., both witha stable outlook.

• Affirmed its 'BBB-/A-3' counterparty credit ratings on Kutxabank S.A.(Kutxabank) and Barclays Bank S.A.U. (BBSA), its 'BB/B' counterpartycredit ratings on Banco de Sabadell S.A. (Sabadell), its 'BB-/B'counterparty credit ratings on Bankia S.A., and its 'B+/B' counterpartycredit ratings on Banco Popular Español S.A. (Popular) and NCG Banco S.A.(NBG). The outlooks on all six banks are negative.

• Maintained its unsolicited 'BB' long-term counterparty credit rating onCaja de Ahorros y Pensiones de Barcelona (la Caixa) on CreditWatch withnegative implications, where it had been placed on April 14, 2014, andaffirmed its unsolicited 'B' short-term rating on la Caixa.

The rating actions follow the completion of our review of 12 rated Spanishbanks. The review incorporates our view that the economic risks affectingSpanish banks are easing and that potential extraordinary government supportfor European banks is likely to decrease as resolution frameworks are put inplace. The review also took into consideration recent bank-specificdevelopments.

In our view, Spanish banks have absorbed most of the credit losses associatedwith the correction in the real estate market and the double-dip recession.Over a five-year period, we calculate that Spanish banks have recognizedcredit losses equivalent to 13.5% of the credit outstanding at the beginningof the downturn. We believe that the real estate market correction is close toan end as prices and activity levels will likely bottom-out in 2014.Meanwhile, we are seeing a moderate resumption in economic activity, after along, deep recession. We therefore expect banks' credit provisions to declinein 2014 and 2015 and to approach more-normalized levels by 2016.

All these factors support our positive view of the trend in economic risksfaced by the Spanish banking system. At the same time, we continue to see astable trend in industry risk.

The positive trend indicates that over time we could revise our assessment ofeconomic risk for the Spanish banking system, and in turn revise to 'bbb-'from 'bb+' the anchor we apply to financial institutions operating primarilyin Spain. The anchor is the starting point for assigning issuer credit ratingsto banks. At present, we do not expect a change in the anchor to trigger achange in our ratings on most Spanish banks because we would not raise theratings unless we also saw far more-significant capital strengthening than wecurrently incorporate into the ratings.

As a result, of the 12 financial institutions that were part of this review,only two have a positive outlook--we revised the outlook on Cecabank S.A. to


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Various Rating Actions Taken On Spanish Banks On Prospect Of Reduced Economic Risks And Potential ForGovernment Support

positive and maintained the positive outlook on Bankinter S.A. By contrast,the negative outlooks on five Spanish financial institutions--Kutxabank, BBSA,NCG, Popular, and Sabadell--indicate that we still see that their SACPs couldcome under pressure if they do not strengthen their capital as much as weexpect or their asset quality deteriorates by more than we anticipate. BBSA'sSACP could also come under pressure if it fails to successfully restructureits business model and sustainably increase its recurring profitability.Furthermore, we could lower the ratings on Sabadell and NCG if, contrary toour base-case scenario, these banks remain reliant on European Central Bank(ECB) borrowings once the long-term refinancing operations expire and proveunable to restore their liquidity to a level we regard as "adequate" under ourcriteria.

In addition to our review of Spain's economic risk trend, we also finished ourreview of potential extraordinary government support for European banks andconcluded that this is likely to decrease as resolution frameworks are putinto place. We observe that European authorities are taking steps to increasethe resolvability of banks and require creditors, rather than taxpayers, tobear the burden of the costs of failure (see "Standard & Poor's Takes VariousRating Actions On European Banks Following Government Support Review,"published on April 29, 2014). In the near term, we expect that governmentswill remain supportive of systemically important banks' senior unsecuredcreditors while resolution frameworks take shape. From January 2016, however,the EU Bank Recovery and Resolution Directive (BRRD) is set to introduce themandatory bail-in of a minimum amount of eligible liabilities, potentiallyincluding certain senior unsecured obligations, before governments couldprovide solvency support. Accordingly, we consider that the potentialextraordinary government support currently incorporated in the ratings on fiveSpanish financial institutions (Bankia and its holding parent company BFA,Popular, NCG, and Sabadell) will likely diminish within our two-year ratinghorizon. The ratings on these five institutions currently benefit from one ortwo notches uplift above their SACPs.

We incorporate notches for extraordinary government support into the ratingson these five institutions because we view the Kingdom of Spain as"supportive" of private-sector commercial banks, and because we consider themsystemically important. We view all as being of "high" systemic importance,except NCG, which is of "moderate" systemic importance. We could remove thesenotches for extraordinary government support shortly before the January 2016introduction of the BRRD's bail-in powers for senior unsecured liabilities.These rules would indicate to us that EU governments would be much less ableto support senior unsecured bank creditors, even though it may take severalmore years to eliminate concerns about financial stability and theresolvability of systemically important banks.

At the same time, but unrelated to the above, we raised the long- andshort-term ratings on BFA to reflect the bank's improved financialprofile--following its downsizing, BFA no longer reports double leverage(holding company debt used to finance equity capital at the subsidiary). Wenow rate the bank two notches below the group's credit profile; previously, it


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was three notches below. Two notches is the standard notching difference weapply for holding company ratings, when group credit profiles arespeculative-grade.

Our affirmation of the ratings on Bankinter was also primarily based onbank-specific developments. Although the bank has improved its capital to amoderate level and we expect it to maintain this degree of solvency, we nowalso consider the bank unlikely to reduce its relatively high reliance onshort-term funding and so improve its liquidity position to an adequate level,in contrast to our previous expectation. The combination of these factors ledus to revise the bank's SACP to 'bb' from 'bb-', but left the ratingsunchanged because we removed the one-notch uplift incorporated in the ratingsfor short-term support.

We did not include Banco Santander S.A., its highly strategic subsidiarySantander Consumer Finance S.A., and Banco Bilbao Vizcaya Argentaria S.A. inthis review because the ratings on these banks would not be affected by achange in our view of economic risks for Spanish banks or a potentialreduction in government support. Their exposure to their home market is lowerthan that of their domestic peers (the anchor for these banks is already'bbb-') and the ratings are constrained by Spain's creditworthiness, ratherthan benefiting from government support.

OUTLOOK

The positive outlook on Cecabank primarily reflects the possibility that wecould revise the bank's SACP upward and raise the long-term rating on it ifthe positive economic risk trend results in an improvement of our overalleconomic risk assessment for Spanish banks and the remaining rating factorsremain unchanged.

The positive outlook on Bankinter reflects the possibility that we couldrevise the bank's SACP upward and raise the long-term rating on it ifBankinter continued to successfully transform its business model. In amore-benign economy, this might be less difficult to accomplish than weinitially expected.

The negative outlooks on Popular, NCG, Sabadell, BBSA, and Kutxabank reflectpotential downward pressure arising from specific factors. These factors varyfrom bank to bank, but may include a lower capital strengthening than thatincluded in our expectations, greater asset quality deterioration than wecurrently expect, or failure to meet our expectation that their liquiditypositions would improve to an adequate level. In the case of BBSA, pressurecould stem from a failure in the restructuring of its business model or anyevidence of reduced commitment from its parent, U.K.-based bank Barclays BankPLC, because the ratings on BBSA benefit from three notches of uplift over itsSACP due to parental support.

Additionally, the negative outlooks on Bankia, BFA, Popular, NCG, and Sabadellindicate that we may lower their ratings by year-end 2015 if we believe there


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is a greater likelihood that senior unsecured liabilities may incur losses ifthe bank fails, and so decide to reduce or remove notches related togovernment support from the ratings on these banks.

The stable outlook on Caixabank reflects our view that for the positive trendwe see for economic risks in Spain to translate into prospects for a higherrating on Caixabank, we would need to predict a greater improvement of thebank's capital position than the improvement we currently incorporate into theratings and to revise the outlook on our sovereign rating on Spain to positivefrom stable.

The stable outlook on Ibercaja primarily reflects our view that if thepositive economic risk trend materializes as an improvement of the economicrisk for the Spanish banking system, it could benefit our assessment ofIbercaja's capital position, but probably not sufficiently to trigger anupgrade.

CREDITWATCH

The ratings on la Caixa remain on CreditWatch negative to indicate that arecently approved change in its legal form from a savings bank to afoundation--which could lead to changes to the regulatory and supervisoryframework under which it operates--could weaken its creditworthiness.

RELATED CRITERIA AND RESEARCH

Related Criteria• Group Rating Methodology, Nov. 19, 2013• Revised Market Risk Charges For Banks In Our Risk-Adjusted CapitalFramework, June 22, 2012

• Banks: Rating Methodology And Assumptions, Nov. 9, 2011• Banking Industry Country Risk Assessment Methodology And Assumptions,Nov. 9, 2011

• Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011• Bank Capital Methodology And Assumptions, Dec. 6, 2010• Use Of CreditWatch And Outlooks, Sept. 14, 2009

Related Research• Standard & Poor's Takes Various Rating Actions On European BanksFollowing Government Support Review, April 29, 2014

• Credit FAQ: The Rating Impact Of Resolution Regimes For European Banks,April 29, 2014

• Standard & Poor's To Review Government Support In European Bank Ratings,March 4, 2014

BICRA SCORE SNAPSHOT*


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SpainTo From

BICRA Group 6 6

Economic risk 7 7Economic resilience Intermediate risk Intermediate riskEconomic imbalances Very high risk Very high riskCredit risk in the economy High risk High riskEconomic risk trend Positive Stable

Industry risk 5 5Institutional framework Intermediate risk Intermediate riskCompetitive dynamics Intermediate risk Intermediate riskSystemwide funding High risk High riskIndustry risk trend Stable Stable

*Banking Industry Country Risk Assessment (BICRA) economic risk and industryrisk scores are on a scale from 1 (lowest risk) to 10 (highest risk). For moredetails on our BICRA scores on banking industries across the globe, please see"Banking Industry Country risk Assessment Update," published monthly onRatingsDirect.

RATINGS LIST

Ratings RaisedTo From

Banco Financiero y de Ahorros S.A.Counterparty Credit Rating B/Negative/B B-/Negative/C

Ratings Affirmed; Outlook RevisedTo From

Cecabank S.A.Counterparty Credit Rating BB+/Positive/B BB+/Stable/B

Ratings Affirmed

CaixaBank S.A.Counterparty Credit Rating BBB-/Stable/A-3

Kutxabank S.A.Counterparty Credit Rating BBB-/Negative/A-3

Barclays Bank S.A.U.Counterparty Credit Rating BBB-/Negative/A-3

Bankinter S.A.Counterparty Credit Rating BB/Positive/B

Ibercaja Banco S.A.Counterparty Credit Rating BB/Stable/B


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Banco de Sabadell S.A.Counterparty Credit Rating BB/Negative/B

Bankia S.A.Counterparty Credit Rating BB-/Negative/B

Banco Popular Espanol S.A.Counterparty Credit Rating B+/Negative/B

NCG Banco S.A.Counterparty Credit Rating B+/Negative/B

Caja de Ahorros y Pensiones de Barcelona (Unsolicited)Short-Term Counterparty Credit Rating B

Rating Remaining On CreditWatch

Caja de Ahorros y Pensiones de Barcelona (Unsolicited)Long-Term Counterparty Credit Rating BB/Watch Neg

NB: This list does not include all the ratings affected.

Additional Contact:

Financial Institutions Ratings Europe; [email protected]

This unsolicited rating(s) was initiated by Standard & Poor's. It may be basedsolely on publicly available information and may or may not involve theparticipation of the issuer. Standard & Poor's has used information fromsources believed to be reliable based on standards established in our CreditRatings Information and Data Policy but does not guarantee the accuracy,adequacy, or completeness of any information used.

Complete ratings information is available to subscribers of RatingsDirect atwww.globalcreditportal.com and at spcapitaliq.com. All ratings affected bythis rating action can be found on Standard & Poor's public Web site atwww.standardandpoors.com. Use the Ratings search box located in the leftcolumn. Alternatively, call one of the following Standard & Poor's numbers:Client Support Europe (44) 20-7176-7176; London Press Office (44)20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm(46) 8-440-5914; or Moscow 7 (495) 783-4009.


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