caja rural de navarra

FINANCIAL INSTITUTIONS

CREDIT OPINION7 November 2017

Update

RATINGS

Caja Rural de NavarraDomicile Spain

Long Term Debt Not Assigned

Long Term Deposit Baa2

Type LT Bank Deposits - DomCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Analyst Contacts

Maria Vinuela [email protected]

Alberto Postigo +34.91.768.8230VP-Sr Credit [email protected]

Carola Schuler [email protected]

Maria Asensio +44.20.7772.1078Associate [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Caja Rural de NavarraSemiannual update

SummaryCaja Rural de Navarra's (CRN) Baa2/Prime-2 deposit ratings reflect (1) the bank's baa2 BCA;and (2) the result of our Advanced Loss Given Failure (LGF) analysis, which does not translateinto any rating uplift. CRN's Counterparty Risk (CR) Assessment is Baa1(cr)/Prime-2 (cr).

CRN's BCA of baa2 reflects the bank's sound financial fundamentals, namely its (1) strongerasset-quality performance than that of the wider Spanish banking system, (2) soundcapitalisation, and (3) stable retail deposit base and low reliance on wholesale funding.The bank's BCA also reflects its modest, but stable, profitability levels, and the limitedgeographical diversification of its franchise, which is concentrated in Navarra and itsneighbouring regions.

CRN’s BCA is constrained at the level of Spain's sovereign rating (Baa2 stable). Under ourmethodology, a bank’s BCA will not typically exceed the sovereign rating without any factorthat reduces the dependency between the creditworthiness of that bank and the sovereign.Therefore, any upward pressure on CRN’s ratings is dependent on an upgrade of the Spanishgovernment's rating, thereby lifting the current constraint on the bank's BCA.

Exhibit 1

Rating Scorecard - Key financial ratios

3.5% 13.3%0.6%

17.4% 31.7%

0%

5%

10%

15%

20%

25%

30%

35%

0%

2%

4%

6%

8%

10%

12%

14%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid Banking

Assets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

Caja Rural de Navarra (BCA: baa2) Median baa2-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Financial Metrics

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1098527

https://www.moodys.com/credit-ratings/Caja-Rural-de-Navarra-credit-rating-600052353

https://www.moodys.com/credit-ratings/Spain-Government-of-credit-rating-704550

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Sound brand recognition and market positioning in Navarra

» Improving asset-quality indicators, which are significantly stronger than the system average

» Sound solvency levels

» Low reliance on market funding, the majority of which is secured

Credit challenges

» Geographical concentration, which renders the bank vulnerable to the negative developments affecting its home region

» Historically modest profitability indicators, which, however, are better than the system average.

OutlookThe outlook on CRN’s long-term deposit ratings is stable, in line with the outlook on Spain's sovereign rating.

Factors that could lead to an upgradeAny upward pressure on CRN's BCA is unlikely to materialise as long as the Spanish government's bond rating remains at Baa2 becausewithout any factor that reduces the dependency between the creditworthiness of a bank and the sovereign, the bank's BCA will nottypically exceed the sovereign rating under our methodology.

An upgrade of CRN's deposit ratings could arise as a result of changes in its liability structure that indicate a lower loss given failure tobe faced by deposits.

Factors that could lead to a downgradeDownward pressure could be exerted on CRN's BCA as a result of (1) an unexpected and considerable worsening of the bank's asset-quality indicators, which would align its performance closer to that of the comparatively weaker banking system; (2) a weakening ofthe bank's risk-absorption capacity through lower earnings-generation capacity or capital levels; or (3) worsening, beyond our currentexpectations, of the Spanish operating environment, particularly in the region of Navarra.

CRN's deposit ratings could also change as a result of alterations to the bank’s liability structure, which would indicate a higher lossgiven failure to be faced by deposits.

Negative pressure on the bank's BCA and, in turn, on its debt and deposit ratings could also result from a downgrade of the Spanishsovereign rating.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 7 November 2017 Caja Rural de Navarra: Semiannual update


Key indicators

Exhibit 2

Caja Rural de Navarra (Consolidated Financials) [1]12-162 12-152 12-142 12-133 12-123 CAGR/Avg.4

Total Assets (EUR million) 11,086 9,860 9,652 9,662 9,594 3.75

Total Assets (USD million) 11,692 10,711 11,680 13,314 12,649 -1.95

Tangible Common Equity (EUR million) 944 872 795 750 704 7.65

Tangible Common Equity (USD million) 996 948 962 1,034 928 1.85

Problem Loans / Gross Loans (%) 2.6 3.4 4.4 5.2 4.3 4.06

Tangible Common Equity / Risk Weighted Assets (%) 13.3 13.6 13.6 12.0 11.3 13.57

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 16.4 20.0 26.5 32.8 28.5 24.86

Net Interest Margin (%) 1.4 1.5 1.5 1.4 1.5 1.56

PPI / Average RWA (%) 1.8 2.0 2.2 1.5 1.8 2.07

Net Income / Tangible Assets (%) 0.6 0.7 0.5 0.3 -0.4 0.46

Cost / Income Ratio (%) 54.8 53.6 49.2 55.1 50.1 52.66

Market Funds / Tangible Banking Assets (%) 17.4 17.4 22.5 27.7 30.4 23.16

Liquid Banking Assets / Tangible Banking Assets (%) 31.7 29.0 30.4 26.4 18.8 27.36

Gross Loans / Due to Customers (%) 99.8 103.1 105.5 111.6 115.0 107.06

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] May include rounding differences dueto scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latestaccounting regime. [7] Simple average of Basel III periods presented.Source: Moody's Financial Metrics

ProfileWith total assets of €11.5 billion as of the end of June 2017, CRN is the second-largest rural co-operative bank in Spain. The bank isassociated with 28 other rural co-operatives under the Spanish Rural Co-operatives Association (Asociacion Espanola de Cajas Rurales).

CRN is primarily based in Navarra. The bank also operates in the neighbouring regions of La Rioja and the Basque Country as theonly rural credit co-operative. With market shares of 23.4% in lending and 27.2% in deposits as of the end of December 2016 (latestavailable data), the bank is ranked second in Navarra, behind CaixaBank, S.A. (CaixaBank, deposits Baa2 positive, BCA ba1). Despite itssmall size, CRN has strong brand recognition and market position in its home region.

Navarra is one of the wealthiest regions in Spain, with an unemployment rate of 10.6% compared with the nationwide unemploymentrate of 17.1% as of the end of June 2017. The region's GDP per capita was around 20% higher than the Spanish average as of the end ofDecember 2016 (latest available data).

Spanish rural co-operatives have benefitted from the integration of some of their direct local competitors (former savings banks)into major financial groups that have attained a nationwide presence, following the restructuring of the Spanish financial system.In particular, CRN's direct competitor Caja de Ahorros de Navarra was integrated into CaixaBank (through Banca Civica). Theseintegrations have led to the weakening or loss of regional identity for the merged entities, which prompted some customer flight fromthe integrated entities to rural co-operatives.

Detailed credit considerationsImproving asset-quality indicators, which are significantly stronger than the system averageCRN's assigned Asset Risk score of baa1 incorporates its very low level of problematic assets relative to the system as well as thelimited geographical diversification of the bank’s franchise.

CRN's asset-quality indicators have historically performed better than the Spanish banking system average owing to the bank's moreprudent risk management, relatively low exposure to the real estate sector and its activities being limited to its regional territories. Asof the end of June 2017, the bank reported a nonperforming loan (NPL) ratio of 2.2%, down from 2.7% a year earlier, while the sameratio for the banking system stood at 8.0%. The bank's coverage ratio, defined as NPLs as a percentage of loan-loss reserves, stood at ahigh 85% as of the end of June 2017 compared with the system average of 55%.


https://www.moodys.com/credit-ratings/CaixaBank-SA-credit-rating-822151545


In addition to NPLs, CRN has other problematic exposures concerning the real estate assets it has acquired over the past few years.If these assets are included, the bank's NPL ratio rises to 4.2%, which still compares very favourably with that of its domestic peers.Refinanced loans classified as performing represented 1% of its total loans as of the end of June 2017.

We expect this improving trend to continue in the next 12 months as the domestic economy maintains a healthy growth rate, whichwill help the bank reduce its provisioning costs further.

Sound solvency levelsAs of the end of June 2017, the bank's tangible common equity/risk-weighted assets was 13.5%, equivalent to a Capital score of a3. Thishigh score indicates that CRN's capitalisation is a relative strength for its BCA.

CRN's capital is mainly composed of retained earnings and “aportaciones” on which it pays interest. Therefore, similar to other rural co-operatives, the bank has flexibility to raise capital from co-operative members. In line with Spanish legislation, the bank allocates a partof its net profit to a welfare fund although it retains most of the profit to support capital generation and fund future growth. This profitretention translates into the bank's higher-than-average capital ratios.

In terms of regulatory capital ratios, CRN reported a phased-in Common Equity Tier 1 (CET1) capital ratio of 15.7% as of the end ofJune 2017 and a fully loaded CET1 ratio of 16.3%. The bank aims to grow its CET1 ratio by around 1 percentage point in the followingthree years, mainly through profit retention.

Modest profitability indicators, although higher than the system averageWe expect CRN to continue to benefit from Spain's improved economic conditions, which are likely to enable it to gradually improvebusiness volumes from the current subdued levels, and to report lower provisioning requirements as asset-quality metrics improve. Thebank’s ba1 Profitability score already reflects our expectations regarding its profitability over the next 12-18 months.

CRN's topline earnings have been broadly stable over the past few years, as opposed to system trends. As of the end of June 2017, thebank reported an operating income of €135 million, similar to the level reported a year earlier. This stability, combined with an 11%increase in operating expenses, led to a pre-provision income of €56 million compared with €64 million a year earlier.

The bank's bottom-line profitability has been supported by the resilience of its topline revenue. CRN reported a net profit of €41 millionas of the end of June 2017, equivalent to net income/tangible assets of 0.7% and consistent with a modest ba1 Profitability score.

Retail funding has proven resilient throughout the crisisCRN is predominantly retail funded. As of the end of June 2017, deposits accounted for around 74% of the bank's total funding (aftergrowing by around 15% since the end of 2014), representing around 100% of its gross loans. The bank's regional identity adds acomponent of stability to its retail funding base, especially considering that its direct competitor (a former savings bank) has beenintegrated into CaixaBank, a large financial group that has a nationwide presence.

Market funding represented a low 17.4% of CRN's tangible banking assets as of the end of December 2016. Most of CRN's wholesalefunding represents covered bonds and repurchase agreements — 16% and 10% of total funding as of the end of June 2017, respectively— all secured funding sources. Repo financing is primarily used to fund the sovereign portfolio, given the favourable conditions of thisfunding source. The bank’s limited reliance on market funding is reflected in its Funding Structure score of baa2. The bank does not faceany debt maturity in 2017.

CRN's liquid banking assets accounted for 32% of its tangible banking assets as of the end of December. We assign a Liquid Resourcesscore of baa3 to the bank, one notch below its Macro-Adjusted score of baa2, to reflect the encumbrance of some of the bank's liquidassets.

According to our liquidity stress test, the bank displays a net positive funding gap (as of the end of June 2017) in the event that capitalmarkets remained closed for a period of one year. Our stress test includes interbank borrowings, committed undrawn credit lines andthe reissuance of maturing covered bonds, but excludes the liquidity arising from a potential reduction in CRN's commercial gap. Thebank would also be resilient to our stress scenario of a deposit outflow of 5% for retail deposits and 25% for corporate deposits. Thestress test also assumes that debt placed among retail investors is not rolled over.



Support and structural considerationsLoss Given Failure (LGF) analysisCRN is subject to the EU Bank Recovery and Resolution Directive, which we consider to be an Operational Resolution Regime.Accordingly, we apply most of its standard assumptions. These assumptions include a residual tangible common equity of 3%,losses post-failure of 8% of tangible banking assets, a 25% runoff in junior wholesale deposits, and a 5% runoff in preferred deposits,and assign a 25% probability to deposits being preferred to senior unsecured debt. Because we assume that CRN's deposit base isessentially retail in nature, we consider a proportion of 10% of junior deposits below the estimated EU-wide average of 26%.

For CRN's deposits, our LGF analysis considers the likely impact on loss given failure of the combination of its own volume andsubordination. Our LGF analysis indicates a moderate loss given failure for deposits, which leads us to position the bank's PreliminaryRating Assessment at the same level as its Adjusted BCA. Please refer to the Loss Given Failure and Government Support table at thebottom of the scorecard.

Government supportWe assign a low probability of government support for CRN's deposits, which does not translate into any uplift. Likewise, the CRAssessment does not benefit from any rating uplift from government support.

Counterparty Risk (CR) AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default, and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.

CRN’s CR Assessment is positioned at Baa1(cr)/Prime-2(cr)CRN's CR Assesment is constrained by Spain’s sovereign rating of Baa2. Under our methodology, a bank's CR Assessment will typicallynot exceed the sovereign rating by more than one notch.

Prior to the government cap, the CR assessment is positioned two notches above the bank's Adjusted BCA of baa2, based on the bufferagainst default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 8.1%of tangible banking assets. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CRAssessment captures the probability of default on certain senior obligations, rather than expected loss, thereby focusing purely onsubordination and taking no account of the volume of the instrument class.

About Moody's Bank ScorecardOur scorecard is designed to capture, express and explain in summary form our rating committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.



Rating methodology and scorecard factors

Exhibit 3

Caja Rural de NavarraMacro FactorsWeighted Macro Profile Strong - 100%

Factor HistoricRatio

MacroAdjusted

Score

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 3.5% baa2 ↑ baa1 Expected trend Geographical

concentrationCapitalTCE / RWA 13.3% a3 ← → a3 Risk-weighted

capitalisationProfitabilityNet Income / Tangible Assets 0.6% ba1 ← → ba1 Return on assets

Combined Solvency Score baa2 baa1LiquidityFunding StructureMarket Funds / Tangible Banking Assets 17.4% baa2 ← → baa2 Extent of market

funding relianceLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 31.7% a3 ← → baa3 Asset encumbrance

Combined Liquidity Score baa1 baa2Financial Profile baa1

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint: Baa2Scorecard Calculated BCA range baa1-baa3Assigned BCA baa2Affiliate Support notching 0Adjusted BCA baa2

Balance Sheet in-scope(EUR million)

% in-scope at-failure(EUR million)

% at-failure

Other liabilities 3,274 29.6% 3,274 29.6%Deposits 7,467 67.4% 7,467 67.4%

Preferred deposits 6,720 60.7% 6,384 57.7%Junior Deposits 747 6.7% 560 5.1%

Equity 332 3.0% 332 3.0%Total Tangible Banking Assets 11,073 100% 11,073 100%



De Jure waterfall De Facto waterfall NotchingDebt classInstrumentvolume +

subordination

Sub-ordination

Instrumentvolume +

subordination

Sub-ordination

De Jure De FactoLGF

NotchingGuidance

vs.Adjusted

BCA

AssignedLGF

notching

Additionalnotching

PreliminaryRating

Assessment

Counterparty Risk Assessment 8.1% 8.1% 8.1% 8.1% 1 1 1 1 0 baa1 (cr)Deposits 8.1% 3.0% 8.1% 3.0% 0 0 0 0 0 baa2

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Assessment 1 0 baa1 (cr) 0 Baa1 (cr) --Deposits 0 0 baa2 0 Baa2 --Source: Moody's Financial Metrics

Ratings

Exhibit 4Category Moody's RatingCAJA RURAL DE NAVARRA

Outlook StableBank Deposits -Dom Curr Baa2/P-2Baseline Credit Assessment baa2Adjusted Baseline Credit Assessment baa2Counterparty Risk Assessment Baa1(cr)/P-2(cr)

Source: Moody's Investors Service



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