TEXT - S&P affirms Itau Unibanco Holding S.A.
Overview -- Itau Unibanco Holding S.A. has maintained its "very strong" business position and "adequate" risk, funding, and liquidity positions, and its capital and earnings is still "moderate." -- We are affirming our global scale 'BBB/A-2' and 'brAAA/brA-1' national scale ratings on Itau Unibanco and its core operating subsidiary Banco Itau BBA S.A. -- The stable outlook reflects our expectation that Itau Unibanco will continue to expand its loan portfolio and maintain its market share while improving its credit quality metrics. Rating Action On Dec. 7, 2012, Standard & Poor's Ratings Services affirmed its 'BBB/A-2' global scale ratings on Itau Unibanco Holding S.A. and its operating subsidiary Banco Itau BBA S.A. At the same time, Standard & Poor's affirmed its 'brAAA/brA-1' national scale ratings on both companies. The outlook on the long-term ratings remains stable. The stand-alone credit profile (SACP) of both companies is 'bbb+'. Rationale The ratings on Itau Unibanco Holding S.A. reflect its "very strong" (as our criteria define the term) business position, "moderate" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity. Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in Brazil is 'bbb'. Our economic risk assessment reflects our opinion that economic improvements and cautious fiscal and monetary policies have added to the Brazilian economic authorities' flexibility to manage significant external shocks and potential distortions arising from the current economic expansion in Brazil. We believe these potential risks remain manageable, and the central bank's proactive stance has contained them. We assess industry risk based on our view of Brazil's sound regulation, good regulatory track record, and high and stable share of core deposits. We consider the banking sector's moderate risk appetite as a positive factor. We assess Itau Unibanco's business position as "very strong," based on its "very strong" market position and solid franchise, especially within the retail segment. This has resulted in stable market shares in both loans and deposits. With total assets of Brazilian real (R$) 960 billion (US$457 billion)as Sept. 30, 2012, Itau Unibanco is the largest private bank in Latin America, and its geographic diversification is not limited to the Federative Republic of Brazil (foreign currency rating BBB/Stable/A-2, local currency rating A-/Stable/A-2), since it has been expanding its operations in Latin America over the past few years. We believe that management has adequately guided the group through a long-term strategy to prudently expand operations outside of Brazil, while preserving the existing business and prioritizing bottom-line results. Itau Unibanco has banking licenses in Argentina, Chile, Paraguay, Uruguay, and Colombia. However, the consolidated assets of these subsidiaries accounted for a limited 3.9% of the bank's consolidated assets as of Sept. 30, 2012, and we don't expect any substantial acquisition in the short-term that would change its business profile. Locally, Itau Unibanco has established a joint venture with Banco BMG S.A. (B/Stable/B), one of the largest originators of payroll lending in Brazil, in which Itau Unibanco will hold a 70% stake in a new bank called Banco Itau BMG Consignado S.A. (not rated). The deal structure commits limited upfront capital (R$700 million) from Itau Unibanco, while giving the bank further access to a very competitive and low-risk credit market. We expect that about 30% of Itau Unibanco's payroll loans will be generated through this channel. We assess the bank's capital and earnings as "moderate," based on our expectation of a risk-adjusted capital (RAC) ratio of 6.0%-6.5% over the next 12 months to 18 months. Our base case scenario considers loans growth of 9% in 2012 and 15% in 2013, dividends payout in line with previous years, and a return on adjusted assets of about 1.5% during that time. Our RAC for December 2011 was 7.2%, but we lowered the forecasted figure due to the impact the goodwill that resulted from the company's acquisition of Redecard, a credit card processor, had on the total adjusted capital. Itau Unibanco, which was already Redecard's largest shareholder, completed its plans to delist the company after the acquisition. Itau Unibanco's risk position is "adequate," in our view, based on its relatively simple business model for an institution of its size and its diversified balance sheet. We believe that the loan portfolio is adequately diverse in terms of customers and geography. The bank has moderate single-name concentration due to its retail focus, and the 20 largest exposures are highly rated corporates and account for only about 10% of the loan portfolio. Itau Unibanco also benefits from its national scope and wide industry representation of the lending book. The bank has a higher proportion of unsecured retail lending and car loans than its peers, and we believe that these products have typically higher risk metrics than payroll or corporate loans. Despite this, we believe that Itau Unibanco's healthy margins compensate for the risk. Like many of its peers, the bank's asset quality deteriorated during the past few quarters due to the fast lending growth from 2009 to 2011. However, we expect the asset quality indicators to stabilize in fourth-quarter 2012. The bank's short-term asset quality indicators have improved, and we expect that the asset quality metrics will be at about 5.0% as of year-end 2012, similar to those as of year-end 2011. We consider Itau Unibanco's funding to be "average" and its liquidity as "adequate." The group benefits from a large base of stable deposits obtained through its extensive retail branch network. The loan-to-deposit ratio was about 94% as of Sept. 30, 2012, which is similar to a year earlier and stronger than most of its large regional peers'. The bank's liquidity is consistent with its peers'. Liquid assets represent about 48% of the bank's short-term deposits base and include cash plus free government bonds and net repurchase agreements totaling approximately R$120 billion. The long-term issuer credit rating on Itau Unibanco is one notch lower than the SACP, and is at the same level as the long-term foreign currency rating on Brazil, where Itau Unibanco is domiciled. Under our criteria, the possibility of an issuer credit rating on a bank surpassing the sovereign credit rating is rare, since the bank would have to show capacity to maintain sufficient capital and liquidity to cover the harsh stress that accompanies a sovereign default. In addition, the bank could not have significant loan or asset exposure to the sovereign, which is not the case for any Brazilian banks because their liquid assets are largely invested in sovereign bonds. Outlook The stable outlook on Itau Unibanco reflects our expectations that the bank will maintain its "very strong" business position and "adequate" risk position, while preserving its profitability and capitalization levels and without sacrificing underwriting standards. We could raise the rating if we take a similar rating action on the foreign currency rating of the sovereign, as long as SACP on the bank remains at 'bbb+'. We could lower the rating on the bank if the projected RAC ratio were to deteriorate to less than 5%. Ratings Score Snapshot Issuer Credit Rating BBB/Stable/A-2 SACP bbb+ Anchor bbb Business Position Very Strong (+2) Capital and Earnings Moderate (-1) Risk Position Adequate (0) Funding and Liquidity Average and Adequate (0) Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 Additional Factors -1 Related Criteria And Research -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment: Brazil, Feb. 24, 2012 Ratings List Ratings Affirmed Itau Unibanco Holding S.A. Banco Itau BBA S.A. Counterparty Credit Rating BBB/Stable/A-2 Brazilian Rating Scale brAAA/Stable/brA-1 Itau Unibanco Holding S.A. Certificate Of Deposit BBB/A-2