TEXT-S&P affirms Banco Santander (Brasil) 'BBB/A-2' ratings
Overview -- On Oct. 15, 2012, we downgraded Banco Santander S.A., Banco Santander Brasil's parent, to BBB/Negative/A-2. -- We are revising the Brazilian unit's systemic importance to "high" from "moderate." -- Banco Santander Brasil has kept its strong business position and remains an important player in the retail segment. -- We are affirming our 'BBB/A-2' issuer credit ratings on the bank. -- The stable outlook reflects our expectation that if the bank's stand-alone credit profile deteriorates, our ratings are unlikely to change because we would incorporate government support. Rating Action On Dec. 18, 2012, Standard & Poor's Ratings Services affirmed its 'BBB/A-2' global scale and 'brAAA/brA-1' national scale issuer credit ratings on Banco Santander (Brasil) S.A. The outlook on both scales is stable. Rationale The issuer credit ratings on Banco Santander Brasil continue to reflect our 'bbb' anchor for banks operating primarily in Brazil, and our assessments of its "strong" business position, "adequate" capital and earnings, "adequate" risk position, as well as our view of its "average" funding and "adequate" liquidity (as our criteria defines these terms). The foreign currency rating on Brazil constrains the ratings on the bank. The stand-alone credit profile (SACP) is 'bbb+'. As a result of our analysis on Banco Santander Brasil we are changing its systemic importance to "high" from "moderate." This stems from our view that the bank's hypothetical failure would likely harm Brazil's financial system and the economy, and would cause a systemic problem. As a result, we believe there is a "moderately high" likelihood of extraordinary government support, which is reflected in our stable outlook. We also believe that under current circumstances and challenges that its Spain-based parent, Banco Santander S.A. (BBB/Negative/A-2) is facing, the Brazilian government won't treat Banco Santander Brasil differently from other banks of high systemic importance in the country. Likewise, the bank's sound market share in terms of deposits--7.3% as of September 2012--and its strong presence in the retail segment and payment system make it a significant and important player in the local market. The 'bbb' anchor draws on our Banking Industry Country Risk Assessment (BICRA) methodology and our view of the economic and industry risk in Brazil, where Banco Santander Brasil operates. The indicative BICRA for Brazil is group '4', according to our criteria. One of the factors we base the BICRA group on is our evaluation of economic risk. In our opinion, economic improvements and cautious fiscal and monetary policies have added to the flexibility the Brazilian economic authorities have to manage significant external shocks and potential distortions from the current expansionary phase in Brazil. We believe these potential risks remain manageable, and a proactive stance from the central bank has contained them. With regard to industry risk, sound regulation, regulators' good track record, and a high and stable share of core deposits support the Brazilian banking industry. At the same time, we consider the banking sector's moderate risk appetite as a positive in our assessment. Banco Santander Brasil's overall business position remains "strong." Our opinion reflects the bank's still steady loan portfolio growth, stable market shares and operating revenues, and a sound business diversification. We expect the bank to maintain these strong features for the next 12-18 months. We also believe the bank benefits from its importance to the Brazilian financial system, long track record, solid retail customer base, and still valued franchise, which we expect will continue to provide it with a healthy stream of business activities. Business stability has remained strong, in our view. As of September 2012, Banco Santander Brasil was the third-largest private bank in Brazil (the sixth-largest if public-owned banks are included) with a market share in terms of loans and deposits of 9.7% and 7.3%, respectively, according to Central Bank data. In our opinion, these market shares and recent credit expansion in Brazil have provided sound business volumes and a healthy revenue stream. Banco Santander Brasil's total loan portfolio and operating revenues have grown at a compound annual growth rate (CAGR) of 17.8% and 8.2%, respectively, over the past two years. The bank's nationwide footprint and large branching network also supports its business stability, given also its retail orientation which has delivered a large and stable customer base, of 26.8 million clients as of September 2012. We also see no evidence so far that the recent downgrades of its Spain-based parent, Banco Santander, have affected the bank's business operations, in terms of volumes and revenues. Our forecasted RAC ratio between 9.0% and 9.5% supports our "adequate" assessment for its capital and earnings. This forecast takes into consideration our base-case scenario assumptions which include a loan portfolio growth of 10% for 2012 and 16% loan growth for year-end 2013. These growth rates are lower than in previous years, primarily reflecting the easing in credit growth from private banks in Brazil; a similar dividend payout ratio compared to previous years; and an overall 19% average growth in Standard & Poor's risk weighted assets before diversification. Quality of capital and earnings has remained "adequate" as well. Banco Santander Brasil's high-quality capital is reflected in a capital base that is primarily composed of paid-in capital, reserves, and retained earnings. We are not expecting the bank to support future capital levels by issuing hybrids or other forms of quasi capital. However, the bank does have a large amount of deferred tax assets as does its national peers, which in our view weakens the quality of its capital. Quality of earnings remains adequate related to other large and diversified rated peers in Latin America thanks to its strong loan portfolio growth in previous years with high net interest margins and an adequate efficiency. Trading revenues have represented around 1% of its total revenue base, which have kept recurring revenues more predictable than for its peers with high treasury and proprietary position activities. In our view, Banco Santander Brasil's risk position remains "adequate." This opinion stems from the bank's adequate growth and changes in exposure, risk diversification, the lack of high complexity in its operations, and our expectation that nonperforming assets (NPAs) will start to gradually decrease over the next two years. Growth and changes in exposure remain adequate primarily because we are not anticipating significant growth in the credit portfolio for over the next 12 to 18 months following the high growth rate the bank and the system experienced in the past. Also, risk concentrations remain adequate as the bank continues to show spread risks among a diverse set of asset classes. We are anticipating the loan portfolio mix to remain very similar as current one. Banco Santander Brasil's NPAs and credit losses rose as a result of the rapid credit expansion in Brazil over the past eight years. Its exposure to auto loans also caused a negative effect in NPAs. As of September 2012, its NPAs were 7.6%, while credit losses were 5%. These levels are higher than the average for the system, 3.8% and 3.3%, respectively. We are expecting these measures to ease over the next two years as the bank takes a more conservative approach in its credit risk management, improving economic conditions for 2013, and credit quality will likely start to improve in Brazil amid lower interest rates, which will translate into lower debt service for households. One factor mitigating its increasing NPAs is its sound reserve coverage, which at September 2012 was 92.8%. Banco Santander Brasil's funding structure has remained "average" compared to the industry norm, and has not changed over the past 12 months. The bank has maintained a stable and growing deposit base despite the recent weakening credit quality of its parent. Its core customer deposit base has grown at a CAGR of 11.7% over the past three fiscal years. During the first nine months of 2012, core customer deposit base grew 6.5%. The latter, in our view, was due to the bank's extensive branch network and retail focus. Around 90% of Banco Santander Brasil's funding is local, which limits its exposure to external shocks. Core customer deposits remain the main funding source, accounting for 67.1% of its total funding base as of September 2012. In addition, around 45% of the bank's total deposit base is composed of retail deposits, which we also deem as more stable. The remaining funding sources are mainly comprised of repurchase agreements, government funding (particularly from Banco Nacional de Desenvolvimento Economico e Social), senior and subordinated bonds, and corresponding bank lines. In our opinion, Banco Santander Brasil's funding structure is well diversified and we expect it to remain. The bank's operations and management are independent from its parent for funding purposes. Our view of Banco Santander Brasil's liquidity is "adequate" because its cash on hand plus government securities represented around 25% of its total deposit base, in line with its regional and global peers. Also, in our opinion, refinancing risk is manageable. Other borrowings, which mainly include market debt issuances (senior, subordinated, and securitization notes), Ex-Im financing lines, and other domestic and foreign credit facilities, represented around 17% of its total funding base. Additionally, the bank's maturity profile for its market debt issuances is adequate, in our view. Around 53% of it matures after 2015, and maturities are well dispersed between 2013 and 2015. Likewise, liquid assets exceed its market debt issuances. We expect the bank to keep an adequate liquidity management, as it has been for over the past four years. We continue to consider Banco Santander Brasil as "core" to its parent, given integration, ownership, strategy, and long-term commitment. In addition, the bank has become a significant contributor to its parent's earnings, accounting for more than 30% of its operating revenues. Our ratings on Banco Santander Brasil, however, don't benefit from notches of uplift for parent support, given that the group's group credit profile (GCP) is 'bbb', below the bank's SACP. Our ratings on Banco Santander Brasil are one notch lower than its SACP because the foreign currency ratings on Brazil limit the ratings on the bank. The latter stems from the bank's high exposure to the sovereign and our belief Banco Santander Brasil will find it difficult to cope with a stressful situation without access to extraordinary liquidity support or central bank facilities. We also think that the bank will default if the sovereign defaults in its foreign currency obligations. Outlook The stable outlook on Banco Santander Brasil reflects our base-case expectation that it will maintain strong business position within the highly competitive Brazilian financial system. It also incorporates our expectation that its RAC will remain at adequate levels over the next 12-18 months, with a funding structure that continues to leverage on its extensive retail participation. The stable outlook also reflects our view that if the bank's SACP deteriorates, our ratings are unlikely to change because we would incorporate government support. This is due to our view of its high systemic importance to the Brazilian banking system and our opinion of the government being "supportive" towards its financial system. Nonetheless, a negative rating action would occur if Banco Santander Brasil's SACP deteriorates by three or more notches, other things been equal. The latter could take place if a combination of the following factors were to happen: -- A less-than-adequate capitalization as measured by RAC, which in turn could be caused by unexpected capital reductions or increased economic risk score for our Brazilian BICRA; -- Related party transactions that affect Banco Santander Brasil's adequate risk position; -- If Banco Santander Brasil's strong business or adequate funding positions weaken as result of perceived risks by the market, on the deterioration of the parent's creditworthiness; and -- If there is a change in the anchor related to any review of our BICRA assessment on Brazil. Given that the ratings are limited by the foreign currency ratings on Brazil, a negative rating action on the sovereign will also prompt a similar action on the bank. Likewise, a positive rating action on the sovereign will lead to an upgrade if the SACP remains at its current level. Ratings Score Snapshot Issuer Credit Rating BBB/Stable/A-2 SACP bbb+ Anchor bbb Business Position Strong (+1) Capital and Earnings Adequate (0) Risk Position Adequate (0) Funding and liquidity Average and Adequate (0) Support 0 GRE Support 0 Group Support 0 Government Support 0 Additional Factors -1 Related Criteria And Research -- Banco Santander S.A. And Some Subsidiaries Ratings Affirmed Despite Spain's Rising Economic Risk; Outlooks Negative, Nov. 23, 2012 -- Credit FAQ: Rating A Financial Institution Subsidiary Above Its Bank Parent, Oct. 10, 2012 -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Group Rating Methodology And Assumptions, Nov. 9, 2011 Ratings List Ratings Affirmed Banco Santander (Brasil) S.A. Counterparty Credit Rating Global Rating Scale BBB/Stable/A-2 Brazilian Rating Scale brAAA/Stable/brA-1 Certificate Of Deposit BBB/A-2 Senior Unsecured BBB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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