Fitch Affirms Banco Santander (Brasil) and Santander Leasing S.A. Arrendamento Mercantil

Fri May 23, 2014 12:56pm EDT

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(The following statement was released by the rating agency) SAO PAULO/RIO DE JANEIRO/NY, May 23 (Fitch) Fitch Ratings has affirmed the ratings of Banco Santander (Brasil) S.A. and Santander Leasing S.A. Arrendamento Mercantil after completing a group review. KEY RATING DRIVERS Banco Santander (Brasil) S.A. (SANBRA) SANBRA's IDRs and National Ratings are driven by its current Viability Rating (VR) of 'bbb', which is one notch below its parent's Banco Santander S.A. Spain (SAN) VR rating ('bbb+'). SANBRA's VR reflects the bank's robust capitalization, its strong local franchise, and self-funded nature mostly within its home market which is highly diversified. SANBRA does not rely on the parent for funding its day-to-day business. Its management team and board of directors enjoy a high degree of operating independence. SANBRA's VR also reflects the challenges the bank faces with its profitability and asset quality in the current weak economic scenario. Although asset quality has improved, the bank's profitability still does not compare as well to that of its peers. The bank's diversified funding, supported by its large branch network and client base, enables the bank to remain liquid and independent in terms of funding from its parent. SANBRA is a core subsidiary for SAN, having contributed 20%-26% of consolidated net income over the past few years. Fitch views the Brazilian market as a core market for Spanish parent, SAN. The parent benefits from the geographic diversification of its Latin American subsidiaries, which gives SAN the capacity to generate earnings internationally and make up for the recent muted results in Spain. The fact that SAN's international subsidiaries are self-funded helps SAN's liquidity and minimizes contagion risk, giving the group's subsidiaries the capacity to issue from different jurisdictions. Growth prospects for emerging markets have been revised down and they are not entirely immune to global economic trends, but it is expected that profits from these markets will continue to contribute significantly to the group's earnings. In early 2014 SANBRA issued a special dividend of BRL6 billion to existing shareholders. The vast majority of those shareholders subscribed to SANBRA's Tier I and Tier II issuances. Despite the former dividend payment, SANBRA's capital metrics still compares better than those of its peer group. During 2013 the bank also showed significant improvement in asset quality ratios so that its asset quality indicators are now more in line with its domestic private-sector peers. On April 29, 2014, SAN announced an offer to acquire the remaining portion (slightly less than 25%) of the shares that it does not already own of its Brazilian banking subsidiary. The stated objectives for the proposed exchange of SANBRA's shares, along with a premium, for shares of SAN include the unlocking of long-term value in the Brazilian business, increasing their weight in the Brazilian market, and making a financially attractive offer to its SANBRA shareholder base. Fitch views this announcement as having a neutral impact on the ratings as in the short term, Fitch believes that this exchange and the expected synergies will not have an immediate impact on the bank's strategies for doing business in Brazil. Also, this program will require the approval of multiple regulators, which is expected by September. Once approval is received, the share exchange is expected to be completed during the fourth quarter of this year. The minority shareholders that do accept the offer will own shares in the Spanish parent bank and receive future dividends from them. At this point, SANBRA's VR, IDRs and National-scale ratings do not reflect any extraordinary support from its parent, although it is viewed as a Core entity for SAN (rated 'BBB+' by Fitch with a Stable Outlook); as mentioned, the current ratings are driven by SANBRA's VR. On April 28, 2014, Fitch announced that the agency sees rating upside potential for some Spanish banks (including SAN) following its recent upgrade of Spain's sovereign rating by one notch (see 'Fitch Upgrades Spain to 'BBB+'; Outlook Stable' published April 25, 2014 available on www.fitchratings.com). The agency expects to review the credit fundamentals and ratings of Spanish banks that may benefit most from the improved sovereign dynamics in the near future. As part of its assessment Fitch will also review the banks' rating sensitivities, including with respect to the Sovereign rating. Fitch has affirmed the Support Rating (SR) at '2'. As the fifth largest bank by total assets in Brazil with a deposit market share of approximately 8%, it is highly likely that the Brazilian government (FC and LC IDR 'BBB'/'BBB' by Fitch; Outlook Stable) will provide support, should it be required. Fitch has also affirmed the Support Rating Floor (SRF) of SANBRA, given its systemic importance in Brazil and also considering the vested interest of the Brazilian sovereign to preserve the health of the financial system. Fitch's SRF indicates a level below which the agency will not lower the bank's Long-term IDRs. However, at present, the VR of SANBRA remains above its SRF as evidence of its good financial profile. Santander Leasing S.A. Arrendamento Mercantil (SAN Leasing) Fitch has affirmed the National Ratings of SAN Leasing. The ratings are driven by potential support from SANBRA. Fitch views SAN Leasing as an integral part of SANBRA's franchise as it shares management, policies and strategy of SANBRA, and as a result, those National scale ratings are equalized to those of SANBRA. The National ratings of SAN Leasing's subordinated issuances are one notch below the National ratings of SAN Brazil, as they incorporate Fitch's loss severity assumption in case of liquidation. RATING SENSITIVITIES If SANBRA is able to consistently improve the quality of its results to a level where its return on average assets (ROAA) is above 1.5%, and sustain the recent improvement in its asset quality indicators so that they remain similar to those of its peers, the VR could be upgraded. If asset quality becomes relatively inferior to its peers and ROAA is consistently below 0.5%, negatively affecting its comfortable capital ratios, the VR could experience a negative action. SANBRA's VR and IDRs, as well as the National scale ratings of SAN Leasing, could also be affected by a change in the rating its parent, SAN. Fitch acknowledges that the reputations of the parent and its subsidiaries in Latin America are somewhat interdependent and correlated. Hence, the ratings of the parent and its subsidiaries cannot be completely dissociated. In such cases, further upgrades or downgrades at the parent level or changes in market perception concerning SAN's Brazilian subsidiaries, may trigger further rating reviews of those ratings. Considering the current Support Rating Floor, and aided by the expectation of possible government support if it will be required, SANBRA's IDR's will not be reduced below 'BBB-'. Fitch has affirmed the following ratings: Banco Santander (Brasil): --Long-term foreign and local currency IDRs at 'BBB'; Outlook Stable --Short-term foreign and local currency IDRs at 'F2'; --Viability rating at 'bbb'; --Support rating at '2'; --Support rating floor at 'BBB-'; --National Long-term rating at 'AAA(bra)'; Outlook Stable; --National short-term rating at 'F1+(bra)'; Senior notes due 2015: --Long-term Foreign Currency at 'BBB'; Senior notes due 2016: --Long-term Foreign Currency rating at 'BBB'; Senior notes due 2017: --Long-term Foreign Currency rating at 'BBB'. Santander Leasing S.A. Arrendamento Mercantil: --National long-term rating at 'AAA(bra)'; Outlook Stable; --National short-term rating at 'F1+(bra)'. 4th and 5th Debentures Issue: --National long-term rating at 'AA+(bra) . Santander Leasing S.A. Arrendamento Mercantil (Ex-ABN AMRO Arrendamento Mercantil S.A.) - 4th, 5th and 6th Debentures Issue --National long-term rating at 'AA+(bra)'. Contact: Primary Analyst Robert Stoll Director +1-212-908-9155 Fitch Ratings, Inc. 33 Whitehall St New York, NY 10004 Secondary Analyst Eduardo Ribas Director +55-11-4504-2213 Committee Chairperson Franklin Santarelli Managing Director +1-212-908-0739 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. 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