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Fitch Affirms GF SAN Mexico and SAN Mexico at 'BBB+'; Outlook Stable
May 18, 2017 / 9:22 PM / 2 months ago

Fitch Affirms GF SAN Mexico and SAN Mexico at 'BBB+'; Outlook Stable

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(The following statement was released by the rating agency) MONTERREY, May 18 (Fitch) Fitch Ratings has affirmed Grupo Financiero Santander Mexico S.A.B. de C.V. (GF SAN Mexico) and Banco Santander (Mexico), S.A., Institucion de Banca Multiple, Grupo Financiero Santander Mexico's (SAN Mexico) Viability Ratings (VRs) at 'bbb+', as well as their Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB+'. The Rating Outlook is Stable. In addition, Fitch has affirmed GF SAN Mexico and SAN Mexico's short-term foreign- and local-currency IDRs at 'F2'. In addition, Fitch has affirmed the National-scale ratings of GF SAN Mexico and SAN Mexico's non-bank subsidiaries Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander Mexico, (CBSantander) and Santander Consumo, S.A. de C.V., SOFOM ER, Grupo Financiero Santander Mexico (Santander Consumo) at 'AAA(mex)' and 'F1+(mex)'. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS SAN Mexico VR SAN Mexico's 'bbb+' VR is driven by its robust franchise and competitive position in the Mexican banking system, evident in its growing customer base and in the maintenance of its position within the three largest banks in terms of assets, loan portfolio and deposits. Its VR also considers its improved asset quality and profitability metrics, its adequate loss absorption capacity reflected in its capitalization metrics, as well as its stable and growing deposit franchise that adds flexibility to its funding mix. In Fitch's opinion, SAN Mexico's capitalization levels are adequate and are underpinned by its ability to internally generate capital. Additionally, its issuances of non-core capital (AT1 and Tier 2 notes) could absorb losses prior to the bank becoming non-viable, further enhancing capitalization levels. As of the first quarter of 2017 (1Q17), its Fitch Core Capital (FCC) ratio stood at 13.4%, up from 12.4% as of the close of 2016, as a result of lower risk weighted assets (RWA) due to slower loan growth and charge-offs or sale of non-performing loans. This ratio is similar to that of its closest peers. Loan growth decelerated during 2016 to 8% year-over-year, compared with average growth of 16.1% during 2013 to 2015. This is attributed to the bank's strategy to emphasize profitability over growth and to the tougher economic environment in Mexico. During 1Q17, gross loans grew 7.6% y-o-y, maintaining the trend. The bank expects to grow between 7%-9% during 2017. In the past years, growth rates have exceeded internal capital generation; the latter averaged 6.9% during 2013 to 2015. SAN Mexico's profitability has shown a recent moderate improvement. Its operating return on assets (ROA) calculated by Fitch increased to 1.8% during 1Q17, compared with the 1.6% and 1.7% registered during 2016 and 2015, respectively. The bank's operating return on RWAs, which is Fitch's core metric in evaluating profitability, showed a more relevant improvement, increasing to 3.5% during 1Q17, up from a three-year average of 2.9%. The improvement is a result of management's strategic efforts to focus on profitable transactions, while maintaining a stable cost of risk and controlling operating costs. Fitch estimates that profitability will remain relatively stable or improve moderately if the bank is able to consolidate its strategic objectives and is able to capture the benefit of higher interest rates in Mexico. SAN Mexico's asset quality has gradually improved since 2015. As of 1Q17, its impaired loan ratio stood at 2.4%, down from the 3.3% average registered during 2013-2016. The improvement is mainly driven by the charge-off of its legacy exposure to homebuilders and the sale of a portion of a lower-asset-quality mortgage portfolio from past acquisitions, while adequate underwriting standards underpin the good asset quality of recent loan originations. SAN Mexico's adjusted impaired ratio, which considers charge-offs, improved moderately with respect to historical metrics. This ratio stood at 5.8% as of March 2017, compared to 6.3% 2016 and 2015; however, it ranks sixth among the G-7, as the charge-off of legacy loans to homebuilders and mortgage portfolios from acquisitions continue to adversely impact this metric. The concentration in its top 20 clients increased recently. The 20 largest group exposures accounted for 21.5% of gross loans or 1.1x total equity, compared to 20% of gross loans or 96% of total equity as of the close of 1Q16. Since 2015, the bank has improved its reserve coverage ratio, reaching 142.8% in 1Q17, compared to an average of 114.1% in the past four years. SAN Mexico's funding profile benefits from a strong and growing deposit base; this grew at a rate of 14.5% y-o-y as of 1Q17 and accounted for 66.3% of its total funding excluding derivatives. Current deposits represented 69.8% of total deposits. The bank's loans to deposits ratio improved to 98.4% during 1Q17, down from 100% and 106% in 2016 and 2015, respectively. The improvement is driven by higher deposit growth compared to loan growth. Its liquidity position is adequate, reflected in positive cumulative maturity gaps and a Liquidity Coverage Ratio (LCR) consistently above 100%. IDRs AND NATIONAL SCALE RATINGS SAN Mexico's 'BBB+' IDRs are already at the implied floor derived from its parent's IDRs, regardless of being still driven by its VR, given that SAN Mexico is viewed as a strategically important entity for Spain's Banco Santander, S.A. (SAN, 'A-'/Stable Outlook). SAN Mexico's 'AAA(mex)'/'F1+(mex)' National-scale ratings are also still driven by its standalone profile as reflected in its VR. SUPPORT RATING Fitch's affirmation of SAN Mexico's Support Rating at '2' reflects the view that there is high probability of support to SAN Mexico from Spain's SAN, if needed, given the strategic role of the Mexican subsidiary for its parent. SUBORDINATED DEBT AND SENIOR DEBT Tier 2 notes in Mexico are typically rated three notches below the anchor rating, which in this case is SAN Mexico's VR. However, Fitch considers that parental support mitigates non-performance risk and therefore SAN Mexico's Tier 2 securities are rated at the level that would be assigned to equivalent securities issued by its parent. The agency believes that the recent changes in the bank's capital structure are evidence of Spain's SAN's support propensity toward these securities. The notching for non-performance risk reflects Fitch's consideration that the triggers for coupon deferrals or cancellations are relatively high, according to applicable local regulations. The notching for loss severity reflects that these securities are plain-vanilla subordinated debt ("subordinated preferred," under the local terminology). Fitch rates the local debt issued by SAN Mexico at the same level as the bank's corporate rating, reflecting its senior unsecured nature. GF SAN Mexico VR GF SAN Mexico's VR reflects the financial performance of its main operating subsidiary, SAN Mexico ('BBB+'/Stable Outlook), in which it holds a 99.9% equity stake. SAN Mexico's assets represented 99.9% of the group's consolidated assets at the end of March 2017. IDRs AND NATIONAL SCALE RATINGS GF SAN Mexico's 'BBB+' IDRs are already at the implied floor derived from its parent's IDRs, regardless of still being driven by its VR, given that GF SAN Mexico is viewed as a strategically important entity for Spain's SAN. GF SAN Mexico's 'AAA(mex)'/'F1+(mex)' National-scale ratings are also still driven by its standalone profile, as reflected in its VR. SUPPORT RATING GF SAN Mexico's Support Rating of '2' reflects the view that there is high probability of support to GF SAN Mexico from Spain's SAN, if needed, given the strategic role of the Mexican subsidiary for its parent. SUBORDINATED DEBT GF SAN Mexico's perpetual subordinated non-preferred contingent convertible capital notes qualify as additional Tier 1 (AT1) securities for regulatory capital purposes. According to Fitch's criteria, these instruments are typically rated five notches below the anchor rating, GF SAN Mexico's VR of 'bbb+'. The securities are notched twice for loss severity to reflect the notes' deep subordination - only ordinary equity ranks below the notes. The three notches for incremental non-performance risk reflect the notes' non-cumulative cancellable coupons, which Fitch views as the most easily activated form of loss absorption. However, Fitch considers that parental support partially mitigates non-performance risk and therefore the GF SAN Mexico AT1 securities are rated at the level that would be assigned to equivalent securities issued by its parent. Fitch believes that the recent changes in the bank's capital structure further enhance the mitigation effect of Spain's SAN's support toward these securities. CBSantander and Santander Consumo NATIONAL SCALE RATINGS The ratings of CBSantander and Santander Consumo are driven by the legal obligation GF SAN Mexico has to support its subsidiaries, if needed. In Fitch's view, these entities remain core for GF SAN Mexico's strategy, its business model, and future prospects but are strategically important for its ultimate parent, Spain's SAN. RATING SENSITIVITIES SAN Mexico VR While not driving its IDRs, the VR of SAN Mexico would also likely mirror a potential sovereign downgrade, given its relatively high level (i.e. at the sovereign level). Fitch could downgrade the bank's VR if its non-performing loan (NPL) ratio deteriorates to levels above 4% or if its operating profit to risk-weighted assets (RWAs) ratio decreases to levels consistently below 2%. A deterioration of its asset quality metrics or internal capital generation that puts pressure on its FCC ratio to levels consistently below 11% could drive a downgrade. Fitch believes there is limited upside potential for SAN Mexico's VR and IDRs at present based on current expectations for the Mexican sovereign ratings and its operating environment. However, the ratings could be upgraded in the medium term if the bank continues consolidating its competitive position and franchise and improves its financial performance reflected in an operating return on RWAs consistently above 4%, while maintaining adequate asset quality and capitalization metrics. IDRs AND NATIONAL SCALE RATINGS SAN Mexico's IDRs could benefit from an upgrade of its parent company's ratings, given that the entity is considered strategically important for Spain's SAN; Fitch believes SAN Mexico's IDRs would maintain one-notch relativity to its parents'. Alternatively, IDRs could mirror a potential upgrade of its VR, a scenario not likely at present. The National-scale ratings could be downgraded in the event of a downgrade of SAN Mexico's VR coupled with a reduced propensity and ability of support from its parent, which is an unlikely scenario at present. SUPPORT RATING The bank's Support Rating could be affected if Fitch changes its view of Spain's SAN's ability or willingness to support the Mexican bank. SUBORDINATED DEBT AND SENIOR DEBT SAN Mexico's Tier 2 Notes are sensitive to movements in the bank's VR, together with an assessment of the implications of its relativity to its parent's VR. Senior debt ratings of SAN Mexico would mirror any changes in the bank's IDRs or National-scale ratings. GF SAN Mexico VR GF SAN Mexico's VR could be affected by a potential change in the ratings of its main subsidiary or if the group's intrinsic performance materially deviates from the one of the bank, a scenario which is not likely at present. Additionally, while not driving its IDRs, the VR of GF SAN Mexico would also likely mirror a potential sovereign downgrade, given its relatively high level (i.e. at the sovereign level). IDRs AND NATIONAL SCALE RATINGS GF SAN Mexico's IDRs could benefit from an upgrade of its parent company's ratings, given that the entity is considered strategically important for Spain's SAN; Fitch believes GF SAN Mexico's IDRs would maintain one-notch relativity to its parents'. Alternatively, IDRs could mirror a potential upgrade of its VR, a scenario not likely at present. SUPPORT RATING The group's Support Rating could be affected if Fitch changes its view of Spain's SAN's ability or willingness to support its Mexican subsidiary. SUBORDINATED DEBT GF SAN Mexico's AT1 notes rating is sensitive to movements in the group's VR, together with an assessment of the implications of its relativity to its parent's VR. This rating could be downgraded as a result of changes in Fitch's assessment of the notes' non-performance risk, such as changes in the bank's capital management that would reduce its flexibility to service the securities or under unexpected additional regulatory buffer requirements. CBSantander and Santander Consumo NATIONAL SCALE RATINGS Any potential changes of CBSantander and Santander Consumo's ratings will be driven by any changes in GF SAN Mexico's ratings or in the legal framework that could alter the propensity of the group to support them, an unlikely scenario at present. Fitch has affirmed the following ratings: GF SAN Mexico --Long-Term Foreign and Local Currency IDRs at 'BBB+'; --Viability rating at 'bbb+'; --Short-term foreign and local currency IDRs at 'F2'; --Support Rating at '2'; --National-scale long-term rating at 'AAA(mex)'; --National-scale short-term rating at 'F1+(mex)'; --Perpetual subordinated non-preferred contingent convertible capital notes long-term rating at 'BB'. SAN Mexico --Long-term Foreign and Local Currency IDRs at 'BBB+'; --Short-term foreign and local currency IDRs at 'F2'; --Viability rating at 'bbb+'; --Support rating at '2'; --National-scale long-term rating at 'AAA(mex)'; --National-scale short-term rating at 'F1+(mex)'; --Long-term senior unsecured global notes at 'BBB+'; --National-scale long-term rating for local senior unsecured debt issues affirmed at 'AAA(mex)'; --Long-term Basel III compliant Tier 2 subordinated notes at 'BBB-'. Santander Consumo --National-scale long-term rating at 'AAA(mex)'; --National-scale short-term rating at 'F1+(mex)'. CBSantander --National-scale long-term rating at 'AAA(mex)'; --National-scale short-term rating at 'F1+(mex)'. The Rating Outlook for the long-term ratings is Stable. Contact: Primary Analyst Alba Maria Zavala, CFA Associate Director +52 818 399 9137 Fitch Mexico S.A. de C.V. Prol. Alfonso Reyes 2612 64920 Monterrey, Mexico Secondary Analyst Diego Garcia Analyst +52 818 399 9100 ext. 1502 Committee Chairperson Alejandro Garcia, CFA Managing Director +1-212-908-9137 Summary of Financial Statement Adjustments - Pre-paid expenses and other deferred assets were classified as intangibles and deducted from Fitch Core Capital to reflect its low absorption capacity. Fitch has made adjustments to the Risk Weighted Assets (RWAs) following its criteria and consolidated the bank's RWAs with those of its subsidiaries with credit operations. Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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