April 28, 2017 / 3:25 PM / 7 months ago

Fitch Affirms Banco Santander at 'A-'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA/LONDON, April 28 (Fitch) Fitch Ratings has affirmed Spain-based Banco Santander, S.A.'s Long-Term Issuer Default Rating (IDR) at 'A-' and its Viability Rating (VR) at 'a-'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. In addition, Fitch has assigned an 'A-(dcr)' Derivative Counterparty Rating (DCR) to Banco Santander as part of its roll-out of DCRs to significant derivative counterparties in western Europe and the US. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. KEY RATING DRIVERS IDRS, VR, DCR AND SENIOR DEBT Banco Santander's Long-Term IDR and VR are rated one notch above Spain's sovereign rating (BBB+/Stable), reflecting diversification benefits from the bank's solid retail franchises in a number of European and Latin American countries, as well as the US. The group's ratings reflect its diversified franchise, fairly modest risk appetite, adequate asset quality despite challenges in some geographies, resilient profit generation and improved capitalisation. Despite the group's international diversification, Banco Santander's risk profile is correlated with that of the sovereign. This is reflected in sensitivity of the group's performance and asset quality to the economic environment in Spain. The bank's cost of market funding and the stability of the investor base are also typically influenced by perceptions of sovereign risk. Banco Santander's earnings have been relatively stable over the business cycles thanks to its geographical diversification and retail-banking focus. The group has sound franchises with demonstrated pricing power in several emerging markets, which results in fairly wide margins. A strong cost-focus also supports pre-impairment operating profitability and has enabled the group to absorb higher impairment charges over the past years, particularly in Spain, while maintaining strong internal capital generation. The mild deterioration in the operating environment in Latin America and the UK, together with increased volatility in foreign currency exchange rates, poses challenges for the group. However, we expect the recovery in Spain and other developed markets and further growth in the consumer finance business to offset these pressures at the group level. The improvement in asset quality indicators has been supported by Spain's economic recovery. At end-2016, the problem asset ratio (including NPLs and foreclosed assets) stood at 4.9%, still slightly above international peers. In 1Q17, the NPL ratio declined to 3.74% (from 3.93% at end-2016) and in 2017 we expect further reduction in problem asset volumes in Spain; however, this could be offset by the continued asset quality pressure in Latin American subsidiaries and the economic slowdown in the UK. Banco Santander has steadily improved its capitalisation over the past few years through internal capital generation. At end-March 2017, the group's fully loaded CET1 ratio stood at 10.7%, having increased by around 40bps yoy. However, we expect the bank's risk-adjusted capital ratios to remain slightly below many international peers given its exposure to emerging markets. Tangible leverage is better than peers'. Banco Santander has a stable funding profile that benefits from solid core deposit franchises in the main markets where it operates. The group's autonomous subsidiary model implies that foreign subsidiaries are locally funded. At the same time, the group has a good track record in accessing international wholesale markets and in our view the bank's funding plan for 2017-2018, which entails the issuance of material volumes of non-preferred senior debt, is credible and well-structured. The banks hold ample unencumbered liquid assets relative to upcoming wholesale debt maturities, which are well-spread over time. Fitch has affirmed the rating of Banco Santander's second ranking senior notes in line with the bank's Long-Term IDR and existing senior debt ratings. Fitch views the likelihood of default on the second ranking senior notes the same as the likelihood of default of the bank. Fitch has also assigned a DCR to Banco Santander since the bank has significant derivatives activity and is a swap counterparty to Fitch-rated structured finance transactions. The DCR is at the same level as the Long-Term IDR because, in Spain, derivative counterparties have no preferential legal status over other senior obligations in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR Banco Santander's Support Ratings (SR) of '5' and Support Rating Floors (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the bank can no longer rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that is likely to require senior creditors participating in losses, instead of or ahead of a bank receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Banco Santander are notched down from its VR, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated (lower Tier 2) debt is rated one notch below the bank's VR to reflect above average loss severity of this type of debt compared with average recoveries (one notch). Upper Tier 2 debt is rated three notches below the bank's VR to reflect above average loss severity of this type of debt compared with average recoveries (one notch) and high risk of non-performance (two notches) as there is the option to defer coupons if the issuer reported losses in the last audited accounts. Preferred shares are rated five notches below the bank's VR to reflect higher loss severity risk of these securities when compared with average recoveries (two notches from the VR), as well as high risk of non-performance (an additional three notches) due to profit test for legacy issues and fully discretionary coupon payments for recent issues. RATING SENSITIVITIES IDRS, VR, DCR AND SENIOR DEBT The Stable Outlook reflects our expectation that the group's overall credit profile will remain stable in the foreseeable future. Currently, Banco Santander's VR (and hence its IDRs) is capped at one notch above Spain's sovereign rating. An upgrade of the VR would be contingent on a potential upgrade of Spain's sovereign rating. This would have to be accompanied by further improved capital metrics while the positive asset quality trend and the earnings resilience of the major international subsidiaries is maintained. A downgrade of Spain's sovereign rating would trigger a downgrade of the bank's VR. Downward rating pressure could also arise from sharp asset quality deterioration or a substantial weakening of earnings, which we view as unlikely. The rating of second ranking senior notes is primarily sensitive to a change in the Long-Term IDR of Santander. For the preferred senior notes and the DCR to achieve a one-notch uplift, the buffer of qualifying junior debt and non-preferred senior debt would need to exceed our estimate of a 'recapitalisation amount'. This amount is likely to be around or above the bank's minimum pillar 1 total capital requirement. SUPPORT RATING AND SUPPORT RATING FLOOR Any upgrade of the SRs and upward revision of the SRFs would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Banco Santander are primarily sensitive to any change in their VRs. Upper Tier 2 notes and preferred shares are also sensitive to Fitch changing its assessment of the probability of their non-performance relative to the risk captured in the banks' VRs. The rating actions are as follows: Banco Santander Long-Term IDR: affirmed at 'A-'; Outlook Stable Short-Term IDR: affirmed at 'F2' VR: affirmed at 'a-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: assigned at 'A-(dcr)' Second ranking senior notes: affirmed at 'A-' Senior unsecured debt long-term rating and certificates of deposit: affirmed at 'A-' Senior unsecured debt short-term rating, commercial paper and certificate of deposits: affirmed at 'F2' Market-linked senior unsecured securities: affirmed at 'A-emr' Subordinated debt: affirmed at 'BBB+' Preference shares: affirmed at 'BB' Santander International Debt, S.A. Unipersonal Senior unsecured debt long-term rating: affirmed at 'A-' Senior unsecured debt short-term rating: affirmed at 'F2' Market-linked senior unsecured securities: affirmed at 'A-emr' Santander Issuances S.A. Subordinated debt long-term rating: affirmed at 'BBB+' Santander International Preferred, S.A. Unipersonal Preference shares: affirmed at 'BB' Santander Commercial Paper, S.A. Unipersonal Commercial paper: affirmed at 'F2' Santander Finance Capital, S.A. Unipersonal Preference shares: affirmed at 'BB' Santander Finance Preferred, S.A. Unipersonal Preference shares: affirmed at 'BB' Santander Perpetual, S.A. Unipersonal Upper Tier 2 debt: affirmed at 'BBB-' Emisora Santander Espana, S.A.U. Senior unsecured debt long-term rating programme: affirmed at 'A-' Senior unsecured debt short-term rating programme: affirmed at 'F2' Santander International Products PLC Senior unsecured debt long-term rating: affirmed at 'A-' Contact: Primary Analyst Josu Fabo, CFA Director +34 93 494 3464 Fitch Ratings Espana, S.A.U. Av. Diagonal, 601, 2nd Floor 08028 Barcelona Secondary Analyst Olivia Perney Guillot Senior Director +33 1 44 29 91 74 Committee Chairperson Bjorn Norrman Senior Director +44 20 3530 1330 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) 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. 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