October 17, 2017 / 4:03 PM / 5 months ago

Fitch Upgrades Banco Santander Rio's LC IDR to 'B+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, October 17 (Fitch) Fitch Ratings has upgraded Banco Santander Rio S.A.'s (Santander Rio) local currency (LC) long-term Issuer Default Rating (IDR) to 'B+' from 'B' and Support Rating to '4' from '5'. The Rating Outlook is Stable. Fitch has also affirmed the bank's Viability Rating (VR) at 'b'. A full list of rating actions follows at the end of this press release. Fitch has upgraded Santander Rio's local currency IDR and support rating as its view on shareholder support has improved. KEY RATING DRIVERS IDR and Support Rating The likelihood of parent support drives the bank's Local Currency IDR. In Fitch's view, in light of an improved economic and regulatory policy framework and decreased risk of government intervention in private banks' operations, the probability of parent support has improved and is likely to remain in place given the strategic role of this subsidiary. Notwithstanding Banco Santander, S.A.'s (SAN, A-/Stable) strong financial profile, Santander Rio's rating uplift from support is limited to one notch above Argentina's Local Currency Long Term IDR given downside risks of high economic stress, the country's tentative policy reforms and still normalizing relations with creditors. VR The low sovereign ratings of Argentina and the still volatile economic and operating environment constrain Santander's VR. Fitch also weighs the bank's risk appetite and financial metrics, which are in line with its current VR, even when considering the impact of inflation on the bank's performance, in its analysis. The bank's capital adequacy metrics have historically stood at adequate levels, albeit lower than those of its closest peers, in line with its parent's capital allocation strategy for its subsidiaries. At June 30, 2017, however, the bank's Fitch core capital to risk weighted assets ratio declined to 10.3% (from 12.4% as of Dec. 31, 2016) as a consequence of the acquisition of the consumer banking operations from Citibank Argentina. To compensate for this, the bank has issued USD160 million in 10 years subordinated debt that qualifies as regulatory Tier II capital (USD100 of which in July 2017) subscribed by other units of Santander. Fitch estimates that the bank's capitalization will gradually return to levels closer to its historic average, helped by its strong earnings generation capacity and the higher regulatory capital requirements in line with Basel III standards. Santander Rio's main funding source is core customer deposits and its liquidity levels are ample and benefit from strong deposit growth and lower demand of long term credit. Santander Rio's loan to deposits ratio is one of the strongest among the largest Argentine banks due to its retail-oriented focus and has historically been below 85% (80.1% at June 30, 2017) and its liquidity coverage ratio (LCR) was 240%. Fitch estimates that its liquidity will remain adequate but gradually decrease as the bank follows its strategy of strong loan growth. Santander Rio's VR also considers its strong and growing franchise as the largest private sector bank in the country by loans and deposits, with market shares of 9.8% and 9.5%, respectively, as of April 30, 2017, and the ample experience of its main shareholder. Santander Rio's profitability is adequate although, like the rest of the financial system, has been under some pressure affected by slower loan growth. Additionally, high inflation distorts international comparison of these ratios. Net fees and commissions income is a key strength of Santander Rio's, covering roughly 50% of non-interest expenses. Santander Rio's delinquency ratios have deteriorated since 2015 given the adverse economic conditions and, in 2017, a change in the charge-offs policy from 180 to 360 days. However, its non-performing loans (NPLs) remain at adequate levels, though inflation blurs international comparisons. Conservative lending policies, good risk management, strong loan growth and inflation underpin the bank's asset quality ratios. At June 30, 2017, NPLs represented 2.27% of total loans and were covered by loan reserves 1.1x. RATING SENSITIVITIES IDR, Support AND VR The bank's IDR is sensitive to a change in Fitch's views on Santander's ability and propensity to provide support. Santander Rio's IDR and VR would likely move in line with any change of Argentina's sovereign rating. In addition, the bank's IDR and SR could be negatively affected by changes in the political scene that result in a return to unorthodox policies resulting in political and regulatory intervention in the banking system. On the contrary, these ratings could benefit from a medium term consolidation of a more market friendly political framework. Santander Rio's VR could be affected if the difficult operating environment drives material deterioration in its liquidity position or loss absorption capacity. Fitch has taken the following ratings actions on Santander Rio: --Local Currency Long-Term IDR upgraded to 'B+' from 'B'; Outlook Stable; --Viability rating affirmed at 'b'; --Support Rating upgraded to '4' from '5'. Contact: Primary Analyst Mark Narron Director +1-212-612-7898 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Santiago Gallo Director +562 24993320 Committee Chairperson Theresa Paiz Fredel Senior Director +1-212-908-0534 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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