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Fitch Rates GF SAN Mexico 'BBB+' and its Upcoming Perpetual AT1 Notes 'BB(EXP)'
December 22, 2016 / 5:44 PM / a year ago

Fitch Rates GF SAN Mexico 'BBB+' and its Upcoming Perpetual AT1 Notes 'BB(EXP)'

(The following statement was released by the rating agency) MONTERREY, December 22 (Fitch) Fitch Ratings has assigned ratings to Grupo Financiero Santander Mexico S.A.B. de C.V. (GF SAN Mexico) including its Viability Rating (VR) at 'bbb+', Long-term Foreign Currency Issuer Default Ratings (IDRs) at 'BBB+', and Short-term Foreign- and Local-Currency Rating at 'F2'. Fitch has also assigned a Support Rating of '2' and National Long- and Short-term ratings of 'AAA(mex)/F1+(mex). The Rating Outlook for the long term ratings is Stable. A full list of rating actions is at the end of this press release. At the same time Fitch assigned GF SAN Mexico's upcoming issue up to USD500 million perpetual subordinated non-preferred contingent convertible capital notes an expected long-term rating of 'BB(EXP)'. The final rating is contingent upon the receipt of final documents conforming to information already received. GF SAN Mexico will use the proceeds of the offering to acquire from Banco Santander (Mexico), S.A., Institucion de Banca Multiple, Grupo Financiero Santander Mexico (SAN Mexico) a perpetual subordinated non-preferred contingent capital note in the same principal amount and with substantially the same terms and conditions. The notes are perpetual, but can be redeemed at the option of the issuer on the fifth anniversary of the issue date and every interest payment date thereafter, if it maintains its capital ratios in accordance with regulatory requirements and after receiving regulatory approval. SAN Mexico's ultimate parent, Spain's Banco Santander, S.A.'s (SAN; 'A-'/Stable Outlook) intends to buy at least 75% of the issuance. KEY RATING DRIVERS 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 99.96% of the group's consolidated assets at the end of September, 2016. IDRs AND NATIONAL SCALE RATINGS GF SAN Mexico's 'BBB+' IDRs and 'AAA(mex)/F1+(mex)' National Scale ratings are driven by its standalone profile as reflected in its VR. Nevertheless, the group's IDRs are currently at the same level as would be derived from the institutional support approach, given that GF SAN Mexico is viewed as a strategically important entity for SAN. 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 The planned notes qualify as additional Tier 1 (AT1) securities for regulatory capital purposes. Coupon payments may be omitted at any time at the issuer's full discretion; additionally, interest due on the notes will be automatically cancelled if the bank's Common Equity Tier 1 (CET1), Tier 1 and Total Regulatory Capital Ratios fall below 7%, 8.5% and 10.5%, respectively, plus additional capital requirements for domestic systemically important banks (D-SIBs) and countercyclical buffers. The notes have additional loss absorption features in the form of a conversion to common equity trigger; partial or full conversion would occur if, among others, GF SAN Mexico's Common Equity Tier 1 Regulatory Capital Ratio falls to or below, 5.125%. 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 hence the GF SAN Mexico's AT1 securities are rated at the level that would be assigned to equivalent securities issued by its parent. Fitch believes that the proposed changes in the bank's capital structure further enhance the mitigation effect of Spain's SAN's support toward these securities. In May 2016, the local regulator announced SAN Mexico was required to constitute an additional capital supplement of 1.2% for being a D-SIB; it also imposed a countercyclical capital supplement that has not been defined yet. The D-SIB capital supplement will be required within a four-year period starting Dec. 31, 2016. Regulatory capital requirements in 2019 are expected to be 8.2%, 9.7% and 11.7% for its CET1, Tier 1 and total regulatory capital ratios, respectively. At Sept. 30, 2016, these ratios stood at 12.4%, 12.4% and 16%, respectively. Fitch estimates that on a pro forma basis as of September 2016, its CET1 regulatory capital ratio after the payment of the dividend would stand at levels that are consistent with its current rating. RATING SENSITIVITIES 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 importantly deviates from the one of the bank, a scenario which is not likely at present. IDRs AND NATIONAL SCALE RATINGS GF SAN Mexico's IDRs could mirror a potential upgrade of its VR over the medium term. Alternatively, 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 SAN; Fitch believes GF SAN Mexico's IDRs would maintain one-notch relativity to its parents'. 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. Fitch has assigned the following ratings: -- Long-Term foreign currency IDR 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 expected long-term rating at 'BB(EXP)'. Fitch has published the following rating: -- Long Term local currency IDR at 'BBB+'. The 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 Monica Ibarra Director +52 818 399 9150 Committee Chairperson Alejandro Garcia, CFA Managing Director +1-212-908-9137 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available at Date of Relevant Rating Committee: Dec. 6, 2016 Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016985 Solicitation Status here 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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