OREANDA-NEWS. This announcement replaces the version published on 1 July 2015, which incorrectly stated Banco Santander's demonstrated liquidity support in the past.

Fitch Ratings has affirmed Santander Totta, SGPS, S.A.'s and Banco Santander Totta, S.A.'s (BST) Long-term Issuer Default Ratings (IDRs) at 'BBB', Short-term IDR at 'F2' Viability Rating at 'bb+' and Support Rating at '2'. The Outlook is Positive. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS

IDRs, SENIOR DEBT AND SUPPORT RATING
The IDRs of Santander Totta and its fully owned bank subsidiary, BST, reflect a high probability of support from its Spanish parent bank, Banco Santander, S.A. (Santander; A-/Stable), in case of need. Fitch believes that Santander Totta's activities in Portugal are strategically important to the Spanish banking group.

Santander Totta's and BST's Long-term IDRs are capped at two notches above that of the Portuguese sovereign (BB+/Positive), in accordance with Fitch's criteria.
In a higher sovereign rating environment, these would be notched down once from the parent's IDR, reflecting common branding, strong synergies and integration with the parent, and a wide range of shared risk management and operational policies and procedures.

Santander Totta is a Portuguese holding company, wholly owned by Santander. BST is it main operating subsidiary in Portugal. The ratings of Santander Totta and BST are equalised because the two are regulated as a consolidated entity in Portugal, the bank is wholly owned by the holding company and the holding company has no outstanding debt.

The Positive Outlook reflects that of the sovereign and that their ratings are currently capped.

Available support from the parent is reflected in the higher of the two possible Short-term IDRs for banks with a Long-term IDR of 'BBB'.

VR
Santander Totta's VR reflects the company's robust capital and asset quality indicators, which are better than peers'. It also takes into account the improving domestic economy, which is supporting profitability.

Santander Totta's capital ratios have been supported by internal capital generation, declining risk-weighted assets and higher revaluation reserves. At end-2014, Fitch core capital (FCC)/weighted risks ratio was robust at 16.8%. Capital has a high influence on and is supportive of Santander Totta's VR. At end-1Q15, Santander Totta reported a CET1 ratio of 15.2% (1Q14: 14.5%) and its CET1 fully loaded was 15.4%.

Also unreserved credit at risk (CaR) loans-to-FCC was less than 15%, which is considered low. Santander Totta's CaR ratio was 5.7% at end-1Q15, which was lower than system average and loan loss reserves were ample at 78% of CaR loans. Moreover, foreclosed assets are comparatively modest. Asset quality is supported by a large share of residential mortgages and lower exposure to troubled sectors, benefiting from the sound risk management and risk-taking approach of the Santander group. Sustained economic recovery should further support asset quality indicators.

Santander Totta reported positive net income throughout the crisis, due to sound fee income generation, strong cost efficiency, a higher proportion of ECB funding and, as with many peers, capital gains from the sale of sovereign debt securities. Fitch believes the bank's profitability has scope to improve, though only just moderately, as the improving economy supports business volumes and eases pressure on loan impairment charges. Continued reduction of deposit costs should also be beneficial.

The bank continued to improve its funding and liquidity profile, supported by a slight reduction of its loan book and higher deposits. Its regulatory net loans/deposits ratio improved to 117% at end-1Q15 from 130% at end-1Q14. Santander Totta has a higher proportion of funding from the ECB's liquidity facility, representing EUR3.8bn at end-1Q15 or almost 9% of assets, but it also maintains a large portfolio of discountable assets (EUR5bn, net of haircut at end-1Q15).

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
BST's preference shares are capped at the level assigned to equivalent securities issued by the parent. In Fitch's view support from the parent mitigates the non-performance risk of the instruments. Therefore, the agency would only notch down the rating of the preference shares twice for loss severity from the subsidiary's IDR if the cap was not applied.

RATING SENSITIVITIES

IDRS, SENIOR DEBT and SUPPORT RATING
At the current levels, the IDRs of Santander Totta and BST are sensitive to a change of the sovereign rating. The IDRs and the SR are also sensitive to a change in Fitch's assumptions around Santander's propensity or ability to support its Portuguese subsidiary.

VR
Santander's VR would benefit from an improving operating environment. This in turn will support higher business volumes, benefiting asset quality and profitability. Santander Totta's VR would also benefit from a continued improving funding profile, with a reduced reliance on central bank borrowing.

A downgrade would primarily come from a marked deterioration of asset quality.

The bank's VR is also sensitive to the conclusion of the sale process of NovoBanco and potential impact on its risk profile and capitalisation, if any.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
BST's preference shares are sensitive to a change in Santander's IDR.

The rating actions are as follows:

Santander Totta:
Long-term IDR affirmed at 'BBB', Outlook Positive
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '2'

BST:
Long-term IDR affirmed at 'BBB', Outlook Positive
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '2'
Senior unsecured debt affirmed at 'BBB'
Commercial paper affirmed at 'F2'
Preference shares affirmed at 'BB'.