Fitch Affirms Banco Santander Rio's VR at 'ccc' and IDR at 'CCC'
KEY RATING DRIVERS
VR AND IDR
Santander Rio's ratings are driven and constrained by the weak and deteriorating operating environment in Argentina, characterized by ample economic imbalances, and the risk of increasing political or regulatory intervention on the banking system. Santander Rio's ratings also consider the restrictive default of the Argentine sovereign, which triggered in July 2014 a downgrade of the country's sovereign long-term LC IDR and Country Ceiling to 'CCC' from 'B-'.
Santander Rio's ratings benefit from the ample experience of its main shareholder, Spain's Banco Santander S.A. (Santander; rated 'A-'/Stable Outlook by Fitch), as well as from its strong and growing franchise as the largest private bank in the country. The bank's ratings also reflect its healthy asset quality, sound and consistent profitability, its adequate capitalization, as well as robust liquidity.
In Fitch's view, regardless of Santander Rio's overall reasonable financial condition, its ratings are currently capped by the LC sovereign rating, due to the weak and worsening operating environment, and the challenges posed by the sovereign's delicate position with foreign creditors.
Santander Rio is a universal commercial bank with a strong position in the financing of enterprises and individuals. It is one of the oldest banks in the country and currently is the largest private bank measured by assets, loans and deposits, and No. 3 in the financial system after considering the two largest state-owned banks.
Net income and core profits continue growing at a solid pace, driven by the bank's transactional business which allows it to generate stable and recurrent fees. Net fees and commissions are the key strength of Santander Rio's source of revenue, covering roughly 65% of non-interest expenses. Fitch expects that in 2015-2016, the bank, like the rest of the financial system, could be affected by the volatile environment marked by an election year, weak credit demand and high inflation.
Like the main banks in the system, delinquency remains at historically low levels. Thus, Santander Rio's non-performing loans (NPLs) remain at very satisfactory levels, favored by conservative lending policies and good risk management. At March 2015, NPLs represented 1.29% of the total loan portfolio, while loan reserves covered 160% of impairments loans (2.06x the total loan portfolio). Asset quality is expected to deteriorate in 2015, although Fitch believes that Santander Rio will contain that trend.
The bank's capital adequacy metrics stand at adequate levels, albeit lower than its closest peers. The Fitch core capital-to-risk-weighted assets ratio stood at 14.3% as of March 2015, boosted by sound and stable earnings coupled with lower loan growth and the regulatory restrictions on dividend payment. Fitch estimated that the bank's capitalization will be maintained at satisfactory levels, favored by the lower growth in loans and the bank's good ability to generate sustained earnings.
Santander Rio's main funding source is core customer deposits. These are growing at a solid pace and comprise 95% of the bank's total funding. Santander Rio's loan-to-deposits ratio is one of the strongest among the largest Argentine banks due to its retail-oriented focus. Historically, such ratios have been below 85%. The bank's liquidity levels are ample and benefit from lower demand for credit. At March 2015, the bank's liquid assets (cash plus central bank securities plus other short-term asset loans) covered 40.5% of their deposits. Given the bank's policies, Fitch estimates that its liquidity will remain adequate during 2015 but is expected to decrease slightly as the credit recovery continues.
SUPPORT RATING
Despite the importance of Santander Rio to its parent, their common brand, and integration levels which normally suggest some probability of support, country risks in Argentina may limit the ability to provide support to local subsidiaries of foreign bank groups. As such, the parent's ability (Santander rated 'A-' by Fitch) and willingness to support Santander Rio, although possible, cannot be relied upon.
RATING SENSITIVITIES
VR AND IDR
Any downgrade of Argentina's sovereign rating could trigger further downgrades in Santander Rio's ratings.
Also Santander Rio's ratings could be affected if the worsening operating environment drives material deterioration in asset quality, earnings, and/or loss absorption capacity. Material increases in liquidity and/or refinancing risk could also put downward pressure on Santander Rio's ratings.
Upside potential of Santander Rio's ratings is heavily contingent upon positive developments in the sovereign rating dynamics.
SUPPORT RATING
Changes in the SR of Santander Rio are highly unlikely in the foreseeable future.
Fitch has affirmed the ratings as follows:
Santander Rio
-- LC long-term IDR at 'CCC';
--Viability Rating at 'ccc';
--Support rating at '5'.
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