News Column

Fitch Affirms Banco Santander (Mexico) and Subsidiaries' Ratings; Outlook Stable

May 23, 2014

MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has today affirmed Banco Santander (Mexico) (SAN Mexico)'s Viability Rating (VR) at 'bbb+', its long term foreign- and local-currency Issuer Default Ratings (IDRs) at 'BBB+'; and its short-term foreign- and local-currency rating at 'F2'. The long- and short-term National scale ratings of SAN Mexico and its subsidiary Santander Vivienda, as well as the non-bank subsidiary of Grupo Financiero Santander Mexico (GFSM), Casa de Bolsa Santander, S.A de C.V., Grupo Financiero Santander Mexico (CBSantander), were affirmed at 'AAA(mex)' and 'F1+(mex)', respectively.

SAN Mexico's Support Rating was affirmed at '2' and Support Rating Floor at 'BBB-'. The bank's global issuance of subordinated securities was affirmed at 'BB+'. See the full list of rating actions at the end of this rating action commentary.

SAN Mexico

KEY RATING DRIVERS

SAN Mexico's VR, IDRs and National scale ratings do not reflect any extraordinary support from its parent, although it is viewed as a strategically important entity for Banco Santander (SAN, rated 'BBB+' by Fitch with a Stable Outlook). On April 28, 2014, Fitch announced that the agency sees rating upside potential for some Spanish banks (including SAN) following its recent upgrade of Spain's sovereign rating by one notch (see 'Fitch Upgrades Spain to 'BBB+'; Outlook Stable' published April 25, 2014 and available at www.fitchratings.com). The agency expects to review the credit fundamentals and ratings of Spanish banks that may benefit most from the improved sovereign dynamics in the near future. As part of its assessment Fitch will also review the banks' rating sensitivities, including with respect to the sovereign rating.

SAN Mexico's ratings consider its well-positioned and robust franchise in the Mexican banking system, as the third largest bank by total assets and deposits as of March 2014; the bank's ability to prevent abrupt increase of operating costs, maintaining a solid efficiency and an adequate operating profitability, as well as its stable funding and liquidity profile, through an increasing customer deposit base.

In addition, the bank's recently deteriorated asset quality metrics (the result of higher non-performing loans (NPLs) and increased loan provisions, mainly as a result of its exposure to local home developers); and its sound loss absorption capacity, through a robust Fitch core capital ratio, are also considered in SAN Mexico's ratings. The Stable Outlook is in line with the above factors.

SAN Mexico's Support Rating and Support Rating Floor were affirmed at '2' and 'BBB-', respectively, driven by the bank's systemic importance and its role as the one of the largest banks in the Mexican banking system. Fitch's Support Rating Floors indicate a level below which the agency will not lower the bank's Long-term IDRs as long as the assessment of the support factors does not change.

The bank's issuance of global subordinated hybrids is rated three notches below the applicable anchor rating, San Mexico's VR. The ratings are driven by Fitch's approach to factoring certain degrees of subordination. The notching for non-performance risk (-2) is typical for hybrids issued by Mexican banks, since Fitch considers that the triggers for coupon deferrals or cancellations are relatively high, according to applicable local regulations; and the notching for loss severity (-1) reflects that these securities are plain-vanilla subordinated debt (subordinated preferred, under the local terminology).

RATING SENSITIVITIES

SAN Mexico's VR and IDRs could benefit from further improvements in the bank's competitive position and revenue diversification, as well as a recovery in its asset quality metrics and an enhanced funding profile through a steady increase in its core customer deposit base. The bank's ratings could be downgraded by further deterioration of its non-performing loan (NPL) ratio to levels closer to or above 4% and a deterioration of its adequate and stable profitability, for example, an Operating ROA consistently below 1.7%.

The bank's IDRs could be positively affected by an upgrade of its VR. Alternatively, these ratings could also benefit from a multi-notch upgrade of its parent company, given that the entity is considered strategically important for SAN.

A potential upgrade or downgrade of San Mexico's Support Rating and Support Rating Floor would be driven by a change in Mexico's sovereign rating and/or a change in the expected propensity of support from the Mexican government; both factors unlikely at present.

The bank's subordinated debt ratings will likely mirror any change in the bank's VR, as these are expected to maintain the same relevance to SAN Mexico's credit rating.

CBSantander and Santander Vivienda

KEY RATING DRIVERS

The ratings of CBSantander and Santander Vivienda are driven by Fitch's view that these entities remain core for GFSM's strategy, its business model and future prospects. The ratings also consider the legal obligation of GFSM to support its subsidiaries, although Fitch recalls that Santander Vivienda is expecting to be incorporated into the agreement of responsibilities in the third trimester of 2014. The credit profile of GFSM is associated with that of its main subsidiary, SAN Mexico.

RATING SENSITIVITIES

Any potential changes of CBSantander and Santander Vivienda's ratings will be driven by any changes in SAN Mexico's ratings or in the legal framework that could alter the propensity of the group to support them, an unlikely scenario at present. A modification on each entity's strategic importance to the group could also, lead to changes of its ratings.

Fitch affirms the following ratings:

Banco Santander (Mexico), S.A.:

--Long-term foreign and local currency IDRs at 'BBB+';

--Short-term foreign and local currency IDRs at 'F2';

--Viability rating at 'bbb+';

--Support rating at '2';

--Support rating floor at 'BBB-';

--National-scale long-term rating at 'AAA(mex)';

--National-scale short-term rating at 'F1+(mex)';

--Long-term Basel III compliant subordinated notes at 'BB+';

--Long-term senior unsecured global notes at 'BBB+';

--National-scale long-term rating for local senior unsecured debt issues at 'AAA(mex)'.

Casa de Bolsa Santander, S.A. de C.V.:

--National-scale long-term rating at 'AAA(mex)';

--National-scale short-term rating at 'F1+(mex)'.

Santander Vivienda, S.A. de C.V.:

--National-scale long-term rating at 'AAA(mex)';

--National-scale short-term rating affirmed at 'F1+(mex)';

--National-scale long-term rating for local senior unsecured debt issues at 'AAA(mex)'.

The Outlook for the long-term ratings is Stable.

Additional information is available on www.fitchratings.com

Applicable criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014)

--'Finance and Leasing Companies Criteria' (Dec. 11, 2012)

--'Securities Firms Criteria' (Jan. 31, 2014)

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012)

--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Jan. 31, 2014)

--'National Scale Ratings Criteria' (Oct. 30, 2013)

--'2014 Outlook: Mexican Commercial Banks' (Dec. 13, 2013)

Applicable Criteria and Related Research:

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732556

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

2014 Outlook: Mexican Insurance Market (Substantial Changes in Regulation but Challenges Remain)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725980

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831516

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst (SAN Mexico and CBSantander)

Monica Ibarra, +52 818 399 9150

Director

Fitch Mexico S.A. de C.V.

Prol. Alfonso Reyes 2612

64920 Monterrey, Mexico

or

Primary Analyst (Santander Vivienda)

Gilda de la Garza, +52 818 399 9160

Analyst

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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