Fitch Affirms Banco Santander (Mexico) at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed the ratings for Banco Santander (Mexico), S.A. (SAN Mexico) including its Viability Rating (VR) at 'bbb+', long-term foreign- and local-currency Issuer Default Ratings (IDRs) at 'BBB+', and short-term foreign- and local-currency rating at 'F2'.

Fitch has also affirmed the long- and short-term national scale ratings of SAN Mexico and the following subsidiaries at 'AAA(mex)/F1+(mex)':

--Santander Vivienda, S.A. de C.V., Sofom, E.R., Grupo Financiero Santander Mexico (Santander Vivienda)

--Santander Consumo, S.A. de C.V., Sofom, E.R., Grupo Financiero Santander Mexico (Santander Consumo)

--Casa de Bolsa Santander, S.A de C.V., Grupo Financiero Santander Mexico (CBSantander)

A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

VR

SAN Mexico's 'bbb+' VR is driven by its robust competitive position, with a growing franchise in the Mexican banking system. Since September 2015, it is the second largest bank in the Mexican banking system in terms of total assets, up from the third position it held previously. As of March 2016, it ranked third by total loan portfolio and customer deposits. The ratings also consider the bank's strong capital position, which is underpinned by its adequate ability to internally generate capital in spite of high loan growth over the past few years. Its Fitch Core Capital (FCC) ratio stood at an adequate 15.4% (2015: 15.6%).

SAN Mexico's operating profitability continues to exhibit a decreasing trend and compares below some of its closest peers. Operating Return on Assets (ROA) and Operating Return on Equity (ROE) as calculated by Fitch were 1.5% and 16.2%, respectively at the end of the first quarter of 2016 (1Q'16), down from the 2.25% and 19.7% average registered over the past four years.

The bank's historically sound asset quality metrics converged toward those of its peers after some organic deterioration and the acquisition of riskier assets in 2013-2014. At 1Q'16, this ratio decreased to 2.97%, from 3.33% and 3.68% in 2015 and 1Q'15, respectively. Loan impairment charges as a percentage of average gross loans resulted of 3.5% as of 1Q'16, in line with the past three-year average of 3.4%. In 2015, the bank restored its reserve coverage ratio above 100%, after the pressure on its asset quality metrics decreased the ratio to 97.1% in 2014.

SAN Mexico's funding and liquidity profile is stable and benefits from its increasing customer deposit base, which grew 13% y-o-y as of 1Q16 and which accounted for 61.8% of the bank's total funding excluding derivatives. The bank's cumulative maturity gap is positive, which along with its sound amount of liquid assets and a Basel III compliant local regulatory liquidity coverage ratio (LCR) consistently above 100%, highlights its adequate liquidity position.

IDRs and National Scale Ratings

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 bank's IDRs are currently at the same level as would be derived from the institutional support approach, given that SAN Mexico is viewed as a strategically important entity for Banco Santander, S.A. (SAN, 'A-'/Stable Outlook).

Support Rating

Fitch's affirmation of SAN Mexico's Support Rating at '2' reflects the view that there is high probability of support to SAN Mexico from Spain's SAN, if needed given the strategic role of the Mexican subsidiary for its parent.

Subordinated Debt and Senior Debt

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. The notching for loss severity (-1) reflects that these securities are plain-vanilla subordinated debt (subordinated preferred, under the local terminology).

Fitch rates the local debt issued by SAN Mexico at the same level as the bank's corporate rating, reflecting its senior unsecured nature.

CBSantander, Santander Vivienda and Santander Consumo's National Ratings

The ratings of CBSantander, Santander Vivienda and Santander Consumo 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. The credit profile of GFSM is associated with that of its main subsidiary, SAN Mexico.

RATING SENSITIVITIES

VR

Fitch could downgrade the bank's VR if its non-performing loan (NPL) ratio deteriorates to levels above 4% or if its operating earnings to risk-weighted assets (RWAs) and FCC ratio decrease to levels consistently below 2% and 12%, respectively. A deterioration of the Mexican operating environment and sovereign rating may also adversely affect the bank's VR.

Fitch believes there is limited upside potential for SAN Mexico's VR and IDRs at present based on current expectations for the Mexican sovereign ratings and its operating environment. However, the ratings could be upgraded in the medium term if the bank continues consolidating its competitive position and franchise and improves its financial performance reflected in an operating return on RWAs consistently above 4%, while maintaining adequate asset quality and capitalization metrics amid a high loan growth strategy.

IDRs and National Scale Ratings

SAN Mexico's IDRs could mirror a potential upgrade of its VR over the medium term. Alternatively, 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 SAN Mexico's IDRs would maintain one-notch relativity to its parents.

The national scale ratings could be downgraded in the event of a downgrade of SAN Mexico's VR coupled with a reduced propensity and ability of support from its parent, which is an unlikely scenario at present.

Support Rating

The bank's Support Rating could be affected if Fitch changes its view of SAN's ability or willingness to support the Mexican bank.

Subordinated Debt and Senior Debt

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

Senior debt ratings of SAN Mexico, Santander Vivienda and Santander Consumo would mirror any changes in the bank's IDRs or national-scale ratings.

CBSantander, Santander Vivienda and Santander Consumo's National Ratings

Any potential changes of CBSantander, Santander Vivienda and Santander Consumo'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 of each entity's strategic importance to the group could also lead to changes of its ratings.

Fitch affirms the following ratings:

SAN Mexico

--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';

--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)'.

CBSantander

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

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

Santander Vivienda

--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)'.

Santander Consumo

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

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

--National-scale short-term rating for local senior unsecured debt program at 'F1+(mex)'.

The Rating Outlook for the long-term ratings is Stable.

Adjustment to Financial Statements: Pre-paid expenses were re-classified as intangibles and deducted from Fitch Core Capital. The subordinated notes were classified as mezzanine debt and were assigned 50% equity credit.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

National Scale Ratings Criteria (pub. 30 Oct 2013)

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004877

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004877

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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