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Rating Action:

Moody's affirms Santander Holdings USA, Inc.'s ratings (long-term senior unsecured Baa3) and Santander Bank N.A.'s ratings (issuer rating Baa1); outlook remains stable

25 Jun 2021

New York, June 25, 2021 -- Moody's Investors Service ("Moody's") has affirmed the Baa3 long-term senior unsecured rating of Santander Holdings USA, Inc. (SHUSA) and the ratings and assessments of its bank subsidiary, Santander Bank N.A. (SBNA) including its baa1 adjusted Baseline Credit Assessment (BCA) and baa2 standalone BCA. The outlook remains stable.

SHUSA is the bank holding company of SBNA and it also owns a majority interest (approximately 80%) of Santander Consumer USA Holdings Inc. (SC), a largely subprime consumer finance company in the US. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A.. The affirmation of SBNA's ratings reflects continued strong capitalization, robust liquidity, asset quality performance, as well as its earnings challenges from its weak operating efficiency and depressed net interest margin from low interest rates. The affirmation of SHUSA's ratings also takes into account the reduction in regulatory risk from the termination of its 2017 written agreement with the Federal Reserve, following its successful remediation of past risk management and governance weaknesses.

Affirmed:

..Issuer: Santander Bank, N.A.

....Baseline Credit Assessment, Affirmed baa2

....Adjusted Baseline Credit Assessment, Affirmed baa1

....Issuer Rating, Affirmed Baa1, Outlook Stable

....Long-Term Bank Deposit Rating, Affirmed A2, Outlook Stable

....Short-Term Deposit Rating, Affirmed P-1

....Long-Term Counterparty Risk Assessment, Affirmed A3(cr)

....Short-Term Counterparty Risk Assessment, Affirmed P-2(cr)

....Long-Term Counterparty Risk Rating, Affirmed Baa1

....Short-Term Counterparty Risk Rating, Affirmed P-2

..Issuer: Santander Holdings USA, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3, Outlook Stable

Issuer: Sovereign Real Estate Investment Trust

....Preferred Stock Non-cumulative, Affirmed Ba1(hyb)

Outlook Actions:

..Issuer: Santander Bank, N.A.

....Outlook, Remains Stable

..Issuer: Santander Holdings USA, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

The affirmation of SBNA's standalone baa2 BCA was driven by Moody's expectation that its strong capital, good liquidity and sound asset quality will persist over the next 12-18 months. The affirmation also reflects Moody's assessment that the bank's profitability will remain hampered by its weak operating efficiency and depressed net interest margin, against the backdrop of prolonged low interest rates.

SBNA's strong capitalization is a key credit strength that underpins its ratings. Moody's believes the bank has sufficient capital to absorb unexpected losses even under a severely adverse economic scenario, which is in line with the view of the Federal Reserve based on SHUSA's quantitative results from the 2020 Comprehensive Capital Analysis and Review (CCAR) process.

SBNA's asset quality has remained sound and in line with similarly rated peer median despite a modest uptick related to the economic impact of the coronavirus pandemic. The bank's problem loans (defined as nonaccrual loans, accruing loans past due 90+ days, and all restructured loans) were 1.38% of total loans at 31 March 2021, up from 0.95% at year-end 2019 prior to the onset of the coronavirus pandemic. The bank's net charge-offs remained modest at 0.45% average gross loans in 2020, in line with 0.40% in 2019. Its liquidity and funding profile have improved driven by massive fiscal stimulus and accommodative monetary policy and a general flight to quality like most US banks have experienced. As such, SBNA has continued to improve its core funding base, reducing high cost certificate of deposits and supporting improved funding costs.

However, SBNA's profitability has been well below that of most US bank peers for many years. In 2020, its profitability has been further dampened by high credit costs driven by the expected fallout of the coronavirus pandemic, low interest rates and a sizeable goodwill impairment. As a result, the bank did not earn a profit in 2020 with a Moody's adjusted net income ratio (as a percentage of risk-weighted assets) of -2.02%, compared to 0.30% in 2019. Moody's expects SBNA's profitability will remain weak, ignoring the near-term boost of the release of loan loss reserves. SBNA's profitability will remain under pressure from its poor operating efficiency as well as its lower net interest margin which has declined in the low interest rate environment.

The affirmation of SBNA's baa1 adjusted BCA and deposit and debt ratings incorporates Moody's view of a high probability of support from its ultimate parent, the Spanish bank Banco Santander, S.A (long-term senior unsecured A2, BCA baa1, outlook stable). That assumption results in a one notch uplift in SBNA's adjusted BCA. The affirmation of SHUSA's Baa3 long-term senior unsecured rating also reflects Moody's view of a high probability of support from its ultimate parent, Banco Santander, S.A. SHUSA's ratings also considers Moody's views that the credit profile of SC (unrated), the US auto finance company of which SHUSA has majority ownership, is much weaker than that of the bank.

Moody's advanced Loss Given Failure (LGF) analysis considers Moody's expectation that SHUSA will continue to comply with Total Loss Absorbing Capacity (TLAC) requirements equivalent to a minimum of 6% of SHUSA's consolidated risk-weighted assets. Moody's advanced LGF analysis indicates a lower loss-given-failure for SBNA's issuer rating thanks to the level of TLAC-qualifying long-term debt at SHUSA, which Moody's believes will largely be available for the bank to facilitate resolution. This would support the subordination of the bank's debt structure, reducing the loss severity of the bank's debt. SHUSA's senior unsecured debt rating incorporates an assumption of high loss severity under Moody's advanced LGF analysis.

Governance is highly relevant for SHUSA, as it is to all players in the banking industry. Corporate governance weaknesses can lead to a deterioration in a bank's credit quality, while governance strengths can benefit a bank's credit profile. Governance weaknesses, previously identified in written regulatory agreements, have been remediated as evidenced by the termination of the final outstanding written agreement in February 2021. In Moody's view, the termination is credit positive because it signals that SHUSA and SC have adequately addressed the deficiencies that regulators identified, removing the risk of additional regulatory actions. It is also a public indication that the Federal Reserve now views SHUSA's and SC's enhanced compliance risk management and governance as sufficiently robust. A sustained period without further risk management or control issues is likely to result in a higher standalone BCA for SBNA.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A sustained period without further risk management or control issues is likely to result in a higher standalone BCA for SBNA. However, an upgrade of the standalone BCA is unlikely to result in a higher adjusted BCA and ratings because SBNA's adjusted BCA is constrained by the financial strength of its parent, currently baa1, under Moody's Joint-Default Analysis. A higher adjusted BCA and ratings could therefore result from an improvement in Banco Santander, S.A.'s credit profile.

SHUSA's debt ratings could be upgraded if SC's credit profile meaningfully improves, or if its overall contribution to SHUSA's assets and profitability declined relative to the contribution of SBNA.

A significant and unexpected deterioration in SBNA's asset quality or capitalization could lead to downward pressure on the bank's baa2 BCA and deposit and debt ratings. A downgrade of Banco Santander, S.A.'s BCA, or a reduction in Moody's assessment of the probability of parental support, could also lead to a downgrade of SBNA's baa1 adjusted BCA and debt and deposit ratings.

SHUSA's debt ratings could be downgraded if 1) growth at SC weakens SHUSA's overall credit profile by becoming a much larger contributor of assets or earnings, and/or 2) SC's credit profile deteriorates, restricting its access to funding/liquidity.

The principal methodology used in these ratings was Banks Methodology published in March 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1261354. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Megan Fox
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Andrea Usai
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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