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Rating Action:

Moody's affirms ratings of Banco Santander México's cross border issuances; outlook remains stable

30 May 2018

New York, May 30, 2018 -- Moody's Investors Service has today affirmed Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México's (Banco Santander México) foreign currency debt ratings of its $1 billion senior unsecured debt issuance and $1.3 billion Ten-Year Subordinated Preferred Non-Convertible Tier 2 Capital Notes with cumulative mandatory deferral of coupons (Tier 2 hybrid). The outlook on Banco Santander México's senior debt rating remains stable.

Moody's also affirmed the junior subordinated debt ratings of Ba1 (hyb) in global foreign currency of the $500 million Perpetual Subordinated Non-Preferred Contingent Convertible Additional Tier 1 Capital Notes with non-cumulative mandatory and optional deferral of coupons (AT1 hybrid) issued by Grupo Financiero Santander, S.A.B. de C.V. (former Grupo Financiero Santander) but assumed by Banco Santander México.

The rating action also follows the rating actions taken earlier today by Moody's de México (MDM) on Banco Santander México. For details on MDM's rating actions please see the press release entitled: " Moody's affirms ratings of Banco Santander México and Casa de Bolsa Santander; outlook on Casa de Bolsa Santander changed to stable."

The following ratings of cross border issuances by Banco Santander México were affirmed:

.Long-term foreign currency senior unsecured debt rating of A3 with a stable outlook

.Long-term foreign currency subordinated debt rating of Baa3 (hyb)

The following rating by Grupo Financiero Santander, S.A.B. de C.V., assumed by Banco Santander México, was affirmed:

.Long-term foreign currency junior subordinated debt rating of Ba1 (hyb)

RATINGS RATIONALE

AFFIRMATION OF BANCO SANTANDER MÉXICO RATINGS AND ASSESSMENTS AND ASSUMED DEBTS FROM THE FORMER GRUPO FINANCIERO SANTANDER

The affirmation of Banco Santander México's ratings reflects recent improvements in the bank's capital and profitability, as well as the bank's stable asset quality and funding structure. The ratings also consider Moody's assessment of a very high willingness from the government to support Banco Santander México to assure banking system stability and investor confidence.

Banco Santander México's net income reached a strong 1.5% of tangible assets in March 2018, up from 1.1% two years earlier, driven by the steep increase in Mexico's benchmark interest rate. Profitability continues to benefit from the bank's efficient operations and its operating costs are the lowest of Mexico's large banks. Nevertheless, the bank's earnings remain lower than those of its peers, in large part because of the bank's above average funding costs. Management expects that recent investments intended to improve the bank's retail funding franchise will help bring down its funding costs and help offset the impact of the eventual decline in Mexico's benchmark interest rate. However, Moody's notes that the bank will face strong competition which will challenge its ability to successfully execute this strategy.

Together with a slowdown in annual loan growth to 9.6% as of March 2018, the improvement in earnings benefited Banco Santander México's ratio of tangible common equity (TCE) to adjusted risk-weighted assets (RWAs), Moody's preferred measure of capitalization, which rose to 11.5% as of March 2018, from 10.5% as of year-end 2016. Moody's expects the bank's TCE/RWA ratio will remain at about 11% going forward supported by continued subdued loan growth and strong profitability. While Banco Santander México's capital levels remain below those of the local peers despite the improvement. The bank has also issued a number of loss absorbing hybrid debt issuances in the last three years, equal to about a third of its TCE, most of which are held by its parent. Although Moody's does not accord capital credit to these instruments because of their limited capacity to absorb losses prior to a failure of the bank, they do indicate Banco Santander S.A. (Spain)'s (Santander Spain, deposits A2 stable, BCA baa1), the bank's ultimate parent, willingness to subject itself to losses prior to the bank's creditors.

Thanks to Mexico's resilient if modest economic growth, non-performing loans declined to 2.4% of gross loans as of March 2018, from 3.3% as of year-end 2015. The improvement was driven by a decline in delinquencies for commercial loans, which represent about half of the portfolio. This more than offset an increase in delinquencies of specific retail portfolios, including mortgages, personal loans and payroll-linked loans, since September 2017, as these loans, which represent about a third of the portfolio, have begun to mature in an environment of higher interest rates and inflation. The stabilization of the bank's asset risk profile also reflects continued progress in the negotiations of the North American Free Trade Agreement (NAFTA) coupled with the bank's limited direct exposures to companies that export to the US and to industries such as manufacturing and agriculture that would be most affected by the cancellation of the treaty.

Notwithstanding its above peer funding costs, the bank's funding mix is mainly composed of deposits. After netting out repos backed by government securities and derivatives with direct netting agreements, market funds equal a relatively moderate 12% of tangible banking assets, limiting the bank's exposure to refinancing and interest rate risk. Funding risks are further mitigated by the bank's ample liquidity. Liquid assets, composed mainly of government securities, account for about a third of tangible banking assets, net of repos.

Moody's assessment of the government's very high willingness to provide financial support to Banco Santander México in an event of stress stems from the bank's importance to the country's payments system and its sizeable 14% share of the system's total deposits as of March 2018, which makes it the third largest deposit taker in the country. Moody's also assesses a moderate willingness from the bank's ultimate parent, Santander Spain, to support Banco Santander México consistent with the rating agency's assessment of support for most of Santander Spain's other subsidiaries in developing markets.

The outlook on Banco Santander México's ratings is stable, reflecting (1) the receding risks to growth stemming from a NAFTA renegotiation; (2) the resilience of the Mexican economy, and (3) the low probability of an election outcome that would undermine positive fiscal and economic trends and reduce the government's capacity to provide support to the bank, factors which also support the stable outlook on Mexico's sovereign rating.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the very high probability of government support, Banco Santander México's ratings could face upward pressure if Mexico's government bond rating is upgraded. Conversely, if Mexico's government bond rating faces downward pressure again, Banco Santander México's ratings would also face negative pressure.

The bank's baa2 BCA could come under positive pressure if its core capitalization strengthens further from the current moderate level, while its asset quality remains stable and profitability continues to improve. However, an upward change in the BCA would not affect the bank's deposit ratings because these ratings are already at the same level as Mexico's A3 sovereign rating, nor would it affect the bank's subordinated and junior subordinated ratings.

Downward pressure on the bank's BCA could accumulate if the bank is not able to maintain its TCE/RWA ratio at about 11%. While a downgrade of the BCA would not affect the bank's deposit and senior debt ratings, provided that the government continues to demonstrate a very high willingness to provide support to the bank, it would exert pressure on the ratings of the bank's subordinated and junior subordinated debt issuances. A downgrade of Santander Spain would also put downward pressure on these ratings, though it would not affect the bank's deposit and senior debt ratings.

The principal methodology used in these ratings was Banks published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Felipe Carvallo
Vice President - Senior Credit Officer
Financial Institutions Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
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.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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