New York, October 18, 2016 -- Moody's Investors Service downgraded the senior unsecured debt and
non-cumulative preferred stock ratings of Santander Holdings USA,
Inc. (SHUSA) to Baa3 from Baa2, and to Ba3(hyb) from Ba2(hyb),
respectively. SHUSA is the US holding company of Spanish bank Banco
Santander, S.A. (deposits A3 stable, senior
unsecured (P)A3, BCA baa1).
The rating agency also downgraded the standalone baseline credit assessment
(BCA) of SHUSA's lead US bank subsidiary, Santander Bank,
N.A., to baa2 from baa1. At the same time,
Moody's affirmed the following ratings/assessments of Santander
Bank: A2/Prime-1 deposit ratings; Baa2 issuer,
senior unsecured and subordinate ratings; baa1 adjusted BCA;
and A3(cr)/Prime-2(cr) Counterparty Risk (CR) Assessments.
Following today's rating actions, the rating outlook on SHUSA
and Santander Bank is stable.
The ratings of SHUSA's Puerto Rico bank subsidiary, Banco
Santander Puerto Rico (A2/Prime-1 deposits, ba3 BCA,
baa1 adjusted BCA), were unaffected by today's actions.
A complete list of today's rating actions can be found at the end
of this press release.
RATING RATIONALE
The downgrade of SHUSA's debt ratings was driven by the weakening
standalone credit strength of SHUSA's lead bank, Santander
Bank, as reflected by Moody's downgrade of the bank's
standalone BCA to baa2 from baa1. The lower BCA primarily reflects
the bank's poor profitability, which hampers its ability to
protect its strong capital ratios in times of stress.
The bank's core profitability ratio, which the rating agency
defines as pre-provision income as a percentage of average risk-weighted
assets, has been a depressed 0.60% since the beginning
of 2015, well below that of most US bank peers. This relative
weakness is driven by Santander Bank's low net interest margin and
weak operating efficiency.
The bank's margin, which was a low 2.2% in the
first half of 2016, is weighed down by higher funding costs relative
to peers. Although largely deposit-funded, Santander
Bank's funding profile is weaker than its peers because of its higher
reliance on non-core funding, including non-core deposits
and other borrowings.
Regarding Santander Bank's efficiency ratio, it was a high
85% during the first half of 2016. In recent years,
growth in non-interest expenses has noticeably outpaced revenue
growth. This disparity has been caused by heightened expenses,
largely in response to deficiencies raised by the Federal Reserve as part
of SHUSA's Comprehensive Capital Analysis and Reviews (CCAR) and
in formal written agreements. These expenses include elevated remediation
expenses and costs to enhance and build out processes/infrastructure.
Despite the downgrade of Santander Bank's BCA, Moody's
affirmed the bank's baa1 adjusted BCA and deposit and debt ratings
because they take into account the high probability of support from its
ultimate parent, Banco Santander, S.A.
SHUSA's debt ratings also incorporate a high probability of parental
support, which results in a one-notch uplift in the ratings.
Moody's added that the downgrade of SHUSA's ratings takes
into account the recent accounting and financial reporting problems at
its majority-owned auto finance company, Santander Consumer
USA Holdings Inc. (unrated). Specifically, SHUSA is
in the process of restating numerous financial statements primarily from
the correction of errors in Santander Consumer's accounting for
retail installment contracts and the related allowance for loan losses.
SHUSA also expects to report the existence of additional material weaknesses
in internal controls over financial reporting, beyond those reported
in previous filings.
Following today's actions, the rating outlook on SHUSA and
Santander Bank is stable, primarily reflecting the company's
strong capital ratios, good liquidity and sound asset quality metrics.
Factors that Could Lead to an Upgrade
SHUSA's successful remediation of its current regulatory deficiencies
and a sustained period without further process or control issues would
be positive. This would also likely lead to improvement in Santander
Bank's profitability metrics, which could lead to upward movement
on the bank's standalone BCA and, in turn, SHUSA debt
ratings.
Factors that Could Lead to a Downgrade
A significant deterioration in Santander Bank's capital ratios,
which are currently a credit strength, could lead to downward movement
on the bank's standalone BCA and deposit and debt ratings.
SHUSA's debt ratings could be downgraded if growth at Santander
Consumer dilutes SHUSA's overall credit profile by becoming a much larger
contributor of assets and/or earnings, or if the accounting and
financial reporting problems are not resolved in a timely manner,
restricting Santander Consumer's access to funding/liquidity.
Issuer: Santander Bank, N.A.
..Downgrades:
.... Baseline Credit Assessment, to
baa2 from baa1
..Affirmations:
.... Long Term Deposit Rating, A2
.... Short Term Deposit Rating, P-1
.... Issuer Rating, Baa2
.... Senior Unsecured Regular Bond/Debenture,
Baa2
.... Subordinate Regular Bond/Debenture,
Baa2
.... Adjusted Baseline Credit Assessment,
baa1
.... Long Term Counterparty Risk Assessment,
A3(cr)
.... Short Term Counterparty Risk Assessment,
P-2(cr)
..Outlook Actions:
....Outlook, Remains Stable
Issuer: Santander Holdings USA, Inc.
..Downgrades:
....Senior Unsecured Regular Bond/Debenture,
to Baa3 from Baa2
....Senior Unsecured Shelf, to (P)Baa3
from (P)Baa2
....Pref. Stock Non-cumulative
Preferred Stock, to Ba3(hyb) from Ba2(hyb)
..Outlook Actions:
....Outlook, Changed To Stable from
Negative
Issuer: Sovereign Capital Trust VI
..Downgrades:
....BACKED Pref. Stock Preferred Stock,
to Ba2(hyb) from Ba1(hyb)
....BACKED Pref. Stock Shelf,
to (P)Ba2 from (P)Ba1
Issuer: Sovereign Real Estate Investment Trust
..Affirmations:
.... Pref. Stock Non-cumulative
Preferred Stock, Ba1 (hyb)
The principal methodology used in these ratings was "Banks" published
in January 2016. 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Joseph Pucella
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Robert Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653