August 29, 2017 / 8:19 PM / a year ago

Fitch Affirms Itau Unibanco Holding S.A.'s Ratings; Outlook Negative

(The following statement was released by the rating agency) NEW YORK, August 29 (Fitch) Fitch Ratings has affirmed the ratings for Itau Unibanco Holding S.A. (IUH) and its subsidiary, Itau Unibanco S.A., including the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+'. The Rating Outlook is Negative. See the full list of rating actions at the end of this release. KEY RATING DRIVERS VR, IDRS, AND SENIOR DEBT The bank's IDRs and senior debt ratings are driven by the bank's 'bb+' Viability Rating (VR) which reflects IUH's consistent performance within the challenging operating environment of the past four years and its diversified revenues from its global franchise. The VR also reflects IUH's conservative risk appetite and growth, strong liquidity and capitalization. IUH and Itau Unibanco's VRs are one notch above Brazil's sovereign rating given the bank's sound business and financial profile, but they remain constrained by Brazil's challenging operating environment. The Negative Outlook for the banks' Long-Term IDR mirrors the Negative Outlook on the sovereign's IDRs. One rationale for IUH's IDRs being above the sovereign rating is that IUH is the largest private-sector financial conglomerate in Brazil, and in Latin America, where it is a market leader in assets, deposits, credit, and asset management. With a substantial branch network focusing on a solid and diversified base of depositors and customers, IUH is considered locally as a safe haven in times of crisis. While having significantly curtailed its risk appetite during the past few years over concerns with the difficult operating environment in Brazil, the bank continued its expansion in other Latin American and overseas countries as part of its strategy to further diversify its risks and sources of revenues. The most recent and relevant effort was through a merger between Itau Chile and CorpBanca. During the second quarter of 2016, Itau Corpbanca was consolidated into IUH's financial statements, as IUH is the controlling shareholder. IUH continues to perform satisfactorily in the still challenging operating environment as evidenced most recently by the results of 1H17 when it reported an ROAA and ROAE of approximately 1.7% and 19.3%, respectively, as per Fitch's method of calculation. These results compare favorably to the approximately 1.6% and 18.0% reported at FYE2016 and also compare well to those of its direct peers. Lower margins and the impact of the new revolving credit card regulations on pricing were offset by higher fee income. Profitability was boosted by lower credit-provisioning expenses as the need for loan-loss provisioning decreased as asset quality continued to show signs of improvement. IUH also continues to focus on cost control. IUH's asset quality metrics remained satisfactory as its consolidated 90-day NPL ratio fell to 3.2% at June 30, 2017 down from 3.6% a year earlier. At the same time the 90-day non-performing loan (NPL) coverage ratio rose to 243% from 215% over the same period. Reflecting management's conservatism, the IUH maintained an additional provision of BRL10.7 billion at June 30, 2017. IUH's ample client deposit base, as well as its conservative funding policies, contribute to a strong liquidity position. The bank's Loan-to-Deposit ratio (including Letras Financeiras, LCIs and LCAs) at June 30, 2017 was at a comfortable level. Also, the majority of the securities portfolio consists of liquid government securities. Capitalization ratios are also at very comfortable levels and are expected to remain so given management's recently revised guidance for total credit growth ranging from 0% to 4% for the remainder of 2017. Fitch Core Capital (FCC) at June 30, 2017 reached one of its highest levels of the past five years at 13.9%, which compares well to peers. IUH's CET I at June 30, 2017 was 15.7%. Given IUH's expected performance and conservative risk appetite, IUH is not expected to have any difficulty adapting to the BIS III requirements, and if those were fully implemented as of June 30, 2017, the simulated CET I would be 14.5% even with the impact of the Citibank consolidation and the XP investment, as these would be mostly offset by the use of tax credits. The total Regulatory capital ratio has remained at a comfortable 18.4% as of June 30 2017). SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating of '3' and Support Rating Floor of 'BB-' reflect a moderate probability of support from the Brazilian government, in view of the uncertainty as to its capacity and willingness to do so. It also mirrors IUH's strong franchise and market share within the banking system, where is accounts for nearly 14% of the loans and 17% of the deposits. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Following Fitch's rating criteria, the IUH Tier II subordinated debt is rated two notches below its VR, one notch lower due to Loss Severity features and its subordinated status, and a one-notch deduction due to the risk of non-performance. IUH's subordinated debt carries a cumulative coupon deferral mechanism. A deferral will only occur if IUH is noncompliant with its regulatory capital requirement. This rating was also affirmed. SUBSIDIARY AND AFFILIATED COMPANY Itau Unibanco is a wholly owned subsidiary of IUH and currently has the same VR as IUH, reflecting Fitch's view of their integral roles in the consolidated operation, and the fact that broad risk management and strategic direction are coordinated as a consolidated entity. NATIONAL RATINGS The 'AAA(bra)'/Stable Outlook National Rating was also affirmed, reflecting the bank's very strong credit profile. RATING SENSITIVITIES IDRS, SENIOR DEBT IUH and Itau Unibanco's IDRs and debt ratings are sensitive to a change in Fitch's assumptions around specific issuer rating factors and rating factors affecting the sovereign. The Negative Outlook on the IDRs reflects Fitch's current negative view on the operating environment for Brazilian banks, which in turn is heavily influenced by the Negative Outlook on Brazil's Sovereign rating. A downgrade of the sovereign could lead to a downgrade of IUH's ratings. The Rating Outlook for the sovereign is Negative. VR IUH and Itau Unibanco's VRs are sensitive to a change in Fitch's assumptions regarding the bank's rating factors. The VR could be downgraded if the bank's loss absorption capacity diminishes. In the unlikely event that the issuer's FCC falls below 9%, or there is a sustained decrease in ROAA below 1.25% and over-90-day NPL ratios are above 6% (currently 3.2%), a ratings review would be triggered. SUPPORT RATING AND SUPPORT RATING FLOOR SR is potentially sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES IUH's subordinated debt ratings are broadly sensitive to the same considerations that might affect IUH's VR. NATIONAL RATINGS As the National Ratings are at the highest possible level of Fitch's Rating Scale, there is no upside potential for these ratings, thus the Rating Outlook for the National Rating is Stable. These ratings could only be downgraded in the event of Itau being rated at or below the Sovereign rating on the international scale. IUH is the largest private-sector financial conglomerate in Brazil, and Latin America, where it is a market leader in assets, deposits, credit, and asset management. With a substantial branch network focusing on a solid and diversified base of depositors and customers, IUH is considered locally as a safe haven in times of crisis. Fitch has affirmed the following ratings: IUH --Long-Term Foreign- and Local-Currency IDRs at 'BB+'; Outlook Negative; --Short-Term Foreign- and Local-Currency IDRs at 'B'; --Viability Rating at 'bb+'; --National Long-Term Rating at 'AAA(bra)'; Outlook Stable; --National Short-Term rating at 'F1+(bra)'; --Support Rating at '3' --Support Rating Floor at 'BB-'. --Senior USD notes due 2018, Long-Term Foreign Currency rating at 'BB+'. --Subordinated USD notes due 2020-2023 Long-Term Foreign Currency rating at 'BB-'. Itau Unibanco --Long-Term Foreign- and Local-Currency IDRs at 'BB+'; Outlook Negative; --Short-Term Foreign- and Local-Currency IDRs at 'B'; --Viability Rating at 'bb+'; --National Long-Term Rating at 'AAA(bra)'; Outlook Stable; --National Short-Term Rating at 'F1+(bra)'; --Support Rating at '3' --Support Rating Floor at 'BB-'. Contact: Primary Analyst Robert Stoll Director +1 212-908-9155 Fitch Ratings Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Raphael Nascimento Assistant Director +11 55 11 3957-3664 Committee Chairperson Alejandro Garcia Managing Director +1 212 908-9137 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:; Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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