Fitch Ratings has affirmed
The Rating Outlook is Stable. The ratings are one notch below their ultimate parent,
Key Rating Drivers
Support-Driven Rating: SHUSA's and SBNA's Long-Term IDRs reflect the likelihood of support from
Viability Rating: SHUSA's 'bb+' VR reflects its intrinsic creditworthiness absent any extraordinary support, and is anchored by its risk profile, specifically its auto finance concentration, with shifting, albeit declining, nonprime focus.
Business Model Remains Auto Centric: SHUSA has undergone a long-term process of developing its business model, reorganizing segments, divesting noncore businesses, making targeted acquisitions and expanding deposit-funded prime auto originations through SBNA. In 2022, SHUSA acquired
In addition, SHUSA negotiated an extension of its exclusive partnership with
Risk Controls: The VR incorporates long-term progress in remediating weaknesses in SHUSA's control environment, including resolving legacy regulatory findings. Historically, regulatory findings and financial reporting weaknesses centered on SHUSA's consumer subsidiary, SC. Fitch believes SC's subprime focus presents elevated credit, reputational and compliance risks. Fitch anticipates that the subprime segment of the business will grow in 2024 and early 2025, as FICO inflation starts to reverse leading to declining FICOs in the near prime category.
Expected Credit Quality Deterioration: As of 1Q24, SHUSA's impaired loans ratio declined to 4.02%. This represents significant declines in the last few years and relative to the pre-pandemic average (2016-2019 average of 7.06%). Despite declining impaired levels, the net chargeoff ratio moderately increased to 2.6% of average loans, compared with 2.23% at YE23 and 1.83% at YE22.
Fitch anticipates that net chargeoffs and impaired loans will increase in lockstep over the course of 2024 and 2025 as a broadly weaker environment begins to take its toll on consumer budgets, limiting repayment ability amid a backdrop of declining used vehicle prices.
Lower Profitability Driven by Credit Costs: SHUSA's 1Q24 revenue declined yoy by 4%, driven by an 8.8% decline in net interest income. Despite this, net income increased by 15.6%, driven by lower credit loss expenses and lower income tax provision. Allowance coverage of 7.4% of loans held for investment was up over 30 bps yoy and compares favorably to estimated current expected credit loss day 1 coverage of 6.5%. Fitch anticipates that profitability will be affected over the rest of 2024 and into 2025 as credit concerns emerge, especially in light of declining vehicle prices.
Material Decline in Capitalization: The ratings incorporate a decline in capitalization measures toward SHUSA's long-term target. The common equity Tier 1 (CET1) ratio increased qoq to 12.5% at 1Q24 but remains well below 1Q22 levels of 18.5%. Lower capital levels reflect acquisitions and capital actions, as well as management's desire to manage capital at lower levels. Fitch anticipates capital will continue to decline throughout the rest of 2024 and into 2025. SHUSA's expected increase in dividend upstreaming is a driving factor for the negative outlook demonstrating a lack of capital flexibility among a period of expected weaker earnings.
Wholesale Funding Reliance: SHUSA's relatively high reliance on wholesale funding is tied primarily to its financing of subprime auto loans. As of 1Q24, deposits declined roughly 2%. Deposits excluding brokered deposits, however, were flat yoy as roughly
The ratio of loans-to-deposits, excluding brokered deposits, declined to 127% at 1Q24 from 137% at 1Q23. Cost of funds increased to 6% from 4.2% over the same period. SHUSA had moderately strong liquidity at 1Q24, with cash and immediately available sources of liquidity equivalent to 149% of uninsured deposits up from 108% in 1Q23 likely reflecting the company's shift toward higher liquidity in the wake of turbulence in the banking sector in early 2023.
Equalization of Bank and Holding Company VRs: SHUSA's VR is equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Negative rating action would likely follow a sustained decline in SHUSA's credit profile, such as a decline in the CET1 ratio below 11.0%, an increase in net chargeoffs or loan loss provisions in excess of 3.0% of average loans, conduct risk findings evidencing systemic weaknesses in enterprise risk management and governance, and sustained core deposit outflows in excess of 10% of total deposits.
For the IDR, any negative change in Banco Santander's IDR or Outlook would result in a commensurate change in the IDRs of SHUSA and SBNA. If Fitch's view of Banco Santander's ability or propensity to support these entities diminishes, the IDRs could be reviewed for multiple-notch downgrades, given the rating differential between these entities' support-driven Long-Term IDRs and their VRs.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
For the VR, continued de-risking and business model development resulting in reliance on auto finance declining to a lesser minority of consolidated revenue and reduction in focus on subprime borrowers to less than 20% of loans held for investment. For the IDR, any positive change in Banco Santander's IDR or Outlook would likely result in a commensurate change in the IDRs of SHUSA and SBNA.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SHUSA's subordinated debt is rated one notch below its IDR to reflect loss severity. SHUSA's preferred stock is rated four notches below its IDR, reflecting two notches for loss severity and two notches for nonperformance. The notching is off the IDR, rather than the VR, reflecting Fitch's view of the potential for institutional support to neutralize these risks.
SBNA's uninsured long-term deposit ratings are rated one notch higher than the bank's IDR and senior unsecured debt because
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
SHUSA's subordinated debt and preferred stock ratings would be negatively sensitive to a downgrade of its Long-Term IDR.
SHUSA's subordinated debt and preferred stock ratings would be positively sensitive to an upgrade its Long-Term IDR.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
SBNA's IDRs are equalized with those of SHUSA, in line with how Fitch rates bank holding companies and their operating subsidiaries in the
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Equalization of SHUSA's and SBNA's VRs reflects correlation between holding company and subsidiary default probabilities. Therefore, SBNA's VR would be sensitive to any negative change in SHUSA's VR.
SBNA's VR would be sensitive to any positive change in SHUSA's VR.
VR ADJUSTMENTS
The 'bb+' VR has been assigned below the 'bbb' category implied score due to the following adjustment reason: risk profile (negative).
The 'bbb-' Business Profile score has been assigned below the 'a' category implied score due to the following adjustment reasons: business model (negative) and historical and future metrics (negative).
The 'bb' Asset Quality score has been assigned below the 'bbb' category implied score due to the following adjustment reasons: concentrations (negative) and historical and future metrics (negative).
The 'bb+' Earnings and Profitability score has been assigned below the 'a' category implied score due to the following adjustment reasons: revenue diversification (negative) and historical and future metrics (negative).
The 'bbb' Capitalization and Leverage score has been assigned below the 'a' category implied score due to the following adjustment reasons: concentrations (negative) and historical and future metrics (negative).
The 'bb+' Funding and Liquidity score has been assigned below the 'a' category implied score due to the following adjustment reason: deposit structure (negative) and historical and future metrics (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
The IDRs of
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
