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

NEW YORK--()--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 IDRs at 'BB+'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this release.

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KEY RATING DRIVERS

VR, IDRs, NATIONAL RATINGS AND SENIOR DEBT

The bank's IDRs, National and senior debt ratings are driven by the bank's 'bb+' Viability Rating (VR) and reflects IUH's consistent performance during the challenging economic cycle of the last few years.

The bank's VRs reflects IUH's credit metrics which have consistently shown diversified sources of liquidity/funding, good capitalization, consistent levels of profitability and comfortable levels of Asset Quality. IUH's VR is limited by Brazil's current operating environment. The VR was downgraded by multiple notches since October 2015, following the various downgrades of the sovereign rating. However, IUH's IDRs are one notch above the Sovereign Rating and are constrained by the country ceiling ('BB+'). The 'AAA(bra)' National Rating reflects the bank's very strong credit profile.

One rationale for IUH's IDRs being above the sovereign rating is that 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. While having limited its credit appetite in the last few years over concerns with the difficult operating environment in Brazil, the bank continued its expansion in other Latin American and overseas countries as an effort to diversify its risks and sources of revenues. The most recent and relevant effort was via the merger between Itau Chile and CorpBanca that was concluded on April 1st. As of the second quarter of 2016, Itau Corpbanca was consolidated into IUH's financial statements, as IUH is the controlling shareholder, with a nearly 33.6% ownership.

IUH continues to perform satisfactorily in the continued challenging environment as evidenced most recently by the results of the first half of 2016 when it reported a ROAA of 1.6% and a ROAE of 19.2%. However, these results were lower than those reported a year earlier they compare well to those of its direct peers. Profitability was impacted by the need for loan loss provisions as the level of impaired loans rose; however, IUH's asset quality metrics remained satisfactory and compare well with peers, (consolidated 90-day NPL Ratio reached 3.6% and the 90-day NPL coverage ratio was at 215%). Reflecting management's conservatism, the bank maintained a consolidated excess provision of BRL10.2 billion at June 30, 2016.

The bank's extensive deposit base, along with its other multiple sources of funding, provides a comfortable level of liquidity. The bank's large securities portfolio represents a relevant portion of IUH's of total assets. The current low risk appetite is evidenced by the fact that a significant amount of the on-balance sheet loan and advances currently have tenors that are under one year.

Capitalization ratios are also at comfortable levels and are expected to remain so given management's recently revised guidance for a decrease in credit growth for the remainder of 2016, ranging between -10.5% to -5.5%. Fitch Core Capital at June 30, 2016 reached one of its highest levels of the past five years at 12.6%, which compares well to peers. IUH's CET I at June 30, 2016 was 14.8%. 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, 2016, the simulated CET I would be 14.1%. In the event of an unlikely need to do so, IUH could use its excess reserves to further support future growth while maintaining a comfortable capital ratio.

SUPPORT RATING AND SUPPORT RATING FLOOR

The bank's Support Rating and Support Rating Floor reflect the strong franchise and market share within the banking system where is accounts for nearly 14% of the loans and 16.9% of the deposits. As the largest private-sector bank in Brazil and its role as a payment and other banking services provider, Fitch believes that in the unlikely event of need, the government would provide support. However, the support rating also reflects a moderate probability of support in view of the uncertainty over the capacity and willingness to provide extensive support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Following Fitch's rating criteria, the IUH Tier II subordinated debt was rated two notches below its Viability Rating (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 carry a cumulative coupon deferral mechanism. A deferral will only occur if IUH is noncompliant with its regulatory capital requirement.

SUBSIDIARY AND AFFILIATED COMPANY

Itau Unibanco S.A. is a wholly owned subsidiary of IUH. Itau Unibanco have the same VR as IUH as this reflects the agency's view of their integral roles to the consolidated operation, and the fact that broad risk management and strategic direction are coordinated as a consolidated entity.

RATING SENSITIVITIES

IDRs, SENIOR AND SUBORDINATED DEBT

IUH's 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 currently Negative.

NATIONAL RATINGS

As the National Ratings are at the highest possible rating on Fitch's Rating Scale a further upgrade would not be possible, 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.

VR

IUH's 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 issuers FCC falls below 9%, or a sustained decrease in ROAA below 1.25% and over 90-day NPL ratios are above 6% (currently 3.6%, a ratings review would be triggered.

SUPPORT RATING AND SUPPORT RATING FLOOR

The 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.

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-'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011138

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011138

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings Inc.
Primary Analyst
Robert Stoll
Director
+1-212-908-9155
Fitch Ratings Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eduardo Ribas
Director
+11 55 11 4504 2213
or
Committee Chairperson
Alejandro Garcia
Managing Director
+1-212-908-9137
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings Inc.
Primary Analyst
Robert Stoll
Director
+1-212-908-9155
Fitch Ratings Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eduardo Ribas
Director
+11 55 11 4504 2213
or
Committee Chairperson
Alejandro Garcia
Managing Director
+1-212-908-9137
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com