ITAÚ UNIBANCO HOLDING S.A.
Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of
The Rating Outlooks are Stable. Fitch has also affirmed IUH and
Key Rating Drivers
The IDRs and National Ratings are driven by the entities' standalone creditworthiness, as expressed by their 'bb' Viability Ratings (VR).
The VRs are in line with the implied VRs and reflect the group's leading domestic franchise and sound business diversification, including some risk diversification from its Latin American business. It also reflects resilient earnings through multiple credit cycles, good asset quality protection through strong provisioning buffers, satisfactory capitalization, ample access to stable funding and comfortable liquidity buffers.
The VRs are one notch above
Fitch rates IUH and its main bank subsidiary,
Operating Environment Outlook Revised to Stable: The operating environment score for Brazilians Banks is bb-, and is in line with the implied assessment based on
However, growth is cooling following the lagged effect of substantial monetary tightening, and the expected global deceleration will be an additional drag. High policy rates should be supportive for banks' interest revenue but will continue to moderately pressure asset quality and credit volumes, as households' resilience and business prospects weaken.
Leading Banking Franchise in
Contained Risks from Uncertain Operating Environment: IUH's risk profile is moderate overall and is supported by the group's strong risk management expertise and a fairly high level of lending collateralization. Underwriting standards benefit from a leading market position and credit concentration is not a key risk as in other emerging markets. This, combined with its geographic diversification, underpins the resilience of the group's asset quality in periods of stress. However, IUH's risk profile is sensitive to the concentration of activities within
Asset Quality Remains Adequate: IUH's 90-day nonperforming loan (NPL) increased to 2.8% at end-9M22, from 2.5% at end-2021, but remains below pre-pandemic levels despite the persistent weak credit cycle over the past two years. Fitch expects the ratio to increase moderately over the next year as households contend with challenging economic conditions, including higher inflation and interest rates and slowing real GDP growth, but to peak close to pre-pandemic levels in 1H23. IUH's prudent loan provision policy remains a rating strength and current coverage levels provides some protection to risks of an economic slowdown in
Strong Profitability, Good Cost Efficiency: IUH manages to deliver resilient operating profitability through the cycles, supported by a healthy net interest margin (NIM), sound business diversification and loan impairment charges (LICs) that tend to erode only a moderate percentage of pre-impairment operating profit. Operating returns on risk-weighted assets (RWAs) recovered to 3.8% in 2021 from a pandemic-induced low of 2.6% in 2020, reflecting a significant decline in LICs, and remained stable at 3.7% in 9M22 as a result of a wider NIM that has helped to absorb increased LICs.
Excess Liquidity and Stable Funding: IUH's funding benefits from a stable and large deposit base and good pricing power. Funding and liquidity management also benefits from deep global capital market access at the group level. Its approach requires foreign subsidiaries to be locally funded. Fitch expects IUH's liquidity coverage ratio to be maintained at more normal levels after a rise during the pandemic, while the net stable funding ratio should remain high.
Government Support Rating: IUH's 'b+' GSR reflects a limited probability of support from the Brazilian authorities, if required. Despite contagion risks stemming from IUH's position as a domestic systemically important bank with dominant market shares, the government's limited financial flexibility and capacity to provide support as indicated by its sovereign rating, highly influence its GSR.
VRs Equalized with Group VR: IUH is a non-operating bank holding company (BHC). Its VR is equalized with the group VR, derived from the consolidated risk assessment of the group, due to moderate double leverage, high fungibility of capital and liquidity as well as their high degree of operational and balance-sheet integration. As the main operating entity (73% of group assets at end-1H22),
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The entities' VRs and Long-Term IDRs would come under pressure if its CET1 ratio declines sustainably below 11% without a credible plan to rebuild it in the short term, including as a result of greater-than-expected asset-quality deterioration or unexpected events. A meaningful erosion of the bank's earnings resilience (i.e. operating profit/risk weighted assets (RWAs) below 2% on a sustained basis) would also likely result in a negative rating action.
IUH's ratings remain sensitive to a downgrade of
The National Ratings are sensitive to a weakening creditworthiness relative to other Brazilian issuers.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the VRs and Long-Term IDRs would require a sovereign upgrade while maintaining healthy financial metrics.
The National Ratings are sensitive to strengthening creditworthiness relative to other Brazilian issuers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
IUH's senior unsecured debt is rated in line with its IDRs as the likelihood of default on these obligations reflects the likelihood of default of the entity.
IUH's subordinated debt is rated two notches below IUH's 'bb' Viability Rating (VR). The notching is driven by the subordinated status and the expected high loss severity of the notes. No notching for non-performance is applied, because there is no coupon flexibility (i.e., coupons must be paid as they are not deferrable and the write-off trigger is close to the point of non-viability). As a result, Fitch believes that the incremental non-performance risk is not material from a rating perspective.
IUH's additional Tier 1 (AT1) securities' ratings at 'B', three notches below the bank's VR. Fitch's baseline notching for such high loss-absorbing and subordinated securities is to notch them four notches below the VR (two for loss severity and two for non-performance risk). However, Fitch's rating criteria also factors in compression for non-investment-grade VRs, such as that of IUH, and the criteria provides room for a narrower notching. Therefore, the overall notching for these securities is three. These securities make up the AT1 capital of IUH.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
SENIOR UNSECURED AND SUBORDINATED DEBT
IUH's senior unsecured debt ratings is sensitive to a change in its IDR. IUH's hybrid ratings (for its Tier II subordinated debt and AT1) rating are sensitive to a change in its anchor VR.
VR ADJUSTMENTS
The Asset Quality of 'bb-' has been assigned above the 'b' category implied score because of the following adjustment reasons: collateral and reserves (positive)
The Capitalization & Leverage score of 'bb-' has been assigned above the 'b' category implied score because of the following adjustment reasons: Internal capital generation and growth (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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