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Rating Action: Moody's rates B1(hyb) Itau Unibanco Holding's proposed Tier 2 subordinated sustainability notes
Global Credit Research - 11 Jan 2021
New York, January 11, 2021 -- Moody's Investors Service ("Moody's") has today assigned a B1(hyb) rating to the proposed USD-denominated contractual non-viability Tier 2 subordinated notes to be issued by Itau Unibanco Holding S.A. (Cayman Islands) (IUH Cayman), the Cayman Islands branch under its $100 billion Global Medium-term Note Program. The notes will be due in 2031 with a call option in five years.
The capital security notes are Basel III-compliant, and their terms and conditions have been defined so as to qualify the notes for treatment as Tier 2 capital pursuant to Brazilian regulation. The proceeds of IUH Cayman's notes will be used to fund eligible sustainable projects.
Issuer: Itau Unibanco Holding S.A. (Cayman Islands)
Foreign Currency Subordinated Debt Rating, assigned B1(hyb)
The B1(hyb) rating assigned to the new Tier 2 subordinated notes is positioned two notches below the ba2 adjusted baseline credit assessment (adjusted BCA) of Itau Unibanco S.A. (IU), in line with Moody's standard notching guidance for contractual non-viability subordinated debt with a full or partial principal write-down triggered at or close to the point of non-viability.
IUH is the holding company of IU, which contributes 99% to the holding's earnings. As such, debt obligations at the holding company incorporate their structural subordination to IU's senior debt obligations, which are rated (P)Ba2.
According to the terms, the principal on these notes will be fully or partially written-down in the event that (i) IUH's common equity Tier 1 ratio falls below 4.5%, (ii) the bank receives a capital injection from government funds, (iii) the Central Bank of Brazil makes a discretionary determination that a write-down is necessary, or (iv) the Central Bank of Brazil intervenes in the bank or establishes a special administrative regime at IUH or IU. The B1(hyb) assigned to IUH's new contractual non-viability Tier 2 notes reflects the higher probability of default related to the potential write-down of principal and/or interest payment in the event of the bank's failure.
As with IUH´s other ratings, the rating on the notes does not incorporate any uplift from either affiliate or government support. This is because the purpose of the subordinated notes is to provide loss absorption and improve the ability of authorities to conduct a smooth resolution of troubled banks. For this reason, Moody's views government support for these instruments as unlikely and the agency therefore attributes only a low probability to a scenario where the government would support this debt class.
The B1(hyb) rating is positioned one notch below the Ba3 rating assigned to IUH Cayman´s existing plain vanilla Tier 2 subordinated debt due between 2021 and 2029. Those outstanding debts were issued under Basel II rules, and unlike the new notes, do not have a contractual provision for equity conversion or principal write down.
IU's baseline credit assessment (BCA) and adjusted BCA of ba2 takes into account the bank's strong earnings recurrence that results from well-established positions in diversified businesses, ensuring internal capital replenishment to support growth, as well as its stable funding and liquidity. For the first nine months of 2020, IUH's net income to tangible assets was 0.72%, lower than 1.48% in the 12-month prior, reflecting lower business volumes, record low interest rates and sizable loan loss provisions that resulted from the weak credit conditions triggered by the coronavirus pandemic. A recovering economy and increasing mobility in Brazil particularly in Q3 2020 have helped business volumes rebound boosting fee revenues and loan growth.
Itau's problem loan ratio as of September 2020 declined to 2.6% of total loans, from 3.5% at the end of 2019, aided by loan deferrals and income support programs, but asset quality may yet deteriorate over the next quarters as these measures expire. However, IU has built a conservative reserve buffer that accounted for 7.3% of total loans as of September 2020, which will help mitigate the expected increase in credit losses. A lower dividend payout in 2020 will help restore IU's capitalization ratio that was reduced by the effect of FX volatility and hedges of its investments abroad. As of September 2020, Moody's tangible common equity ratio declined to 5.7% of risk weighted assets, from 9.4% at the end of 2019.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The ratings of the Tier 2 notes are notched from IU's adjusted BCA. As such, the ratings of the securities will move in tandem with IU's adjusted BCA, which does not incorporate any affiliate support. At this juncture, upward pressure is unlikely because the bank´s BCA, which is the anchor credit risk assessment for the instrument rating, is currently at the same level as the Ba2 Brazil's sovereign rating, which carries a stable outlook.
IU's BCA could be upgraded if Brazil's sovereign rating is upgraded, and if the bank maintains strong asset quality, capital and profitability metrics supporting a continued strengthening in its loss-absorbing capital buffers. Conversely, the rating assigned to the Tier 2 notes would face downward pressure if Brazil's sovereign rating is downgraded or if IU's asset quality, capital and profitability weaken materially.
The principal methodology used in this rating was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Itau Unibanco Holding S.A. is headquartered in São Paulo, and is the bank-holding company of Itau Unibanco financial conglomerate. IUH had consolidated assets in the amount of BRL2,110.1 billion ($374.4 billion) and shareholders' equity of BRL130.6 billion ($23.2 billion) as of 30 September 2020.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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.
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This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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