KBRA Affirms Ratings for Banesco USA

KBRA affirms the deposit and senior unsecured debt ratings of BBB, the subordinated debt rating of BBB-, and the short-term deposit and debt ratings of K3 for Banesco USA (“Banesco” or “the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by a positive view of the Banesco's solid management team, which has continuously strengthened its risk management practices, particularly in BSA/AML and compliance in light of the bank’s international clientele base, which is key to its operational focus. Additionally, Banesco has reported rather stable credit metrics in recent years, demonstrative of the bank’s comprehensive credit policies and deep knowledge of its loan portfolio, which includes a modest exposure to Puerto Rico (~15% of total loans) as well a new West Palm Beach, FL LPO/DPO and newly integrated C&I and residential teams. Earnings have also been pressured from a relatively high-cost funding base driven, in part, by a notable concentration in time deposits (~30% of total deposits at 3Q23). While Banesco has made meaningful investments to improve its core funding base, the bank’s accelerated growth rates (annualized loan growth of ~25% during 9M23) have continued to partially stress its funding, which could result in downward pressure on NIM over the medium term. However, Banesco has sustained a solid noninterest bearing deposit portion of ~30% of total deposits as of 3Q23. Noninterest income regularly tracks below peer averages trending near 15% of total revenues (or 0.5% of average assets) in recent periods; however, KBRA has a positive view of the bank’s fee revenues, which are diversified and considered relatively stable. In 2022, Banesco received $250 million of noncumulative perpetual preferred equity from the U.S. Treasury’s Emergency Capital Investment Program (“ECIP”), which is treated as Tier 1 capital. Although the bank adopted the community bank leverage ratio ("CBLR") in 1Q23, management indicates that the risk-based capital ratio will remain above well capitalized. Banesco remains committed to maintaining a solid capital position including the CBLR above 10% (13.2% at 3Q23).

Rating Sensitivities

A reduction in wholesale funding usage resulting in consistently higher earnings, without elevated levels of NPAs and NCOs, combined with better than peer capital levels could result in positive rating momentum over time. The additional use of wholesale funding, largely in combination with deposit runoff or via additional balance sheet growth, asset quality issues such as elevated NPLs or NCOs, or reported regulatory capital levels falling below peer averages, could result in rating pressure.

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Methodologies