KBRA Affirms Ratings for Banesco USA

5 Dec 2023   |   New York


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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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1002773

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