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 continued stable asset quality including negligible credit costs with Banesco reporting a net recovery of $2 million (0.1% of average assets) through 9M24 as compared to an $8 million provision for credit losses (0.2% of average assets) reported in 2023 contributing to the recent positive earnings trends. Furthermore, Banesco has made remarkable strides in managing operating leverage with its efficiency ratio trending to a five-year low at 58% through 9M24 from the scale achieved through balance sheet growth supplemented by the U.S. Treasury’s Emergency Capital Investment Program (“ECIP”) funds and prior technological investments. Notably, operating expenses as a percent of average assets declined to 2.1% through 9M24 from 2.5% in 2022, benefiting ROA.

Banesco has a unique funding profile, which includes approximately 34% from international retail and corporate clients, with deposit rates closely tied to the movement in the Fed funds rate, enabling the bank to effectively reprice its deposit book, benefiting from the recent Fed rate cuts. The bank expects NIM to continue improving as the interest rate curve normalizes going forward. Banesco is well-positioned with diverse revenue streams steadily increasing, favorable growth prospects, and earnings potential with prudently managed credit quality supported by an experienced management team with a strong execution track record. Banesco projects organic asset growth reaching $6 billion by 2026 with a strategic focus on developing deep and impactful customer relationships. In conjunction with its receipt of $250 million in perpetual preferred equity through the ECIP program, Banesco has received continuous capital investments from its shareholders, totaling approximately $45 million since 2022, providing meaningful common equity support towards the bank's recent growth. With that said, KBRA recognizes Banesco's below average TCE of 6.0%, though view the bank's capital position as sufficient in part due to the perpetual and low-cost nature of the preferred equity provided by the ECIP program. 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% ( 12.8 % at 3Q24).

Rating Sensitivities

Sustainable profitability tracking in line with higher rated peer category paired with strong credit quality and conservative capital management could result in positive rating momentum over time. In the event of profitability impacted by credit costs with asset quality deterioration beyond expectations, above average utilization of wholesale funding, and capital levels tracking below peers, the ratings could become pressured.

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