New York, January 26, 2023 -- Moody's Investors Service ("Moody's") has today affirmed Itau Unibanco S.A.'s (IU) long-term local and foreign currency deposit ratings at Ba2, following the affirmation of the bank's Baseline Credit Assessment (BCA) and Adjusted BCA at ba2. Moody's also affirmed the bank's short-term local and foreign currency deposit ratings at Not Prime and the foreign currency senior unsecured MTN program rating at (P)Ba2. Moody's also affirmed the bank's long-term and short-term local and foreign currency Counterparty Risk Ratings at Ba1 and Not Prime and long-term and short-term Counterparty Risk Assessments at Ba1(cr)/Not Prime(cr). The outlook on IU's ratings remains stable.
As part of today's rating action Moody's has also affirmed all ratings assigned to Itau Unibanco Holding S.A. (IUH), including its local currency issuer rating at Ba3. All ratings assigned to the MTN programs and outstanding debts issued by Itau Unibanco S.A. (Cayman Islands) and Itau Unibanco Holding S.A. (Cayman Islands) were also affirmed. The outlook on Itau Unibanco and Itau Unibanco Holding's ratings remains stable.
A full list of affected ratings and assessments is at the bottom of the press release.
RATINGS RATIONALE
The affirmation of the ratings and assessments assigned to IU reflects Moody's view that the bank's fundamental credit strengths remain resilient through economic cycles, including the recent recession caused by the Covid-19 pandemic. The ba2 BCA assigned to IU is supported by the bank's highly diversified earnings structure, both in terms of lines of business and revenues from operations domiciled abroad, as well as good asset quality metrics that are lower than that of its private-owned peers, reflecting its disciplined risk appetite and risk management profile. The bank's ample access to low-cost funding and conservative liquidity management are strong credit drivers to the ba2 BCA.
By affirming the BCA, Moody's also incorporates the view that IU's asset quality metrics will weaken and its profitability will decline over the first half of 2023 as a result of a challenging economic environment forecasted for the year. Asset risk will continue to rise by the effect of a prolonged period of high policy rates, which will likely reduce borrowers' ability to repay loans; however, the increase in loan delinquency will likely be gradual, reflecting IU's robust risk management policy. The need to create additional provisions will likely strain on the bank's profitability and on its capacity to generate capital internally. IU's tangible capitalization remains below that of its global peers, despite the bank's solid earnings retention policy and steady improvement in tangible common equity ratio over the past two years.
The ba2 BCA and Ba2 deposit ratings also acknowledge the bank's long-track record of sound risk management practices showed through good asset quality metrics, which have remained consistently below the ratios of its private-owned peers in the past eight years. In September 2022, IU's 90-day problem loans to gross loans stood at 3.36%, up by 59 bps since December 2021, while for the other two large private commercial banks in Brazil, this ratio averaged 4.32% in September 2022. The deterioration in the bank's loan delinquency stems partly from growth in higher-risk assets, including credit cards, overdraft accounts and consumer loans, a similar dynamic observed at its peer banks in Brazil. Additionally, it also reflects weakening macroeconomic conditions in the country, following the quick recovery of activities after business reopening in 2021. This steadily lower-than-peers' problem loan ratio also benefits from a high portfolio diversification, a large share of collateralized loans in IU's retail portfolio (53% of retail loans in Q3 2022), factors that help to mitigate these negative pressures on asset risk. Despite the rise of problem loans, loan loss reserves remained high, accounting for 5.4% of gross loans and 161.2% of problem loans in Q3 2022.
IU's sound risk management governance has protected the bank's capital position from losses during periods of economic downturn. In September 2022, Moody's capital ratio of tangible common equity (TCE) as a percentage of risk weighted assets (RWA) for IU was 8.1%, an improvement from 6.7% in the same period last year and 5.7% in Q3 2020. This improvement reflected an increase in profit retention due to a rebound of economic activity in 2021 and lower dividend distributions since 2020. In the next six months, IU's profitability will likely benefit from higher margins with clients. Despite its recent improvement, the ratio is still below that of global peers' average of 13.5% (as of June 2022) and below IU's average ratio of 9.5% between year-end 2017 and 2019. The expected weakening of economic activity in 2023 will likely reduce the pace of loan origination relative to one year prior, resulting in lower capital allocation.
The Ba2 deposit ratings assigned to IU incorporates Moody's assessment of high government support to the bank, reflecting its well-established market position and its relevance to the country's payment system. Despite that, IU's deposit ratings do not benefit from any uplift because the bank's BCA is already at the same level as the Government of Brazil's Ba2 sovereign rating. The Ba3 issuer rating assigned to IUH, the bank holding company of IU, incorporates one notch of structural subordination off its operating bank deposit ratings of Ba2.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
As IU's ba2 BCA and Ba2 deposit ratings are at the same level as Brazil's Ba2 bond rating, a ratings upgrade is unlikely at this time. The bank's BCA and ratings could be upgraded if Brazil's sovereign bond rating was upgraded.
Downward pressure on IU's BCA and ratings would materialize if the bank reports a sustained weakening of its capital position as a result of growing asset risks and credit costs that could materially hurt profitability. A robust deterioration in asset quality, caused by increased risk appetite, or a consistent reduction in profitability could also have negative pressure on IU's BCA and ratings. A downgrade of Brazil's sovereign bond rating would also result in a downgrade of IU's BCA and ratings.
IUH's ratings are notched off of IU's adjusted BCA, and therefore, IUH's ratings would move in tandem with IU's adjusted BCA. Since IU's ratings are at the same level of Brazil's government bond rating, the ratings assigned to IUH would face downward pressure if Brazil's sovereign rating is downgraded or if IU's asset quality, capital and profitability weaken materially.
METHODOLOGY USED
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
LIST OF AFFECTED RATINGS
Issuer: Itau Unibanco Holding S.A.
..Affirmations:
.... ST Issuer Rating (Local Currency), Affirmed NP
.... LT Issuer Rating (Local Currency), Affirmed Ba3 STA
....Subordinate Medium-Term Note Program (Foreign Currency), Affirmed (P)B1
....Pref. Stock Non-cumulative Medium-Term Note Program (Foreign Currency), Affirmed (P)B2
....Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)Ba3
....Other Short Term (Foreign Currency), Affirmed (P)NP
Outlook Actions:
....Outlook, Remains Stable
Issuer: Itau Unibanco Holding S.A. (Cayman Islands)
..Affirmations:
....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed Ba3 STA
....Subordinate Regular Bond/Debenture (Foreign Currency), Affirmed B1 (hyb)
....Subordinate Regular Bond/Debenture (Foreign Currency), Affirmed Ba3
....Pref. Stock Non-cumulative (Foreign Currency), Affirmed B2 (hyb)
....Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)Ba3
....Subordinate Medium-Term Note Program (Foreign Currency), Affirmed (P)B1
....Pref. Stock Non-cumulative Medium-Term Note Program (Foreign Currency), Affirmed (P)B2
....Other Short Term (Foreign Currency), Affirmed (P)NP
Outlook Actions:
....Outlook, Remains Stable
Issuer: Itau Unibanco S.A.
..Affirmations:
.... Adjusted Baseline Credit Assessment, Affirmed ba2
.... Baseline Credit Assessment, Affirmed ba2
.... ST Counterparty Risk Assessment, Affirmed NP(cr)
.... LT Counterparty Risk Assessment, Affirmed Ba1(cr)
.... ST Counterparty Risk Rating (Foreign Currency), Affirmed NP
.... ST Counterparty Risk Rating (Local Currency), Affirmed NP
.... LT Counterparty Risk Rating (Foreign Currency), Affirmed Ba1
.... LT Counterparty Risk Rating (Local Currency), Affirmed Ba1
.... ST Bank Deposit (Foreign Currency), Affirmed NP
.... ST Bank Deposit (Local Currency), Affirmed NP
.... LT Bank Deposit Rating (Foreign Currency), Affirmed Ba2 STA
.... LT Bank Deposit Rating (Local Currency), Affirmed Ba2 STA
....Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)Ba2
Outlook Actions:
....Outlook, Remains Stable
Issuer: Itau Unibanco S.A. (Cayman Islands)
..Affirmations:
.... ST Counterparty Risk Assessment, Affirmed NP(cr)
.... LT Counterparty Risk Assessment, Affirmed Ba1(cr)
.... ST Counterparty Risk Rating (Foreign Currency), Affirmed NP
.... ST Counterparty Risk Rating (Local Currency), Affirmed NP
.... LT Counterparty Risk Rating (Foreign Currency), Affirmed Ba1
.... LT Counterparty Risk Rating (Local Currency), Affirmed Ba1
.... LT Deposit Note/CD Program (Foreign Currency), Affirmed (P)Ba2
.... Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)Ba2
REGULATORY DISCLOSURES
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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
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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://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
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