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Moody's: Santander Río to retain credit strength despite growth aims, Citi buy

Banco Santander Río SA should be able to achieve its growth targets without significantly compromising its credit strengths, even with its incoming acquisition of Argentina-based Citibank NA's retail banking business, Moody's said.

In a statement, the rating agency argued that Santander Río is well positioned to achieve new growth opportunities under Argentina's improving operating environment, which would enable it to boost its market position. The bank is aiming to boost its loan market share to 15% by 2020 from the current 10.3% through both loan book growth and the purchase of Citi's retail unit. Moody's estimates Santander Río's loan market share to rise 11.5% with the acquisition alone.

"The bank should be able to achieve its growth plans without weak[en]ing its healthy asset quality metrics, and its capitalization will likely be fully replenished within two years, thanks to its robust profitability," Moody's said.

However, the bank faces challenges due to possible capital deterioration following the impending Citi purchase, as well as its relatively high operating expenses and rising exposure to relatively high-risk retail customers, Moody's noted.

Still, the Citi tie-up will ultimately yield operating synergies that will boost earnings, especially in cash, and wealth and management services. The purchase is expected to give Santander Río access to high-income retail clients and organic growth in its branch network.

"The combined bank, which will have almost 3.5 million retail clients (an increase of 17% clients from current levels) and 220,000 corporate customers, will focus on generating new business in priority market segments, including offering financial services to high income individuals and small and medium size companies (SMEs)," the rating agency noted.

Moody's added that the bank has the expertise to successfully manage the integration and the risks that come with it.

Meanwhile, Moody's noted that Santander Río's poor efficiency exposes its overall profitability to looming lending rate declines, thus efforts to raise productivity and lower costs are needed. The bank unveiled a three-year plan to invest 20 billion Argentine pesos in initiatives to boost efficiency, specifically reducing its cost-to-income ratio to 45% by 2020. The rating agency also expects Santander Río's integration with Citi to result in better efficiency metrics through increased sale and efforts to reduce operating infrastructure overlaps.

"However, the bank will only be able to achieve its goal for operating efficiency if [it] also meets its aggressive target for market share, which will substantially improve its economies of scale," Moody's said.

As of Jan. 17, US$1 was equivalent to 15.88 Argentine pesos.