S&P Global Ratings has revised its view of the strategic importance of the subsidiaries of both Banco Santander S.A. (Santander) and Banco Bilbao Vizcaya Argentaria S.A. (BBVA) for their respective groups. This decision has no rating implications for the parents or the subsidiaries--with the exception of BBVA's Turkish subsidiary, Garanti BBVA, whose outlook we recently revised to negative due to our revised assessment of its strategic importance. We consider that this recalibration brings our view of Santander and BBVA subsidiaries' group status more in line with similar assessments for other banking groups. These other groups, in our opinion, have a greater willingness to provide extraordinary support in the form of capital and funding to their subsidiaries.

Our revised view is that neither Santander nor BBVA should have core subsidiaries. We define core subsidiaries as not only integral to a group's current identity and future strategy, but also as likely to receive support from other group entities under any foreseeable circumstances. We now consider that the two banks' most significant foreign operations--Santander's Brazilian and U.K. subsidiaries and BBVA's Mexican subsidiary--are highly strategic to their groups, rather than core. The distinction is a subtle one. We expect a highly strategic subsidiary to receive support from group members under almost all foreseeable circumstances, while we expect a core subsidiary to receive such support under all foreseeable circumstances. We also applied our revised view to the banks' other subsidiaries, reflecting their relevance compared with the subsidiaries we now consider highly strategic (see table 1).

Table 1

Our decision is largely neutral to the ratings, as most of our ratings on the subsidiaries already included limited or no uplift from potential extraordinary group support.

The stance of Santander and BBVA toward support for their subsidiaries, however, is a positive factor in our overall assessments of how the two banks manage risks. While our ratings acknowledge that the banks face above-average risks because of their geographic footprints, they also reflect the banks' management of those risks, including the benefits they derive from geographic diversification and the risk tolerances they are putting in place for investing abroad.

Our Ratings On Santander's And BBVA's Subsidiaries Have Generally Incorporated Weaker Extraordinary Support Than Our Ratings On Their Peers

Over the years, both Santander and BBVA have showed continuous commitment toward their subsidiaries: integrating them after acquisitions, aligning them with group standards, sharing know-how and best practices, aligning culture, and providing capital to support the growth and development of their franchises. There are several examples of this support, but to name just a few:

• In the U.S., Santander has injected several billions into its consolidated entity since 2010.
• In the U.K., following the acquisition of Abbey National in 2004, Santander invested heavily to restructure the bank, replace its legacy systems, and finance the 2008 acquisitions of Alliance & Leicester and parts of Bradford & Bingley, and even the subsequent aborted acquisition of Williams & Glynn.
• BBVA has also provided substantial capital support to its U.S. operations since it acquired them in 2007 to improve operational performance and offset the losses incurred during the U.S. financial crisis.

However, Santander and BBVA have also both shown a more proactive approach to managing their foreign holdings. They have sold subsidiaries when they considered it made economic sense. This was the case for BBVA's recent sale of its operations in Chile, where the subsidiary's limited scale prevented it from achieving the desired return, and the price offered by the acquirer exceeded the value the bank thought it could generate by managing the subsidiary itself. BBVA has also previously divested its operations in Panama, while Santander did the same some years ago with its operations in Colombia and Venezuela. Additionally, Santander in particular has a history of selling minority stakes and then buying them back a few years later, as it did with its asset management business Santander Asset Management Investment Holdings Ltd., and now plans to do with its Mexican subsidiary.

In addition, while both parents could have incentives to provide financial support to subsidiaries in trouble, we also know that there are situations when they may decide not do so, even if they have the means. Both Santander and BBVA have said that they would most likely not back their subsidiaries if they were to face a systemic, rather than idiosyncratic, crisis. The most extreme example of a systemic event would be a default of the host country. This is a particularly relevant scenario for Santander and BBVA to consider given their material emerging market presences. In such an event, we do not expect the parents to provide additional financial support to the subsidiaries and that is why we have historically capped the ratings on several of them at the level of the foreign currency sovereign rating on the host countries.

But there could be other situations less extreme than a sovereign default scenario when parents could decide not to provide support to subsidiaries. We understand, for example, that subsidiaries of both groups have their own recovery plans, which list the initiatives they would take to restore their financial positions in stress scenarios, without assuming assistance from their respective parents. In those circumstances, parents could have an incentive to protect their investments and reassure the creditors of other subsidiaries, but they would have the flexibility to decide either way.

Historically, our ratings on the subsidiaries of Santander and BBVA have benefited less than the subsidiaries of other global banking groups from potential extraordinary group support from their parents. The examples below show the numerous core subsidiaries of some of the large global banks, which, as a result of their core status, generally have the same rating as their parents (see table 2).

Table 2

The Santander And BBVA Subsidiaries Are Independent Enough For The SRB To Approve An MPE Resolution Plan

Santander and BBVA are two of the few European banks for which the EU's central resolution authority, the Single Resolution Board (SRB), has approved a resolution strategy based on a multiple point-of-entry (MPE) approach. In our view, this reflects how these two banks manage their businesses and presences abroad, through local subsidiaries that, despite benefiting from being part of large global organizations and operating in fairly close alignment with their parents, are significantly financially and operationally independent.

This is not the norm for less internationally diverse banking groups, where funding and capital, for example, are as centrally managed as possible, in what is probably a lower-cost strategy. However, promoting the self-sufficiency and financial independence of subsidiaries has been a deeply embedded practice for Santander and BBVA and is a keystone of their risk management, in our view. Both groups have operated in this way since their initial expansion into Latin America decades ago, and we understand the practice was also encouraged by their regulator at that time, the Bank of Spain.

Conscious that they operate in geographies subject to above-average economic risks and volatility, the goal of both parents is to run the groups in a way that minimizes potential contagion risks within the group if any of the countries where they operate were to face stress. Eliminating contagion risk completely is not possible as subsidiaries share the group brand and parents would always have to deal with potential reputational damage if a subsidiary came under stress, but it is possible to limit it.

We therefore think that the banks' footprints in different geographies, and the limited financial and operational interconnectedness among the different group members, make them appropriate for an MPE resolution strategy. The possibility of an MPE resolution implies that the group could be split into parts, which could then be resolved individually (and, in most cases, by a different resolution authority) if any of them were to reach the point of nonviability. In Santander's case, the SRB has even contemplated this for subsidiaries located in other EU countries, including eurozone members. It is particularly noteworthy that Santander's subsidiary in Portugal (a eurozone member) has also been signaled as a separate point of entry in a resolution scenario.

As a result, each point of entry located in jurisdictions where resolution frameworks are in place will be required to hold a buffer of bail-inable instruments that would allow authorities to better handle a potential resolution scenario. The parent bank, in turn, will build up the minimum requirement for own funds and eligible liabilities (MREL) needed to afford the orderly resolution of the business under its resolution perimeter and the potential loss of the capital investment in subsidiaries abroad.

The Revisions To Group Status Have No Immediate Implications For Other Banks

The repositioning of the group status of subsidiaries of Santander and BBVA has no immediate impact on the handful of other European banking groups that will also follow an MPE-led resolution approach: U.K.-headquartered HSBC Bank PLC, Portugal's Banco Comercial Portugues S.A. (BCP), the Austrian bank Erste Group Bank AG (Erste), and Slovenia's Nova Ljubljanska Banka D.D. (NLB). This is because we don't see the resolution strategy as the key factor in the availability of parental support, but also because some of the so-called MPE approaches are a hybrid between single and multiple points of entry, in that the parent downstreams the MREL required to its material operating subsidiaries.

We therefore continue to believe that the Hong Kong, U.K., Canada, France, and U.S. operations, among others, remain core to HSBC, as does the Czech subsidiary Cesca Sporitelna A.S. to Erste, meaning that we believe they will remain supported by their parents under all foreseeable circumstances. We do not rate subsidiaries of BCP or NLB, so we do not assign them a group status.

Related Research

• Garanti BBVA And Garanti Finansal Kiralama Outlooks Revised To Negative; Ratings Affirmed, July 31, 2019
• Bulletin: Banco Santander Announces Plan To Acquire Remaining 25% Stake In Mexican Subsidiary, April 12, 2019
• Banco Bilbao Vizcaya Argentaria, Jan. 25, 2019
• Banco Santander S.A., Dec. 27, 2018
• Bulletin: Ratings on BBVA Not Immediately Affected by Agreement to Divest Real Estate Portfolio in Spain and Chilean Operations, Nov. 30, 2017
• Banco Bilbao Vizcaya Argentaria Chile 'BBB+/A-2' Ratings Placed On CreditWatch Developing On Its Planned Sale, Nov. 30, 2017
• Banco Bilbao Vizcaya Argentaria (Panama) 'BB+/B' Ratings Placed on Watch Developing on Its Planned Buyout by Grupo Aval, July 25, 2013