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Fitch Ratings Statement
Monterrey, NL - (November 29, 2017): Fitch Ratings affirmed the long-term international ratings (IDRs) of Banco de Costa Rica (BCR) in 'BB' and the long-term national ratings in ' AA + (cri) '. The Outlook is Stable. In addition, Fitch maintained the viability rating (VR) of 'bb-' in Negative Observation. A complete list of qualifications is presented at the end of this release.
The Negative Observation of the VR reflects that the bank maintains corporate governance challenges after a group of senior executives were arrested on charges of embezzlement, related to the approval of a problematic loan. The bank activated the succession plan and immediately appointed new executives with a long track record within the entity. However, appointments are temporary and investigations are still ongoing. Even after the downgrade of October 19, 2017, BCR's VR could be affected if its reputation deteriorates in a way that weakens its funding and liquidity profile or the quality of its management.
KEY FACTORS OF RATINGS IDRs, Debt Issues and National Ratings: IDRs, debt issuance ratings and national ratings are based on the potential support of the Costa Rican government [BB Stable Perspective], due to the explicit guarantee of the Costa Rican State for all your liabilities. As expressed in the Organic Law of the National Banking System, all senior debts of state banks are guaranteed by the State and the government must collaborate with the entities. This explicit guarantee allows these ratings and their outlook to be aligned with the sovereign ratings.
BCR's VR is highly influenced by its appetite for risk, which, in Fitch's opinion, has been significantly weakened due to recent events at the corporate governance level and ongoing investigations; the previous thing that evidences risk controls weaker than those considered initially. This rating also reflects the stability of its deposit and funding base, which has been resilient. In addition, the VR is moderately influenced by the bank's strong franchise, capitalization and quality of good assets, moderate profitability, as well as weaknesses in corporate governance and administration. The bank benefits from an atomized and stable deposit base due to the explicit guarantee of the State. Thanks to this guarantee, the bank's deposits have been stable in times of reputation stress. Also, the entity has taken additional measures to preserve the diversification of its funding while maintaining a liquid balance.
During 2017, BCR has shown significant governance deficiencies due to the fact that the accusations against members of the Board of Directors were not properly mitigated, which caused a crisis in the reputation of the bank. Although this event has not significantly affected the financial performance of BCR or its financing profile, it does illustrate significant weaknesses in its corporate governance framework and in the supervision of the Board. This has led to questions about risk controls and the general process of granting corporate loans. It also distracts the executive bodies of the entity in the fulfillment of its usual strategic objectives.
BCR is the second systemically important state-owned bank, with a market share of 19.4% in terms of assets and 21.1% in deposits from the public, based on unbound data as of September 2017. BCR has a banking business model universal but with a relevant orientation to wholesale credit activities. The business segments represent about two thirds of the loan portfolio, followed by real estate (construction and mortgages, 23%) and consumer loans.
The bank's profitability remains moderate and stable. Operating income over average assets remains above the industry average due to the improvement in operating efficiency in the last 3 years. As of September 2017, this indicator was 1.1% while the industry average 0.6%. Like other local banks, profitability is pressured by the upward trend in funding costs and slow adjustments to the local reference rate. The net interest margin has contracted in the industry, while the expenses for provisions have increased. Expenditures for loan provisions remain below the industry average because their exposure to personal loans is lower and despite the deterioration of the loan to Sinocem.
In Fitch's opinion, BCR maintains a good portfolio quality that is reflected in a low loan level. The main risks are the high dollarization of loans and the potential deterioration of some large clients due to their focus on corporate and business segments. However, the bank's portfolio is well diversified by economic sector and its concentration in large debtors is moderate. As of September 2017, overdue loans (past due to more than 90 days) are at the same level as the industry: 2.1%, but Fitch expects it to increase due to Sinocem.
The capitalization of BCR has been stable in the last 5 years, maintaining an acceptable surplus with respect to the minimum regulatory level. The stability of the capital indicators benefits that since 2015 the credit growth is lower. Fitch expects the Base Capital indicator according to Fitch to hold above 12% in 2018 as profitability and growth are expected to be moderate.
Support and Support Floor Qualification:
The Support Rating (SR) of '3' reflects Fitch's opinion that there is a moderate likelihood of support from the State. In addition, the bank has a clear role for public policies and the explicit support of the State. The SR level is limited by the sovereign rating. The support floor is matched to the sovereign rating given the explicit guarantee of the government and the systemic importance of the bank.
SENSITIVITY OF THE RATINGS
IDRs, National Ratings, SR, Support Floor and Debt Issues:
Changes in Costa Rica's sovereign ratings could result in similar movements in the IDRs, SR, Support Floor and debt issuance rating of BCR. BCR's national ratings have a lower likelihood of change as the government will continue to guarantee the bank's senior liabilities, and Fitch does not expect a change in the bank's solvency compared to other local peers.
The VR could be reduced due to a significant weakening of the bank's credit fundamentals as a result of the emergence of additional events linked to recent corporate governance events. Especially, notable negative implications in its still strong funding and liquidity profile could lead to a downgrade of the rating, although this is not Fitch's base scenario. On the contrary, the VR could be affirmed and the Negative Observation could be removed if the standards of corporate governance of the bank and its management framework are normalized, including the permanent appointment of senior executives, so that the risks of deterioration of its financial profile and of business are largely contained.
Fitch affirmed the following BCR ratings:
- International long-term rating in foreign currency in 'BB'; Stable Perspective;
- Short-term international currency rating in 'B';
- Long-term international local currency rating in 'BB'; Stable Perspective;
- Short-term international currency rating in 'B';
- International qualification of senior unsecured debt in 'BB';
- Support Rating in '3';
- Floor of Support in 'BB';
- National long-term rating in 'AA + (cri)'; Stable Perspective;
- National short-term rating in 'F1 + (cri)';
- Program of Emissions of Standardized Bonds of the Bank of Costa Rica 2012 in 'AA + (cri)';
- Program of Emissions of Standardized Bonds Dollars-BCR 2016 in 'AA + (cri)';
- Colones-BCR 2016 Standardized Bonds Emissions Program in 'AA + (cri)';
- Commercial Paper Emissions Program Dollars-BCR 2016 in 'F1 + (cri)';
- Commercial Paper Emissions Program Colones-BCR 2016 in 'F1 + (cri)'.
Fitch maintained the following rating in Negative Observation:
- Feasibility Rating of 'bb-'.