NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-and Short-term IDRs of Banesco USA (BNSC) at 'B+/B', respectively. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS - IDRs, VR
BNSC's IDRs are currently constrained by low levels of profitability, its geographic and product concentration to the South Florida CRE market, and exposure to non-domestic credit markets. Conversely, the capital base and stable funding profile provide support to the credit profile and ratings. Although credit performance has remained solid over the past seven quarters and dramatically improved since the financial crisis, asset quality indicators may be benefitting from the rapid loan portfolio growth BNSC has experienced since 2011.
BNSC remained profitable during 2013, although earnings have trended downward since 2011 and are considered a key rating constraint. BNSC reported an ROA of just 33bps in 2013. Earnings were constrained by very high operating expenses due to elevated levels of personnel and occupancy expenses associated with hiring executive level and BSA related employees during 2013. Fitch expects that operating costs are likely to continue to constrain earnings potential in the near term as additional costs associated with the BSA remediation program will weigh heavily on earnings throughout 2014. Fitch also expects the NIM to decline in the near term due to the diminishing impact of discount accretion related to the purchase of loans from Security Bank N.A in 2012.
Fitch considers BNSC's credit risk profile to be reflective of the rating. The company has exhibited strong growth, particularly in CRE and commercial credits, in recent years. Moreover, Fitch also considers BNSC to be product and geographically concentrated as CRE represents 400% of capital and is mainly in the Miami-Dade MSA. While the South Florida CRE market has exhibited slowly stabilizing real estate values, the office real estate sector, which is a sizeable portion of the CRE portfolio, has not exhibited any material level of recovery.
Fitch also remains concerned about BNSC's increasing exposure to commercial and CRE credits in Puerto Rico due to the commonwealth's fragile economy and recessionary climate. Additional credit risk considerations include the effects of sovereign risk in the international loan portfolio which makes up approximately 11% of total loans. Over half of the international portfolio consists of exposure to borrowers in Venezuela and is mainly secured by residential, and to a lesser extent CRE properties in South Florida. Although economic instability remains a concern in Venezuela, credit risk is offset by the strong level of collateral protection and prudent non-resident credit underwriting standards.
BNSC's credit quality has improved. Asset quality indicators compare positively to that of similarly rated peers; however, Fitch believes the measures may be understated given that the portfolio is relatively unseasoned due to level of loan growth in recent years. In the first quarter of 2014, total nonperforming assets (inclusive of accruing TDRs) have declined to 277 bps of loans and foreclosed real estate through a combination of pay downs, loan sales and workout strategies, while NCOs have averaged three bps of loans over the past four quarters. These measures are well below the peak levels experienced during the financial crisis of roughly 9.83% and 1.80%, respectively.
BNSC's credit rating benefits from a solid capital structure. As of year-end 2013, the company's Fitch core capital/risk-weighted assets ratio was 13.37% and its tangible common equity/tangible assets ratio was 9.4%. Fitch considers the capital base sufficient to support risks within the business mix; however, further balance sheet growth coupled with limited profitability have the potential to adversely impact capital ratios. Moreover, the lack of access to external capital is considered a rating constraint.
Fitch views BNSC's funding profile favorably. The funding structure is largely core deposit driven, and benefits from a high volume of international deposits which make up 61% of total deposits. The majority of international funding is sourced from Venezuelan depositors who have turned to U.S. banks as a safe haven. These deposits typically have a very low attrition rate, limited rate sensitivity and provide a stable source of low cost funding. In an effort to reduce reliance on Venezuelan funding, management has been working to grow domestic deposits in conjunction with loan growth. Fitch views the diversification of funding sources positively. Although the loan portfolio has grown significantly since 2011, balance sheet leverage remains below peer levels as loans makeup 75.5% of deposits. Furthermore, BNSC maintains a high level of liquid assets to support immediate cash needs. Fitch believes BNSC is well positioned to maintain its liquidity position, fund impending growth/runoff and address any potential shortfalls in the normal course of business.
Fitch views BNSC's relationship with the Banesco Group positively. The brand affiliation has supported BNSC's deposit raising efforts and also provides a more sophisticated risk management infrastructure which is comparable to larger institutions.
The Stable Outlook reflects BNSC's stable credit performance and lowered growth expectations in light of the shift in strategy toward addressing issues related to BSA/AML oversight. Going forward, management anticipates controlled growth in key business segments with no expectations for further acquisitions over the near-term.
RATING SENSITIVITIES - IDRs, VR
Sustained and improved profitability combined with the maintenance of strong credit performance and credit profit would be considered positive rating drivers.
Given BNSC's ratings are relatively low on the rating scale, Fitch does not envision much downward rating pressure. However, ratings could be negatively affected if BNSC continues to grow in high risk lending segments, in excess of manageable levels or if Fitch believes that growth is a result of compromised underwriting. Considering the recent trends and updated growth plans, Fitch considers this a relatively low likelihood.
Fitch notes that there is risk in Venezuelan depositors seeking other U.S. based-banking institutions to deposit their monies in the event of concern regarding BNSC or the Banesco Group. However, to date, BNSC has actually benefited from its association with the Banesco brand, despite volatility in Venezuela, as demonstrated by its stable deposit base. Nonetheless, BNSC's ratings may be vulnerable to changing depositor behavior, if Banesco Group itself were the subject of concern.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
BNSC has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, BNSC is not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support. Historically, BNSC's principal shareholders have demonstrated a willingness to provide capital; however, Fitch's rating analysis does not assume capital support from the shareholders
RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
BNSC's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.
KEY RATING DRIVERS - LONG AND SHORT-TERM DEPOSIT RATINGS
BNSC's uninsured deposit ratings are rated one notch higher than the company's IDR because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of long- and short-term deposits issued by BNSC are primarily sensitive to any change in BNSC's long- and short-term IDRs.
Fitch affirms the following ratings:
Banesco USA (BNSC)
--Long-term IDR at 'B+'; Outlook Stable;
--Short-term IDR at 'B';
--Long-term deposits at 'BB-';
--Short-term deposits at 'B';
--Viability at 'b+';
--Support at '5';
--Support Floor at 'NF'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Rating FI Subsidiaries and Holding Companies