Fitch Takes Rating Actions on Private-Sector Venezuelan Banks

NEW YORK--()--Fitch Ratings has taken rating actions on the following private-sector Venezuelan banks and one holding company subsequent to the downgrade of the sovereign's Issuer Default Ratings (IDRs):

--Banesco, Banco Universal, CA (BBU);

--Banco Provincial, S.A., Banco Universal (Provincial);

--Mercantil, C.A. Banco Universal (Mercantil);

--Mercantil Servicios Financieros (MSF);

--Banco Occidental de Descuento (BOD);

--Banco del Caribe, C.A. Banco Universal (Bancaribe);

--Banco Exterior, C.A. Banco Universal (Exterior);

--Banco Nacional de Credito C.A. (BNC).

A full list of rating actions follows at the end of this press release.

These rating actions follow the downgrade of Venezuela's IDRs to 'CCC' from 'B'. International ratings have been downgraded in line with the sovereign. As with other emerging market commercial banks in this rating category, the operating environment is a constraint to bank ratings. In addition, the significant level of government intervention and high level of exposure to sovereign securities further undermines the financial flexibility of Venezuelan banks.

All long-term national ratings have been downgraded considering the relative strengths and weaknesses of each bank. All short-term national ratings have been either downgraded or affirmed accordingly.

These downgrades reflect the severe deterioration in the operating environment and the Venezuelan economy's reduced capacity to respond to external shocks, such as a sustained drop in oil prices. Additionally, the banks' lower profitability, increased exposure to retail and compulsory loans (segments more vulnerable to an economic shock), as well as their reduced cushion to absorb unexpected losses were also considered.

KEY RATING DRIVERS - IDRS, VRS AND NATIONAL RATINGS

These entities are the seven largest private sector universal commercial banks in Venezuela, with operations primarily in the country. All of these banks' Viability Ratings (VRs), or standalone intrinsic financial strengths, drive their IDRs and do not take into account either institutional or state support.

The operating environment is the key factor constraining the VRs of all Venezuelan banks. Fitch recognizes that the current set of foreign exchange controls have helped preserve the system's funding base relative to past periods of severe macroeconomic imbalances before these controls were implemented.

All national ratings for each bank consider the same strengths and weaknesses as international ratings, but are based on the relative creditworthiness of entities within Venezuela.

BBU

Despite sound profitability (even when adjusted for inflation) and loan quality indicators, BBU's international ratings are limited by the operating environment. High exposure to the Venezuelan public sector, large asset and liability tenor mismatch due to the short contractual maturities (mostly demand deposits) of its funding base also weigh on the bank's ratings. BBU's ratings also consider its adequate liquidity and capitalization.

PROVINCIAL

Provincial's ratings are supported by its solid profitability (even when adjusted for inflation) and its strong franchise compared with its peers. The ratings also incorporate the bank's conservative risk management and operational support from Spain's Banco Bilbao Vizcaya Argentaria (BBVA), its majority shareholder, which has a 55% stake in the bank.

However, the bank's ratings are limited not only by the operating environment (international ratings) but also, by a large asset and liability tenor mismatch given that the vast majority of funding consists of demand deposits and short-term time deposits.

MERCANTIL

Although Mercantil's credit risk profile relative to domestic peers has been resilient, its international ratings are limited by the operating environment. High exposure to the Venezuelan public sector, large asset and liability tenor mismatch due to the short contractual maturities (mostly demand deposits) of its funding base and a decline in the bank's overall loss absorption capacity in recent years, as measured by its equity/assets ratio and loan loss reserves/gross loans, also weigh on the bank's ratings.

In addition, Mercantil's ratings consider the strength of its balance sheet, management's experience in dealing with the inherently volatile operating environment in Venezuela, and its ample market share and strong franchise which allowed the bank to maintain a relatively stable deposit base.

MSF

MSF's national ratings reflect the geographical diversification of its operations, adequate liquidity and the holding company's low double leverage. The ratings also take into account the strengths of its main subsidiary, Mercantil.

As MSF's cash flow is dependent on Mercantil, which by local regulation can only pay dividends up to 50% of net income, rather than its own generation of cash flows, the holding company's long-term national rating is one notch below its main operating subsidiary's national rating. The ratings assigned to MSF's issuances in the local market are in line with its national ratings as these are all senior unsecured debt issuances.

BOD

BOD's ratings incorporate a history of volatile profitability, capitalization, and asset quality indicators relative to peers. With the exception of liquidity, the bank's financial metrics are weaker than other large universal commercial banks in Venezuela. High exposure to the Venezuelan public sector, large asset and liability tenor mismatch due to the short contractual maturities (mostly demand deposits) of its funding base and a decline in the bank's overall loss absorption capacity in recent years, as measured by its equity/assets ratio and loan loss reserves/gross loans, also weigh on the bank's ratings.

The bank is controlled by Cartera de Inversiones Venezuela (CIV), a diversified holding company with interests in financial and nonfinancial companies.

CARIBE

Notwithstanding Bancaribe's resilient performance and stable asset quality indicators, its international ratings are limited by its operating environment and a less robust franchise compared to larger Venezuelan banks. High exposure to the Venezuelan public sector, large asset and liability tenor mismatch due to the short contractual maturities (mostly demand deposits) of its funding base also weigh on the bank's ratings. Bancaribe's ratings also incorporate a strengthening of capital ratios in 2013, following pressures related to high nominal asset growth in recent years and adequate liquidity.

Scotiabank has a minority stake of 27% in Bancaribe.

EXTERIOR

Exterior's ratings reflect its solid loan quality indicators and profitability ratios (even when adjusting for inflation). Liquidity and capitalization remain adequate, though weaker than some of its larger domestic peers. Its ratings are limited not only by the operating environment (international ratings) but also, by a less robust franchise compared to larger banks. Its ratings are also limited by a significant asset and liability tenor mismatch, given that the vast majority of its funding is represented by demand deposits and short-term time deposits, as well as a large exposure to Venezuelan sovereign debt.

Grupo Bancario IF has a 83% stake in Exterior.

BNC

Despite BNC's moderate but growing franchise as well as improved capital ratios and loan quality indicators, the bank's ratings are limited by high nominal credit growth in excess of its domestic peers, lower profitability relative to local banks, and the operating environment.

High exposure to the Venezuelan public sector, large asset and liability tenor mismatch due to the short contractual maturities (mostly demand deposits) of its funding base and a decline in the bank's overall loss absorption capacity in recent years, as measured by considering both its equity/assets ratio and loan loss reserves/gross loans, also weigh on the bank's ratings. The ratings also take into account adequate liquidity and funding.

RATING SENSITIVITIES - IDRS, VRS AND NATIONAL RATINGS

A downgrade of the sovereign's IDRs would result in a similar action on the IDRs and VRs of these banks, which are currently capped at the sovereign. Additional government intervention that pressures financial performance of these banks could negatively affect the banks' IDRs, VRs and National ratings. While not Fitch's base case due to capital controls and liquidity in the domestic market, a persistent decline in deposits would pressure ratings.

Upside potential to any of the banks' ratings in the near term is limited in light of current macroeconomic vulnerabilities.

KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

The banks' Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF' reflect Fitch's expectation of no support. Despite these banks' systemic importance, support cannot be relied upon given Venezuela's highly speculative rating and lack of a consistent policy on bank support. For those banks with foreign shareholders, government interference in the banking system could also negatively influence shareholder support if required.

Venezuela's propensity or ability to provide timely support to these banks is not likely to change given the sovereign's very low speculative-grade ratings. As such, the SR and SRF have no upgrade potential.

Fitch has taken the following rating actions:

BBU

--Long-term foreign and local currency IDRs downgrade to 'CCC' from 'B';

--Short-term foreign and local currency ratings downgraded to 'C' from 'B';

--Viability downgraded to 'ccc' from 'b';

--Support affirmed at '5';

--Support Floor affirmed at 'NF';

--Long-term national-scale rating downgraded to 'A+(ven)' from 'AA-(ven)';

--Short-term national-scale rating affirmed at 'F1+(ven)'.

Provincial

--Long-term foreign and local currency IDRs downgrade to 'CCC' from 'B';

--Short-term foreign and local currency ratings downgraded to 'C' from 'B';

--Viability downgraded to 'ccc' from 'b';

--Support affirmed at '5';

--Support Floor affirmed at 'NF';

--Long-term national-scale rating downgraded to 'AA-(ven)' from 'AA+(ven)';

--Short-term national-scale rating affirmed at 'F1+(ven)'.

Mercantil

--Long-term foreign and local currency IDRs downgraded to 'CCC' from 'B';

--Short-term foreign and local currency ratings downgraded to 'C' from 'B';

--Viability downgraded to 'ccc' from 'b';

--Support affirmed at 5;

--Support Floor affirmed at NF;

--Long-term national-scale rating downgraded to 'AA-(ven)' from 'AA+(ven)';

--Short-term national-scale rating affirmed at 'F1+(ven)'.

MSF

--Long-term national-scale rating downgraded to 'A+(ven)' from 'AA(ven)';

--Short-term national-scale rating affirmed at 'F1+(ven)';

--Long-term senior unsecured bonds national-scale rating downgraded to 'A+(ven)' from 'AA(ven)';

--Short-term commercial paper national-scale rating affirmed at 'F1+(ven)'.

BOD

--Long-term foreign and local currency IDRs downgraded to 'CCC' from 'B';

--Short-term foreign and local currency ratings downgraded to 'C' from 'B';

--Viability downgraded to 'ccc' from 'b';

--Support affirmed at '5';

--Support Floor affirmed at 'NF';

--Long-term national-scale rating downgraded to 'BBB-(ven)' from 'BBB(ven)';

--Short-term national-scale rating downgraded to 'F3(ven)' 'F3(ven)'.

Caribe

--Long-term foreign and local currency IDRs downgraded to 'CCC' from 'B';

--Short-term foreign and local currency ratings downgraded to 'C' from 'B';

--Viability downgraded to 'ccc' from 'b';

--Support affirmed at '5';

--Support Floor affirmed at 'NF';

--Long-term national-scale rating downgraded to 'A-(ven)' from 'A+(ven)';

--Short-term national-scale rating downgraded to 'F2(ven)' from 'F1(ven)'.

Exterior

--Long-term foreign and local currency IDRs downgraded to 'CCC' from 'B';

--Short-term foreign and local currency ratings downgraded to 'C' from 'B';

--Viability downgraded to 'ccc' from 'b';

--Support affirmed at '5';

--Support Floor affirmed at 'NF';

--Long-term national-scale rating downgraded to 'A+(ven)' from 'AA(ven)';

--Short-term national-scale rating downgraded to 'F1(ven)' from 'F1+(ven)'.

BNC

--Long-term foreign and local currency IDRs downgraded to 'CCC' from 'B';

--Short-term foreign and local currency ratings downgraded to 'C' from 'B';

--Viability rating downgraded to 'ccc' from 'b';

--Support affirmed at '5';

--Support Floor affirmed at 'NF';

--Long-term national-scale rating downgraded to 'BBB-(ven)' from 'BBB(ven)';

--Short-term national-scale rating affirmed at 'F3(ven)'.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'National Scale Ratings Criteria' (Oct. 30, 2013);

--'Sector Outlooks: An Update (Argentina, Brazil, Costa Rica, Ecuador, Uruguay and Venezuela)' (Sept. 3. 2014)

--'2015 Outlook: Andean Banks' (Dec. 9, 2014);

--'Peer Review: Private Sector Venezuelan Banks' (Feb. 6, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Sector Outlooks: An Update (Argentina, Brazil, Costa Rica, Ecuador, Uruguay and Venezuela)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=762088

2015 Outlook: Andean Banks (Colombia, Ecuador, Peru and Venezuela)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=822148

Peer Review: Private Sector Venezuelan Banks (Facing Macroeconomic Imbalances)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733216

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=959316

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Theresa Paiz Fredel
(Primary Analyst - BBU, BOD, Caribe, BNC)
Senior Director
+1-212-908-0534
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Mark Narron
(Primary Analyst - Provincial, Mercantil, Exterior)
Director
+1-212-612-7898
or
Andres Marquez
(Primary Analyst - MSF; Secondary Analyst - Mercantil, Bancaribe)
Director
+571 326 9999, Ext. 1220
or
Larisa Arteaga
(Secondary Analyst - BOD, BNC)
Director
+1-809-563-2481
or
Committee Chairperson
Alejandro Garcia
Senior Director
+52 81 8399 9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Theresa Paiz Fredel
(Primary Analyst - BBU, BOD, Caribe, BNC)
Senior Director
+1-212-908-0534
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Mark Narron
(Primary Analyst - Provincial, Mercantil, Exterior)
Director
+1-212-612-7898
or
Andres Marquez
(Primary Analyst - MSF; Secondary Analyst - Mercantil, Bancaribe)
Director
+571 326 9999, Ext. 1220
or
Larisa Arteaga
(Secondary Analyst - BOD, BNC)
Director
+1-809-563-2481
or
Committee Chairperson
Alejandro Garcia
Senior Director
+52 81 8399 9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
New York
elizabeth.fogerty@fitchratings.com