MONTERREY, Mexico & SANTIAGO, Chile--(BUSINESS WIRE)--Fitch Ratings has upgraded Banco Supervielle S.A.'s (Supervielle) foreign currency (FC) and local currency (LC) long-term Issuer Default Ratings (IDRs) to 'B' from 'CCC' and its Viability Rating (VR) to 'b' from 'ccc'. A full list of rating actions follows at the end of this press release.
The upgrade of Supervielle's VR and LC IDR was driven by the same action on Argentina's sovereign rating, the LC IDR and Country Ceiling to 'B' from 'CCC' (see 'Fitch Affirms Argentina's FC IDR at 'RD'; Upgrades LC IDR to 'B'; Outlook Stable' dated March 22, 2016 on www.fitchratings.com). At the time of the sovereign's local currency upgrade, Fitch indicated the resumption of timely debt service on defaulted bonds would lead to the upgrade of the long-term FC IDR, most likely to the level of the long-term LC IDR.
KEY RATING DRIVERS - VR AND IDRs
Banco Supervielle's VR and IDRs are driven by the still volatile and adverse economic and operating environment, albeit some structural recent improvements to Argentina's policy framework could benefit the bank's performance, specifically the lowest level of intervention in the financial system. The ratings also consider the bank's relatively tight loss absorption capacity in the form of core capital and/or loan loss reserves, but also considering its good profitability, sound and stable asset quality, adequate funding and liquidity profile, and gradually strengthening franchise.
In Fitch's view, regardless of its overall reasonable financial condition, Supervielle's ratings are currently capped by the LC sovereign rating, due to the weak operating environment, although the sovereign has made big progress to normalize its situation with foreign creditors. Although the new government is taking measures in the right direction and reducing political and regulatory intervention into the banking system, the local environment in Argentina is still characterized by ample economic imbalances and measures are being taken gradually and, therefore, the recovery of the economy will likely take some time to materialize.
Supervielle remains a medium-sized bank with roughly 2.49% of the system's loans (ranks 13th) and 1.78% of deposits, but it is gradually improving its competitive position in core business lines. It has a strong presence in factoring, leasing, and retail loans, with a particularly sound regional franchise in certain provinces.
Although sound and recurrent core earnings are among Supevielle's top strengths, its profitability ratios are under some pressure due to the regulatory caps on interest rates on personal loans and floors on interest rates of retail time deposits, which affect more heavily Supervielle than the financial system average due to its strong retail focus. Rising costs and higher loan loss provisions have also undermined the bank's profitability. Fitch believes that Supervielle will continue recording adequate profitability metrics based on its expanding portfolio's capacity to generate operating income. In addition, the normalization of the regulatory environment will benefit the bank's revenues as most of the distorting regulatory measures taken by the previous administration have been removed and will now allow the bank to resume growth in the lower segments.
Fitch considers that Supervielle's asset quality is adequate. However, at a consolidated level, Supervielle's impairment level is somewhat higher than that of the Argentine financial system, at 3.18% of total loans as of Dec. 31, 2015 compared to 3.05% at Dec. 31, 2014, and 1.6% for the system at Dec. 31, 2015. The higher level of Supervielle's impaired loans relative to the financial system is explained by its stronger focus in SME and retail lending and the sizeable portion of those coming from relatively riskier segments of the population through a consumer finance subsidiary (roughly 10.4% of gross consolidated loans). As with the rest of the financial system, Supervielle's asset quality is slowly deteriorating due to the worsening economic conditions, a trend Fitch expects to continue in the medium term as the economic recovery will likely be seen towards the end of 2016 or 2017.
In Fitch's view, Supervielle has sound practices regarding funding and liquidity. Customer deposits are the main source of funding. In addition, the bank has a well-diversified mix of local and foreign bank facilities, local and foreign debt programs, and a stable and recurring securitization mechanism.
Supervielle's capital adequacy is tight in Fitch's view. As of Dec. 31, 2015, its tangible common equity to tangible assets ratio was 7.71%, below the figure shown the previous year (8.27%) and the Argentine financial system's average (12.5%). The Fitch core capital to risk-weighted assets ratio has improved in the past three years (to 7.06% at Dec. 31, 2015) along with higher capital requirements and, although is still relatively tight, it is adequate for the current rating level of the bank.
Grupo Supervielle, which is Banco Supervielle's parent company, is currently assessing an initial public offering of its Class B shares of common stock in a global offering in the United States and other countries outside Argentina and a concurrent offering in Argentina during 2016, market conditions permitting, which will significantly boost its capital levels. Grupo Supervielle intends to use a substantial amount of the offering proceeds to increase the volume of assets and loans of its subsidiaries (including Banco Supervielle).
Should this capital increase not take place, and given the rule of the central bank that dividends can only be paid if eligible capital exceeds required capital by at least 75%, and higher capital requirements as regulations move towards Basel III, Fitch expects that capital metrics will continue improving, but most likely at a slow pace.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
Supervielle's SR of '5' and SRFs of 'NF' reflect that, although possible, external support for this bank, as with most Argentine banks, cannot be relied upon given the ample economic imbalances. In turn, the sovereign ability and willingness to support banks is highly uncertain.
KEY RATING DRIVERS - SUBORDINATED DEBT
The 'B-/RR6' rating of Supervielle's subordinated debt reflect the low expected recoveries for these bonds in case of bank liquidation given the bank's low capital levels. However, these are notched only once due to ratings compression arising from the low VR of the issuer. These securities are plain-vanilla subordinated liabilities, without any deferral feature on coupons and/or principal.
RATING SENSITIVITIES
IDRs AND VR
Supervielle's ratings would move in line with any change of Argentina's sovereign rating. In addition, Supervielle's ratings could be affected if the operating environment drives a material deterioration in its financial profile, resulting in a Fitch core capital ratio falling and remaining below 3%, which Fitch's sees unlikely in the short term.
Under current circumstances, Fitch considers unlikely that Argentine banks could be rated above the sovereign. Therefore, upside potential in the Supervielle's ratings is heavily contingent upon positive developments in the sovereign rating dynamics.
RATING SENSITIVITIES -SUPPORT RATING AND SUPPORT RATING FLOOR
Changes in the SRs and SRFs of Supervielle are highly unlikely in the foreseeable future.
RATING SENSITIVITIES -SUBORDINATED DEBT
The rating of the subordinated debt will likely remain one notch below Supervielle's VR under most circumstances while this rating is below 'bb+', meaning that this issue rating would move accordingly with any change in the bank's VR.
Fitch has upgraded the following ratings:
Banco Supervielle:
--Foreign and local currency long-term IDRs to 'B' from 'CCC'; Outlook Stable;
--Foreign and local currency short-term IDRs to 'B' from 'C';
--Viability rating to 'b' from 'ccc';
--Subordinated debt to 'B-/RR6' from 'CC/RR5'.
Fitch has affirmed the following ratings:
--Support at '5';
--Support Floor at 'NF'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Bank Rating Criteria (pub. 20 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002836
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002836
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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.