Fitch Affirms Banrural's IDR at 'BB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Banco de Desarrollo Rural's (Banrural) Long-Term Issuer Default Rating (IDR) at 'BB', Short-Term IDR at 'B', and Viability Rating (VR) at 'bb'. The National Ratings of Banrural were also affirmed. The Rating Outlook is Stable. In addition, the National Ratings of its Subsidiary Financiera Rural S.A. were also affirmed. A full list of rating actions is at the end of this release.

KEY RATING DRIVERS

IDRS, VR AND NATIONAL RATINGS

Banrural's VR drives its IDR and National Ratings. The operating environment has a high influence on Banrural's VR. Changes in Guatemala's operating environment have a strong influence on the bank's financial profile. Guatemala's ratings and Stable Outlook were affirmed in April 2016. The VR is closely linked to the sovereign, as Banrural maintains a moderate exposure to public sector deposits (25% of total deposits), and significant concentration in government bonds. The Guatemalan Government also holds a 17.2% stake in Banrural.

The bank's VR also considers its good capitalization, solid credit quality metrics and profitability. Banrural maintains good capital levels thanks to its solid capital generation capacity and moderate dividends payments. Its Fitch core capital to risk-weighted assets stood at 15.3%, comparing positively with peers.

Banrural good credit quality metrics are consistent with its rating level, with past due loans below 1% of total loans and reserves coverage above 200% of past due loans, considered ample in light of the bank's solid capitalization and moderate loan book concentration. In 2015, the higher risk rating of an important corporate client in the energy sector has required additional loan loss provision expenses. Consistent with its consumer and SME orientation, Banrural's loan portfolio has low exposure in foreign currency loans (12.7% of total loans), most of these granted to corporates whose income is earned in USD.

Banrural's profitability consistently exceeds the Guatemalan market average, underpinned by its ample net interest margin. Banrural's high margins in the SME and consumer segments compensate for moderate income diversification and relatively weak efficiency ratios.

Banrural funding structure is based on a diversified, low cost deposit base is generally stable. Liquidity coverage is adequate although term mismatches are present as a result of the high proportion of savings deposits. In 2015, the bank liquidity and deposits stability experienced challenges under stress. After a rumor disseminated on May 8, 2015 prompted significant deposit withdrawals at some rural branches, access to funding, while available, took longer than expected to reach some of these branches, and contingency plans were challenged.

In Fitch's view, Banrural's importance within the banking system reflects its relative large size in the local market, wide geographic coverage, and focus in SME and individual consumer deposits and loans. Banrural's franchise is strong in its core market. It is the second largest bank in Guatemala in terms of assets, with a market share of 20.13% of total assets and 22.24% of total deposits as of December 2015. The bank has a relative competitive advantage and pricing power in its main segment, strengthened by its presence in the entire territory and its unique ability to address the needs of rural population.

SUPPORT RATING AND SUPPORT RATING FLOOR

The bank's Support Rating (SR) of '3' reflects Fitch's opinion that there is a moderate probability of support from the state, given Banrural's systemic importance in the banking system. This probability is limited by Guatemala's sovereign rating of 'BB'/Outlook Stable. The bank's Support Rating Floor (SRF) is one notch below the sovereign rating at 'BB-'. The bank's SRF reflects the moderate financial flexibility of the government to provide support to systemically important banks in the country and the significant presence of foreign currency funding.

FINANCIERA RURAL

NATIONAL RATINGS

Finrural's ratings are driven by the support it would receive from Banco de Desarrollo Rural SA (Banrural), if required. In the agency's view, Finrural is highly integrated to Banrural. This is also reflected in the brand's standardization, common network of services, alignment of strategies and operations in complementary segments.

RATING SENSITIVITIES

IDRS, VR AND NATIONAL RATINGS

The Stable Outlook reflects Fitch's expectation of no material changes in the bank's overall financial profile over the rating horizon. Banrural's IDRs and VR are at the same level as Guatemala's sovereign rating. Given the operating environment's high influence on Banrural's VR as well as concentrations with the government, changes in the sovereign's ratings may result in a similar action on Banrural's ratings. Banrural's national ratings reflect the bank's relative strength in the local market.

Ratings would be downgraded in the unlikely scenario of a sharp decline in capitalization (below 12%), and a period of sustained low earnings (operating ROAA close to 1%). These changes may result in a VR downgrade which would also imply a downgrade in its IDR.

SUPPORT RATING AND SUPPORT RATING FLOOR

Banrural's SR and SRF are sensitive to changes in the sovereign rating.

FINANCIERA RURAL

NATIONAL RATINGS

Changes in Finrural's ratings are associated with changes in Banrural's capacity and/or propensity to provide support.

Fitch has affirmed the following ratings:

Banco de Desarrollo Rural:

--Long-Term Issuer Default Rating (IDR) at 'BB'; Outlook Stable;

--Short-Term IDR at 'B';

--Local Currency Long-Term IDR at 'BB'; Outlook Stable;

--Local Currency Short-Term IDR at 'B';

--Viability Rating at 'bb';

--Support Rating at '3';

--Support Rating Floor at 'BB-';

--National long-term rating at 'AA+(gtm)'; Outlook Stable;

--National short-term rating at 'F1+(gtm)'.

Financiera Rural, S.A.

--National long-term rating at 'AA+(gtm)'; Outlook Stable;

--National short-term rating at 'F1+(gtm)'.

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

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

National Scale Ratings Criteria (pub. 30 Oct 2013)

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004487

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004487

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Mark Narron
Director
+1-212-612-7898
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Marcela Galicia
Director
+503 2516 6616
or
Committee Chairperson
Theresa Paiz-Fredel
Senior Director
+1-212-908-0534
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Mark Narron
Director
+1-212-612-7898
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Marcela Galicia
Director
+503 2516 6616
or
Committee Chairperson
Theresa Paiz-Fredel
Senior Director
+1-212-908-0534
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com