Fitch Affirms Banco Pichincha C.A. y Subsidiarias at 'B'; Outlook Negative

NEW YORK--()--Fitch Ratings has affirmed Banco Pichincha C.A. y Subsidiarias' (Pichincha) Long-Term Issuer Default Rating (IDR) at 'B' with a Negative Outlook and its Viability Rating (VR) at 'b'. A full list of rating actions follows the end of this release.

KEY RATING DRIVERS

IDRs, VR and SUPPORT RATINGS

Ecuador's operating environment and Pichincha's weak profitability highly influence the bank's ratings. Fitch also considers Pichincha's loan quality challenges, stable capitalization ratios and adequate liquidity for its market of operation.

The bank's ratings are constrained by the sovereign given its direct exposure to Ecuador sovereign debt, as well as the impact of the government's macroeconomic and regulatory policies on its performance. The current economic recession and prospects for a weak recovery will limit Pichincha's potential growth, profitability and internal capital-generation capacity.

Pichincha's performance has been under pressure since 2015 and is weak compared with both international and domestic peers. Pichincha's performance was mainly affected by the currency depreciation in the countries where it operates, as well as the significant contraction of the bank's net interest margin during the first half of 2016 (1H16). Fitch expects Pichincha and the rest of Ecuadorian banks' financial performance to deteriorate in 2017, as a result of low economic expansion that will hinder credit growth, limit revenues and continue to pressure banks' asset quality.

Pichincha's asset quality deterioration reflects the economic recession, the contraction of the loan portfolio, some borrower's reduced repayment capacity due to the earthquake and the seasoning of the retail portfolio in an unfavourable operating environment. Fitch expects further deterioration in loan quality over the near term. Additionally, asset quality ratios will likely be a bit worse than the industry average, reflecting the bank's important exposure in retail lending.

Pichincha's capitalization is tight compared with international peers. However, this is mitigated by conservative reserve coverage, no asset growth during recession period and a lower risk balance sheet relative to other banks in similarly rated emerging markets. Hindered by low profitability, Fitch core capital to risk weighted assets ratio stood at 9.2% at 1H16. Fitch expects that this capital ratio will not improve in the near term given unfavorable operating environment that will hinder internal capital generation.

Pichincha's funding structure benefits from its successful franchise and a wide distribution network. Both allow the bank to enjoy a well-diversified, stable and relatively low-cost funding base. Similar to domestic peers, liquidity is conservative and higher than international peers.

Despite having the largest deposit market share, Pichincha's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF', indicate that Fitch believes external support cannot be relied upon due to Ecuador's limited funding flexibility as well as the lack of a lender of last resort.

RATING SENSITIVITIES

IDRs AND VR

The Rating Outlook on Pichincha's Long-Term IDR remains Negative in line with that of the sovereign. Any negative rating action on the sovereign would lead to a similar action on Pichincha's IDRs and VRs. Furthermore, a significant reduction in the bank's internal capital generation or an acceleration of growth that leads to a decrease in the Fitch Core Capital (FCC) metrics consistently below 9% along with a material decline in excess loan loss reserves could also result in negative rating actions.

SUPPORT RATINGS

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

Fitch has affirmed the following ratings:

PICHINCHA

--Long-Term Foreign Currency IDR at 'B'; Outlook Negative;

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

--Viability Rating at 'b';

--Support at '5';

--Support Floor at 'NF'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014965

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014965

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Theresa Paiz-Fredel
Senior Director
+1-212-908-0534
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larisa Arteaga
Director
+1-809-563-2481
or
Committee Chairperson
Alejandro Garcia
Managing Director
+1-212-908-9137
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Theresa Paiz-Fredel
Senior Director
+1-212-908-0534
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larisa Arteaga
Director
+1-809-563-2481
or
Committee Chairperson
Alejandro Garcia
Managing Director
+1-212-908-9137
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com