Fitch Affirms Banco Nacional de Costa Rica's IDRs at 'BB+'; Outlook Negative

MONTERREY, Mexico--()--Fitch Ratings has affirmed Banco Nacional de Costa Rica's (BNCR) Long- and Short-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+' and 'B', respectively. Fitch has also affirmed BNCR's Viability Rating (VR) at 'bb+' and its National scale ratings at 'AA+(cri)' and 'F1+(cri)'.

The Negative Outlook on the Long-Term Foreign and Local Currency ratings is aligned to the sovereign Rating Outlook. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

IDRS, SENIOR DEBT AND NATIONAL SCALE RATINGS

BNCR's IDRs, senior debt ratings, and National ratings are aligned with those of the sovereign, reflecting Fitch's assessment of the ability and propensity of support from the Costa Rican government ('BB+'/Outlook Negative) if needed. Support ability is limited by the sovereign rating while the propensity for support relies on BNCR's explicit guarantee stated in the National Banking System Law which says that all state-owned banks have the guarantee and full collaboration of the state.

VR

The operating environment limits BNCR's VR given the big influence it exerts on its performance. Fitch considers that the bank's VR is highly sensitive to the Costa Rican economic environment and sovereign rating.

The bank's VR of 'bb+' reflects its leading franchise with a local market share of customer deposits and loan portfolios above 20%. The bank's adequate financial performance benefitted from its manageable asset quality, recurrent income and controlled funding cost, which in turn, supports its capitalization metrics.

The bank's asset quality is moderate, impairment ratios are slightly higher compared to the banking system as a whole but reasonable given its state-owned nature and dominant market position. The bank's reserves remain below those of its domestic and international peers, despite the new regulation on loan-loss provisions. Exposure to FX risk is close to the system average, and loan portfolio diversification is moderate.

BNCR has an ample and stable deposit base which benefits from its solid franchise and sovereign support. The bank has proven access to local and foreign markets, complementing its funding profile by subordinated debt and long-term international issuances which also contribute to reducing mismatches in foreign currency.

The bank's profitability ratios are modest and often lower than those of its closest competitors in the country. Operating profitability, measured as operating profit/risk-weighted assets (RWAs) grew by 2.2% at September 2016 (2013-2015 average: 1.5%). Despite the recent improvement, Fitch believes profitability will likely continue lagging as compared to its closest peers given its public profile, and future earnings may be challenged by the operating environment.

Fitch believes that BNCR has a sound capital base, although pressured by sustained loan growth that usually exceeds its internal capital generation and, along with lower loan loss reserves, may restrict the bank's loss absorption capacity in the event of stress. Its Fitch Core Capital ratio averaged 12.8% in recent years.

The bank has local senior unsecured certificates, which were also affirmed to the same level as its international and National scale rating given Fitch's assessment that the likelihood of default of any given senior unsecured obligation is the same as the likelihood of default of the bank.

SR and SRF

BNCR's Support Rating (SR) of '3' reflects Fitch's opinion that there is a moderate probability of support from the state. In addition, the bank has a clear policy role and the explicit support of the state. Support probability is limited by the sovereign rating. The bank's Support Rating Floor (SRF) is equalized to the sovereign rating, given the explicit guarantee from the government to the bank, and its systemic importance.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS, SENIOR DEBT, SR AND SRF

Changes in Costa Rica's sovereign rating may trigger similar changes in BNCR's IDRs, VR, SR, SRF, and senior debt ratings. Alternatively, a material weakening of the bank's fundamentals could result in a downgrade of its VR, although this is not Fitch's baseline scenario.

National ratings are less likely to be affected should Costa Rica's IDRs be downgraded as it would not alter relativities with local peers, and therefore have a Stable Outlook.

Fitch has affirmed the following ratings:

Banco Nacional de Costa Rica:

--Long-Term Foreign and Local Currency IDRs at 'BB+', Outlook Negative;

--Short-Term Foreign And Local Currency IDRs at 'B';

--Long-term senior unsecured bonds at 'BB+';

--Viability Rating at 'bb+';

--Support Rating at '3';

--Support Rating Floor at 'BB+';

--National scale long-term rating at 'AA+(cri)', Outlook Stable;

--National scale short-term rating at 'F1+(cri)';

--National scale long-term rating for local senior unsecured debt issues at 'AA+(cri)'.

Also, Fitch has assigned the following national ratings:

--Programa de Emisiones de Bonos Estandarizados (Mediano Plazo) en Dolares at 'AA+(cri)';

--Programa de Emisiones de Bonos Estandarizados (Mediano Plazo) en Colones at 'AA+(cri)'.

Adjustment to Financial Statements: Pre-paid expenses and other deferred assets were re-classified as intangibles and deducted from Fitch Core Capital. Fitch has made adjustments to the Risk Weighted Assets (RWAs) following its criteria and the agency consolidated the bank's RWAs with those of its main subsidiaries.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 25 Nov 2016)

https://www.fitchratings.com/site/re/891051

Metodología de Calificaciones Nacionales (pub. 13 Dec 2013)

https://www.fitchratings.com/site/re/727099

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015590

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015590

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings, Media Relations
Elizabeth Fogerty, New York
Tel: +1 (212) 908 0526
Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Bertha Perez
Associate Director
+52 81 83999161
Fitch Mexico, SA de CV
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Rolando Martinez
Director
+503 2516 6619
or
Committee Chairperson
Alejandro Garcia, CFA
Managing Director
+1-212-908-9137

Contacts

Fitch Ratings, Media Relations
Elizabeth Fogerty, New York
Tel: +1 (212) 908 0526
Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Bertha Perez
Associate Director
+52 81 83999161
Fitch Mexico, SA de CV
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Rolando Martinez
Director
+503 2516 6619
or
Committee Chairperson
Alejandro Garcia, CFA
Managing Director
+1-212-908-9137