NEW YORK--(BUSINESS WIRE)--Following the upgrade of the Dominican Republic's sovereign rating, Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) for Banco de Reservas de la Republica Dominicana, Banco de Servicios Multiples (Banreservas) and Banco Multiple BHD Leon (BHD Leon) to 'BB-' from 'B+'. The Rating Outlooks were revised to Stable from Positive for both banks. A full list of rating actions is at the end of this release.
On Nov. 18, 2016, Fitch upgraded the Dominican Republic's Long-Term Foreign and Local Currency IDRs to 'BB-' from 'B+' with a Stable Outlook. The upgrade reflects the country's continued strong growth momentum and rising per capita income, reduced external vulnerabilities and fiscal restraint through the 2016 election cycle. For additional details, see 'Fitch Upgrades Dominican Republic IDRs to 'BB-'; Outlook Stable', available at www.fitchratings.com.
The positive rating actions reflect Fitch's recent upgrade of Dominican Republic's IDRs, as the banks' IDRs were constrained by the sovereign's IDRs. In addition, Fitch expects the current improvement in the Dominican operating environment to benefit the financial profiles of the banks.
National ratings of entities that are not listed below remain unchanged and were not affected in this review.
KEY RATING DRIVERS
Banreservas - IDRs, SUPPORT AND SUBORDINATED DEBT
Banreservas' IDRs, reflect Fitch's expectations of the support the bank would receive from its sole shareholder, the Dominican government (IDR 'BB-'/Positive Outlook), if needed.
The bank's systemic importance, its role collecting funds for the government's single treasury account to pay debt obligations, and its role as a provider of domestic loans results in an equalization of its Support Rating Floor with the sovereign's L-T IDR of 'BB-'. Additionally, Fitch believes the government's willingness to support Banreservas should it be required is substantial given its 100% stake in the bank. However, in the agency's view, the Dominican Republic's capacity of support is limited resulting in a Support Rating of '4'.
Banreservas' outstanding subordinated debt includes an international issuance of USD300 million due 2023. The bank's subordinated note rating is one notch below its supported IDR, reflecting one notch for loss severity, but no notches for incremental non-performance risk relative to the bank's IDR, given the 'gone concern' characteristics of the security. In Fitch's view, the anchor rating is the IDR, even though there is no explicit government guarantee on the security, due to Banreservas' state ownership, policy role and systemic importance.
Banreservas - VR
The upgrade of Banreservas' Viability Rating (VR) to 'B+' from 'B' reflects a stabilization in private sector loan quality indicators as well as a reduction in asset concentrations, despite 2016 being an election year. Nevertheless, the bank's weak capitalization and asset quality continue to be the factors with the highest influence on Banreservas' VR. The bank's VR also considers structural improvements in profitability and stable, albeit low, levels of capitalization.
The bank's main asset concentration, including loans and securities, is with a speculative-grade sovereign. This exposure declined to 3.5x equity at end-September 2016 from 4.4x equity at year-end (YE) 2015. Banreservas' ratio of impaired private sector loans to gross private sector loans has stabilized in recent years, reaching 2% at end-September 2016. This level is now in line with similarly rated peers in the region.
BHD Leon - IDRS, VR AND SUPPORT
BHD Leon's IDRs are driven by its VR, or its standalone creditworthiness. The upgrade of BHD Leon's IDRs are in line with a similar action that Fitch took on the Dominican Republic's sovereign ratings, as it VRs was constrained by the sovereign's IDRs.
The upgrade on the VR's captures the limitations previously imposed by the operating environment which limited the strengths of the bank: resilient performance, stable funding base, and improved franchise. However, the bank's VR is still limited by weaker loan quality, limited access to long-term funding which results in funding gaps and relatively low income diversification, compared to better rated banks in the region.
Despite the bank's systemic importance, the government's inconsistent history of banking sector support for private sector institutions and the sovereign's current rating level result in a Support Floor of 'NF' and a Support Rating of '5'.
RATING SENSITIVITIES
Banreservas
IDRS AND SUBORDINATED DEBT
The bank's IDRs and subordinated debt rating are sensitive to a change in Fitch's assumptions as to support. Changes in the IDRs are also contingent on sovereign rating actions.
VR
A sustained reduction in asset concentrations, a stronger capital base, as well as a more established track record of meeting strategic objectives, could lead to an upgrade of the Banreservas' VR. An unexpected deterioration in loan quality or profitability or sustained high disbursements of income to the government that pressures Banreservas' tangible common equity-to-tangible assets ratio to below 5.5% could trigger a downgrade of its VR.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are potentially sensitive to any change in assumptions as to the propensity or ability of the Dominican government to provide timely support to the bank. This could arise in the event of a sovereign rating action. Currently, the Outlook on the Dominican Republic's Long-Term Local and Foreign Currency IDRs is Stable.
BHD Leon
Future positive changes in BHD Leon's ratings will depend on sustained improvements in capitalization and asset quality within the context of positive sovereign rating actions. A deterioration in asset quality or profitability that causes the bank's Fitch core capital to risk-weighted assets ratio to fall below 8% could pressure creditworthiness.
Dominican Republic Government's propensity or ability to provide timely support to BHD Leon 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 taken the following rating actions:
Banreservas
--Foreign and Local Currency IDRs upgraded to 'BB-' from 'B+'; Outlook revised to Stable from Positive;
--Short-Term Foreign and Local Currency IDRs affirmed at 'B';
--Viability Rating upgraded to 'b+' from 'b';
--Support Rating affirmed at '4';
--Support Floor revised to 'BB-' from 'B+';
--Long-term subordinated notes upgraded to 'B+' from 'B'.
BHD Leon
--Foreign and Local Currency Long-Term IDR upgraded to 'BB-' from 'B+'; Outlook revised to Stable from Positive;
--Foreign and Local Currency Short-Term IDR affirmed at 'B';
--Viability Rating upgraded to 'bb-' from 'b+';
--Support Rating affirmed at '5';
--Support Floor Rating affirmed at 'NF'.
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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015768
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015768
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https://www.fitchratings.com/regulatory
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