NEW YORK--(BUSINESS WIRE)--Following a peer review, Fitch Ratings has affirmed Banesco Banco Universal, C.A.'s (BBU) foreign and local currency Issuer Default Ratings (IDRs) at 'CCC'. No Rating Outlook is assigned at this rating level. Fitch has also downgraded Banesco's Long-term National Rating to 'A(ven)' from 'A+(ven)' and its short-term National Rating to 'F1(ven)' from 'F1+(ven)'. A full list of rating actions follows at the end of this release.
The downgrade of Banesco's national ratings reflects changing relativities and greater compression of bank ratings on the local scale, as well as increasing uniformity of performance amid shared operating challenges. Additionally, the downgrade also considers severe pressures on capitalization as internal capital generation has not kept pace with inflation induced asset growth. As such, Banesco's financial profile is now more in line with lower rated banks on the national scale in Venezuela.
KEY RATING DRIVERS
IDRS, VR AND NATIONAL RATINGS
As with other emerging market commercial banks in highly speculative rating categories, the operating environment highly influences BBU's ratings. Like all Venezuelan banks, the sovereign's creditworthiness constrains BBU's ratings due to exposure to public sector (mostly sovereign) securities, as well as vulnerability to the government's economic and regulatory policy choices. Venezuela's IDR is currently rated 'CCC' by Fitch. High inflation distorts the comparison of financial metrics with regional peers (Latin American commercial banks with a Viability Rating [VR] of 'b+' and below).
Capitalization also highly influences its credit profile. Like other Venezuelan banks, BBU's capital ratios have come under pressure as asset growth has exceeded internal capital generation since early 2014. At 6.7% as of Sept. 30, 2016, the bank's tangible common equity/tangible assets ratio lagged the system average though this was in line with other large private sector banks as of Sept. 30, 2016. Additionally, BBU has tighter reserve coverage of gross loans relative to its domestic peers.
Fitch recognizes that an adjustment of foreign currency assets to a more market oriented exchange rate and a revaluation of fixed assets due to inflation would materially increase capitalization ratios. Nevertheless, in Fitch's view, this does not offset the inherent risk of operating in Venezuela given the depth of the economic crisis and the uncertainty in prospective regulatory measures. Capital ratios are likely to remain under pressure in 2017 due to inflation-induced growth and lower profitability.
Given the bank's high level of liquid assets, the large negative mismatch between short-term assets and liabilities is manageable as long as domestic monetary market conditions remain liquid and any potential liberalization of capital controls is measured. Most liquid assets consist of cash and bank deposits (96% of total) and covered 34% of total deposits and short-term funding as of Sept. 30, 2016. Fitch views a greater proportion of cash favorably, as public sector securities may be of limited liquidity in a stress scenario given the shallow domestic debt market. Furthermore, cash and bank deposits accounted for 30% of BBU's total assets.
Higher margins and rapid nominal loan growth was not sufficient to offset the drag of pressures from increased operating, credit and tax expenses in 2016. Though BBU's profitability in nominal terms was similar to other large private sector banks in Venezuela, it has dropped sharply. As is the case with other Venezuelan banks, Fitch expects expenditure pressures to continue over the medium term.
BBU's impaired loans to gross loans ratio has remained below 1% since 2011, in line with domestic peers and reflecting the effect of inflation on the denominator. At 2.5% of gross loans as of Sept. 30, 2016, Fitch views coverage of gross loans as tight, given the severity and uncertainty of the current economic, social & political crisis and historical NPL levels following economic adjustment of previous crises.
SUPPORT RATING AND SUPPORT RATING FLOOR
The banks' Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF' reflect Fitch's expectation of no support. Despite BBU's systemic importance, support cannot be relied upon given Venezuela's highly speculative rating and lack of a consistent policy on bank support.
RATING SENSITIVITIES
IDRS, VR AND NATIONAL RATINGS
A downgrade of the sovereign's IDRs would result in a similar action on the IDRs and VRs of this bank, which is currently capped at the sovereign. A sustained decline in capitalization below regulatory minimums would also pressure BBU's ratings. Additional government intervention that pressures financial performance could negatively affect the bank's IDRs, VR and National ratings. While not Fitch's base case due to capital controls and high domestic market liquidity, a persistent decline in deposits would pressure ratings.
There is no upside potential to the bank's ratings in the near term in light of the current economic crisis.
SUPPORT RATING AND SUPPORT RATING FLOOR
Venezuela's propensity or ability to provide timely support BBU is not likely to change given the sovereign's very low speculative-grade ratings. As such, the SR and SRF have no upgrade potential.
Fitch has taken the following rating actions on BBU:
--Long-term foreign and local currency IDRs affirmed at 'CCC';
--Short-term foreign and local currency ratings affirmed at 'C';
--Viability Rating affirmed at 'ccc';
--Support affirmed at '5';
--Support Floor affirmed at 'NF';
--Long-term national-scale rating downgraded to 'A(ven)' from 'A+(ven)';
--Short-term national-scale rating downgraded to 'F1(ven)' from 'F1+(ven)'.
Summary of Financial Statement Adjustments
Under Venezuelan banking regulation, compulsory loans are weighted at 50%. For the purposes of analyses and international peer comparison, Fitch adjusts the weightings of such loans to 100%.
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
National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/site/re/720082
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016412
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016412
Endorsement Policy
https://www.fitchratings.com/regulatory
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