NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Banco Popular y de Desarrollo Comunal's (BPDC) ratings including its Issuer Default Rating (IDR) at 'BB+' and its Viability Rating (VR) at 'bb+'. A complete list of rating actions follows at the end of this press release.
KEY RATING DRIVERS - IDRs, VR, SF, and SRF
BPDC's IDR and VR reflect its robust loss absorption capacity, stable deposit base, good profitability ratios and adequate asset quality. The bank's ratings also reflect the moderate tenure mismatches in its asset and liability structure.
The bank's Support Rating (SR) of '3' and Support Floor (SF) of 'BB' indicates that in Fitch's view there is a moderate probability of support from the Costa Rican Government despite having no explicit guarantee, given the nature of the bank and its systemic importance. The bank's systemic importance comes from its relevant market share in terms of assets (13%) and deposits (12.7%) along with its duties of public interest.
Capitalization is the core strength of BPDC, with a Fitch Core Capital of 25% outperforming most national and international peers. The strong capital is underpinned by the capital accumulation mechanisms and good profitability. The capital levels provide an ample loss absorption capacity and room to maintain the balance sheet's dynamic growth; these levels are not expected to decline in the foreseeable future.
The bank's steady funding favors its financial profile. It includes a guaranteed influx of funds from the state. The funding stability arises from the government's monthly deposit of nearly 41% of the public sector payroll. Additionally, the bank collects the mandatory contributions to the complementary pension fund equivalent to 1.25% of the total payroll of public and private sector workers.
Profitability ratios have remained good although they have declined since 2013 due to pressure on margins. As of the first half of 2014 (1H'14) the return on assets ratio was at 1.4% (December 2013: 1.5%; December 2012: 2.1), still above the industry average (1.1%), and further declines are unlikely. The main weakness of the financial performance comes from the low operating efficiency.
The bank's asset quality remains adequate with delinquency ratios in line with its historic average. Non-performing loans to total loans ratio is 2.6%, which is considered sound given the loan portfolio's retail orientation --which has a natural higher propensity to deteriorate when compared with more diversified portfolios (e.g. retail and wholesale). Low levels of write offs and restructuring are also proof of the bank's adequate credit quality.
Potential upgrades of the bank's VR --and consequently of the IDRs-- are limited over the medium term as the bank is currently rated at the same level of the sovereign, which has a Stable Outlook. In the long term, however, upside potential could arise from a substantial improvement in funding and business diversification, coupled with a higher sovereign rating.
A significant deterioration of the bank's profitability and asset quality, which erode the capital and reserves cushion, would place downward pressure on the bank's VR and IDRs.
BPDC's current SR and SRF indicate that in the event of individual risk profile deterioration, the IDR would not fall below 'BB', given the agency's opinion that government support will be forthcoming. Changes on sovereign creditworthiness and/or propensity of support would affect the SR and SRF.
Fitch has affirmed BPDC's ratings as follows:
--Long-term IDR at 'BB+', Outlook Stable;
--Short-term IDR at 'B';
--Long-term local currency IDR at 'BB+', Outlook Stable;
--Short-term local currency IDR at 'B';
--Viability Rating at 'bb+';
--Support Rating at '3';
--Support Rating Floor at 'BB'.
--Long-term national rating at 'AA+(cri)', Outlook Stable;
--Short-term national rating at 'F1+(cri)';
--Long-term senior unsecured bonds at 'AA+(cri)';
--Commercial paper at 'F1+(cri)'.
--Long-term senior unsecured bonds in Panama at 'AA-(pan)';
--Commercial paper in Panama at 'F1+(pan)'.
--Long-term senior unsecured bonds in El Salvador at 'AA+(slv)';
--Commercial paper in El Salvador at 'F1+(slv)'.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Costa Rica' (Jan. 31, 2014);
--'2014 Outlook: Central America and the Dominican Republic' (Dec. 16, 2013).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
2014 Outlook: Central America and the Dominican Republic Insurance