MONTERREY, Mexico & SANTIAGO, Chile--(BUSINESS WIRE)--Fitch Ratings has affirmed Cooperativa de Ahorro y Credito (FUCEREP)'s (FUCEREP) Long-term Issuer Default Ratings (IDRs) at 'B' and Viability rating (VR) at 'b'. The Rating Outlook was revised to Negative from Stable. A full list of rating actions follows at the end of this press release.
The revision of the Rating Outlook to Negative reflects the challenges faced by FUCEREP to meet the increased regulatory capital requirements in times when its overall financial performance has been weak, posting net losses for three years in a row. Failing to meet regulatory capital requirements could threaten the ability of the entity to expand its business in the medium term. In addition, the Negative Outlook reflects the weak results shown in the past three years and the negative trend in asset quality ratios, which Fitch expects to continue in the near future.
KEY RATING DRIVERS - IDR and VR
FUCEREP's IDR and VR are highly influenced by its small size within the financial system and the challenges the cooperative faces to meet the increased regulatory capital requirements. Additionally, the ratings also consider the entity's weak results over the past three years and Fitch's perception of higher risk as the cooperative diversifies its operations. Adequate, although deteriorating, asset quality, good liquidity management and a growing deposit base support FUCECREP's ratings.
FUCEREP's Fitch Core Capital 29.41% is adequate for its business model, supported by the annual contributions made by its members that have partially offset the net losses suffered in the past three years. However, since July 2013, the cooperative has been subject to a new regulatory minimum net equity requirement that must reach 24% of risk weighted assets, according to the regulator's phase-in schedule by 2019. The deduction of hefty IT expenses has challenged compliance with the annual minimum regulatory requirement. FUCEREP is exploring alternatives with the regulator to meet its increased requirement. Its forecasted scenarios appear reasonable to Fitch; however, reaching the new minimum equity represents a challenge for planned growth.
FUCEREP's profitability has been low in the past three years. While its operating revenues have increased in line with loan growth and moderate income diversification, it suffered operational losses in the past three years affected by slower growth in 2015, higher credit costs and rising administrative expenses mainly due to IT investments; net losses were affected by the inflation adjustment in 2014 - 2015. Although FUCEREP is a not for profit entity, internal capital generation is important to finance its expansion.
FUCEREP's operational cost base, which has increased since 2013 due to technology expenditures and a new branch opening each year, is high. Staff costs account nearly for two thirds of operating expenses, Fitch believes FUCEREP's has room to improve its cost to income ratio as its operating revenues expand but the agency only expects the ratio to return to its historical average (around 81%) progressively.
FUCEREP's impaired loan ratio has been historically well contained relative to similar Uruguayan entities (5.94% on average for 2010 - 2014), benefitting from its business model since 75% of the loans are debited from the borrowers' payroll. However, past due loans have risen (7.89% at YE15), a trend Fitch expects to continue due to the economic slowdown. In the medium term further pressures could arise from strong projected growth and expansion into new segments. Charge-offs are low (0.84% at YE15) and loan loss reserve coverage high (151.81%).
The low-cost deposit base has steadily grown (14.05% in 2015). Deposit concentration remains high (top 10 depositors represented 24.8% of total deposits), but this is partially mitigated by FUCEREP's ample liquidity. It has also obtained credit lines in four local banks to fund its strong growth plans.
The cooperative is taking some steps to gradually adapt its business model into non-payroll deducted credits, expand inside the country and grow strongly in SME lending. Fitch perceives an increased risk appetite and sees this expansion as a significant challenge for the entity.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
FUCEREP's Support and Support Rating Floor of '5' and 'NF' respectively reflects Fitch's opinion that extraordinary external support if needed, although possible, cannot be relied upon given its small size and deposit market share.
IDRs AND VR
FUCEREP's VR and IDR ratings could be downgraded if the cooperative fails to meet the regulatory capital requirements or if its low profitability together with material deterioration in asset quality lead to its Fitch Core Capital ratio falling and remaining below 15%.
The outlook on FUCEREP's IDRs could return to stable if the entity consistently meets its regulatory capital requirements. Sustained progresses in its profitability metrics, with ROA consistently remaining above 1%, together with asset quality and capitalization remaining at historic levels could lead to positive rating actions.
RATING SENSITIVITIES -SUPPORT AND SUPPORT RATING FLOOR
Changes in the SR and SRF of FUCEREP are highly unlikely in the foreseeable future.
Fitch has affirmed the following:
--Long-term Foreign and Local Currency IDRs at 'B'; Outlook to Negative from Stable;
--Viability rating at 'b'
--Support rating at '5';
--Support rating floor at 'NF'.
Additional information is available on www.fitchratings.com
Global Bank Rating Criteria (pub. 20 Mar 2015)
Dodd-Frank Rating Information Disclosure Form