Fitch Takes Actions on Banco Internacional de Costa Rica, S.A.'s Ratings

MONTERREY--()--Fitch Ratings has affirmed Banco Internacional de Costa Rica, S.A.'s (BICSA) Long-Term Issuer Default Ratings (IDRs) at 'BB+'. Fitch has also downgraded BICSA's Viability Rating (VR) to 'b+' from 'bb'. The Rating Outlook for the bank's IDR and Long-Term National Rating remains Negative. A full list of rating actions follows at the end of this press release.

The downgrade of BICSA's VR reflects the deterioration of the bank's funding profile in recent months, reliance on ordinary liquidity support from the shareholders, Banco de Costa Rica (BCR, 51%) and Banco Nacional de Costa Rica (BNCR, 49%). Fitch's opinion of BICSA's corporate governance effectiveness has also deteriorated following the resignations of board members representing BNCR on Aug. 1. While shareholder participation in the board has been restored, Fitch believes there is no certainty of effective coordination between both shareholders in order to properly oversee the bank's performance.

KEY RATING DRIVERS

IDRS, NATIONAL RATINGS AND SENIOR DEBT

The IDRs, Support and National ratings assigned to BICSA reflect the support that, in Fitch's opinion, the entity will receive from its main shareholder, Banco de Costa Rica (BCR; 'BB+'/Outlook Negative), if needed. The bank's IDR and long-term National rating have a Negative Outlook, which is in line with BCR's IDR which is driven by the Costa Rica sovereign rating ('BB+'/Outlook Negative). The affirmation of the bank's Support Rating reflects Fitch's view that the probability of support remains unchanged. In May of 2016 the bank received ordinary liquidity support to face the bank's funding needs.

VR

BICSA's VR reflects its highly concentrated funding and tight liquidity that result in a lower financial flexibility compared to its peers and Fitch's diminished perception of corporate governance effectiveness. The rating also considers the bank's moderate profitability, good capital ratios and low delinquency.

Liquidity has been under pressure recently and currently is considered low, with cash & equivalents and investments representing 17% of total financial liabilities showing a decline from previous years. Also the bank operates with a concentrated funding structure that is vulnerable to deposits volatility. The concentrated funding structure and lower liquidity in 2016 poses a material challenge for the bank's financial profile that materialized in recent months and was overcome with the support from both shareholders.

Corporate Governance in BICSA has evidenced its weaknesses recently with the resignation on Aug. 1 of three board members representing BNCR. This event reflected a material lack of coordination between shareholders and that there is no certainty that actions taken by the owners will always be in favor of BICSA's oversight.

BICSA is characterized by low delinquency levels under international standards, with nonperforming loan (NPL) ratios below 1% over the past four years. In June 2016, this metric deteriorated somewhat to 1.1% as a result of the deterioration of a small number of debtors. The bank delinquency metrics compare below local peers, but this is expected given the Costa Rican exposure.

The bank's financial performance is consistent with its corporate focus, although it did decline since 2015. As of June 2016, its return on assets was 0.7%, which is lower than previous years, due to provisioning expenses and higher cost of funding. Also, the bank's performance was hit by loan prepayments. Its already-low NIM has been declining over the past few years as a result of fierce competition.

Fitch considers BICSA's capitalization to be good, with a Fitch core capital (FCC) of 12.8% as of June 2016. Contributing to the company's good capitalization is its asset growth, which is in line with its internal generation of capital and its zero-dividend payout policy.

RATING SENSITIVITIES

IDRS, SUPPORT RATING, NATIONAL RATINGS

The bank's IDRs, support and national ratings are sensitive to a change, in Fitch's view, as to BCR's capacity or willingness to support BICSA. The Negative Outlook on BICSA's IDR reflects the likelihood that a downgrade of BCR's IDRs would result in a similar action on BICSA's IDR and national ratings in Panama.

VR

Reductions in the bank's VR could come from a material increase of the refinancing risk reflected in reductions of funding sources combined with a weaker liquidity cushion. Also deterioration of the bank's VR could come from further deterioration of Fitch's opinion of the corporate governance effectiveness.

Fitch has affirmed BICSA's ratings as follows:

International ratings

--Long-Term IDR at 'BB+'; Outlook Negative;

--Short-Term IDR at 'B';

--Support Rating at '3'.

National ratings

--Long-term National rating at 'AA-(pan)'; Outlook Negative;

--Short-term National rating at 'F1+(pan)';

--Long-term senior unsecured bonds at 'AA-(pan)';

--Commercial paper at 'F1+(pan)'.

--Long-term senior unsecured bonds in El Salvador at 'AAA(slv)'; Outlook Stable

Fitch has downgraded the following rating:

--Viability Rating to 'b+' from 'bb'.

Summary of Financial Statement Adjustments: Pre-paid expenses were reclassified as other intangibles and deducted from Fitch Core Capital. Impaired Loans were adjusted to reflect only loans that are overdue by 90 days or more to be consistent with Fitch's criteria and global industry practices.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

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=1011148

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011148

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Alba Zavala
Associate Director
+52 81-8399-9137
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
64920 Monterrey, Mexico
or
Secondary Analyst
Mario Hernandez
Associate Director
+503 25166614
or
Committee Chairperson
Alejandro Garcia
Managing Director
+1 (212) 908-9137
or
Media Relations
Alyssa Castelli
+1-212-908-0540
New York
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alba Zavala
Associate Director
+52 81-8399-9137
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
64920 Monterrey, Mexico
or
Secondary Analyst
Mario Hernandez
Associate Director
+503 25166614
or
Committee Chairperson
Alejandro Garcia
Managing Director
+1 (212) 908-9137
or
Media Relations
Alyssa Castelli
+1-212-908-0540
New York
alyssa.castelli@fitchratings.com