News Column

Fitch Affirms Banco de la Nacion's (Peru) IDR at 'BBB+'; Upgrades VR to 'bbb-'

July 14, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Peru's Banco de la Nacion's (BN) support-driven foreign currency long-term Issuer Default Rating (IDR) at 'BBB+,' local currency long-term IDR at 'A-', foreign currency short-term IDR at 'F2' and its Support Rating Floor at 'BBB+'. In addition, Fitch has upgraded Banco de la Nacion's Viability Rating (VR) to 'bbb-' from 'bb+.' The Rating Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.

The VR has been upgraded in light of Banco de la Nacion's strong and stable profitability, underpinned by ample margins, as well as its exceptional asset quality, high levels of liquidity and access to stable, low cost funding.

KEY RATING DRIVERS - IDRS, SRF and VR

The bank's IDRs, reflect the potential support from Banco de la Nacion's shareholder, the Republic of Peru ('BBB+/A-'/Outlook Stable). Banco de la Nacion is an autonomous government agency and in Fitch's opinion, forms an integral part of the government's operations.

It performs basic government functions (collections and payments), acts as the government's financial agent, finances key government activities (e.g. defence procurement and infrastructure), and maintains the country's most extensive branch network through which it provides financial services in remote areas where private banks are not present. Therefore, support from the government should be forthcoming, if needed. By the same token, Banco de la Nacion's support rating and support rating floor, indicate the direct link between the entity's creditworthiness and that of its shareholder, the Republic of Peru.

The bank's VR has been upgraded in light of the positive operating environment, the bank's healthy asset quality, its stable profitability and adequate capital base. BN's performance is supported by the strength of the Peruvian operating environment, including a dynamic economy, strong macroeconomic fundamentals, low inflation, a healthy fiscal position and a capable banking regulator. Fitch forecasts real GDP growth in Peru of 5.2% and 5.6% for 2014 and 2015, respectively.

BN's asset quality ratios are considerably healthier than the Peruvian banking sector average and its international peers. BN's risk profile is relatively low, as lending is directed primarily to national and subnational governments, public agencies, public servants and government retirees. Past due loans (PDLs) accounted for a low 0.41% of gross loans and reserve coverage rose to 555.89% at the first quarter of 2014 (1Q'14).

In addition, despite downward pressure on interest rates, BN's profitability has remained relatively stable and strong. BN reported ROAA of 2.94% at 1Q'14 (2.92% at fiscal year-end 2012 [FYE12]). Profitability continues to be driven by asset growth and ample albeit narrowing margins, and growing non-interest revenues. BN's profitability is expected to remain robust in the near term due to its cost of funds and scope to grow its loan portfolio from existing liquidity.

Fitch Core Capital remains solid but has declined to 29.1% of risk-weighted assets at FYE13 from 38.5% at FYE12 mainly due to the bank's steady expansion and high dividend distribution. Capital ratios at 1Q'14 are expected to partially recover by FYE14, as dividends based on prior year earnings were paid early in the year. BN continues to benefit from the low-risk weight of its assets (45.01% in cash and 22.31% in government securities at FYE13). Regulatory capital remains at 15.4% of risk weighted assets at 1Q'14, significantly higher than the 10% regulatory requirement.

A continuing constraint on the bank's VR is its exposure to potential political influence, given its ownership and role. Government influence manifests itself primarily in the appointment of directors. Although current directors are highly qualified, currently there are no eligibility standards in place for service on the board.

RATING SENSITIVITIES - IDRS, NATIONAL RATINGS AND SENIOR DEBT

As a fully state-owned financial institution, deeply integrated within the government, Banco de la Nacion's creditworthiness and ratings are directly linked to those of the Republic of Peru. Hence, its ratings should move in line with any potential change in Peru's sovereign ratings.

RATING SENSITIVITIES - VR

BN's VR could be pressured by a change in risk appetite, including an expansion into new business segments in which the bank has little underwriting experience or an engagement in activities with increased market risk. Similarly, BN's VR is also sensitive to a sustained decline in tangible equity below 5% of tangible assets, particularly if such decline resulted from a deterioration of profitability or asset quality.

Conversely, greater protections against political influence, such as stricter eligibility criteria for Directors, would be positive for BN's VR. However, given the bank's narrow business model and limited scope for franchise development, Fitch sees limited upside potential in its viability rating.

Fitch has taken the following rating actions:

Banco de la Nacion

--Foreign currency long-term IDR affirmed at 'BBB+'; Outlook Stable;

--Local currency long-term IDR affirmed at 'A-'; Outlook Stable;

--Foreign currency short-term IDR affirmed at 'F2';

--Local currency short-term IDR affirmed at 'F2';

--Support Rating affirmed at '2';

--Support Rating Floor affirmed at 'BBB+';

--Viability Rating upgraded to 'bbb-' from 'bb+'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=839399

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Mark Narron

Director

+1-212-612-7898

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Veronica Chau

Director

+52 81 8399 9170

or

Committee Chairperson

Rene Medrano

Senior Director

+503 2516 6610

or

Media Relations:

Elizabeth Fogerty, New York, +1 212-908-0526

Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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