News Column

Fitch Affirms Banco Nacional De Costa Rica's IDR at 'BB+'

July 17, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Banco Nacional de Costa Rica's (BNCR) 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, NATIONAL RATINGS AND SENIOR DEBT

The bank's IDRs, National and senior debt ratings reflect the explicit sovereign guarantees for all state-owned banks stated in Costa Rica's Banking Law. BNCR's IDR and National Ratings are aligned with Costa Rica's Sovereign Ratings (Long-term Foreign and Local Currency IDR 'BB+'/Stable Outlook). The Stable Outlook is also aligned with the sovereign Rating Outlook.

RATING SENSITIVITIES - IDRS, NATIONAL RATINGS AND SENIOR DEBT

Changes in Costa Rica's sovereign rating may trigger changes in the bank's IDRs, National and senior debt ratings.

KEY RATING DRIVERS - VR

The bank's VR is influenced by the bank's moderate risk appetite and adequate, although decreasing capitalization metrics. The rating also considers its strong local franchise, ample funding as well as its modest performance and weaker asset quality metrics relative to similarly rated international peers (emerging market commercial banks with a viability rating between 'bb-' and 'bb+').

BNCR's capital position is adequate. The bank's Fitch Core Capital ratios compare well with similarly rated peers and its regulatory capital ratio is above the regulatory limit, despite the pressure imposed by increased asset growth over the first quarter of 2014. However, the bank runs with a relatively tight buffer in terms of its regulatory capital (100/250 bps above the minimum), which demands a cautious growth plan, considering the relatively low internal capital generation capacity of the bank.

Favorably, BNCR has taken advantage of its capacity to issue subordinated debt and in May 2014 signed a subordinated debt agreement with the Inter-American Development Bank in order to strengthen its regulatory capital ratios. The US$100 million issuance does not receive equity credit from Fitch; however, it allows the bank to execute its growth strategy without additional pressure on regulatory capital. As of June 2014, BNCR reports a regulatory capital ratio of 12.62%.

BNCR is the largest bank in the nation and holds a dominant market position in several business lines. The bank's ample and diversified deposits are a result of the explicit sovereign support, the strength of the bank's franchise, and its ample geographic coverage. Also BNCR funding is benefited by several regulations that name the bank as one of the recipients of some compulsory deposits from private owned banks.

The bank's loan portfolio is well diversified and shows moderate concentrations by individual creditor and by economic sector. BNCR investment portfolio has low credit risk exposure and is well administrated in order to comply with regulatory investment guidelines and to minimize capital charges and maintain liquidity requirements in local and foreign currency.

BNCR also benefits from a measured and well matched exposure to FX risk. Such exposure is controlled through the bank's limits to its open position in U.S. Dollars and its ability to obtain funding in both Colones and U.S. Dollars in the local and international market. BNCR foreign currency loans and deposit exposure is below the average of the system but still significant at 40% and 34%, respectively.

BNCR's asset quality has improved, while still below its peers' average. Non-performing loans have decreased to 2% of total loans and reserve coverage has also increased. In Fitch's opinion, the improved asset quality could positively affect year end results, as it reduces credit costs.

BNCR's operating ROAA remains below the median of similarly rated banks and also below the median of public owned banks in Latin America. Credit costs, which were still high in 2013, have been reducing its burden during 2014 while some advances in terms of operating costs have partially compensated the reduction on spreads. In Fitch's opinion, better income diversification, sustainable lower credit costs and tighter expenses control may benefit the bank's performance.

RATING SENSITIVITIES - VR

Upgrades in the bank's VR are unlikely in the foreseeable future, given its strong relation to the government in both sides of the balance sheet. A downgrade in BNCR's VR could be triggered by a material deterioration of the bank's asset quality metrics (past due loans to total loans ratio above 4%) and/or a reduction in profitability to a point the may hinder the capacity to adequately generate capital internally.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

BNCR's support rating (SR) of '3' reflects Fitch's opinion that there is a moderate probability of support from the state. In Fitch's opinion, the bank has a clear policy roll and the explicit support of the state. Support probability is limited by the sovereign rating. Given the explicit guarantee from the government towards the bank and its systemic importance; the bank SRF is equalized to the sovereign rating.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

BNCR's support SR and SRF are sensitive to changes in the sovereign rating

Fitch has affirmed BNCR's ratings as follows:

International ratings

--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';

--Long-term senior unsecured bonds at 'BB+';

--Viability Rating at 'bb+';

--Support Rating at '3';

--Support Rating Floor at 'BB+'.

National ratings:

--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)'.

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

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

Costa Rica

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732956

2014 Outlook: Central America and the Dominican Republic

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725825

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840269

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, +1-212-612-7898

Director

Fitch Ratings Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Marcela Galicia, +503 2516 6600

Director

or

Committee Chairperson

Rita Goncalves, +5521 4503 2621

Senior Director

or

Media Relations

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

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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