Fitch Affirms Banco Agropecuario's IDR at 'BBB+'; Outlook Stable
KEY RATING DRIVERS
IDRs, SENIOR DEBT AND SUPPORT RATINGS
The bank's IDRs, senior debt rating, support rating (SR) and SRF reflect the likelihood of support from Agrobanco's shareholder, the Republic of Peru (rated 'BBB+'/'A-'/Outlook Stable) should it be required. Although there is no explicit government guarantee, in Fitch's opinion Agrobanco is an integral part of the government's agricultural development strategy. Despite its small share of the financial system, Agrobanco is the country's largest source of financing for the agricultural sector. In addition, its 100% government ownership as well as the representation of the Ministries of Agriculture and Finance on its Board of Directors, demonstrates its national policy importance.
The bank has an elevated risk appetite, in keeping with its business model and target market. Since receiving authorization to leverage its capital in 2011, its loan growth has been rapid, averaging 59.4% annually. This growth has been accompanied by a strategic transformation from wholesale lending to provision of direct working capital financing, equipment financing and long term lines of credit.
Agrobanco's loan quality indicators have deteriorated. While non-performing loans (2.4% at June 2016) compares well with the banking sector, its restructured loan portfolio (4.1%) is higher than the banking system average. In Fitch's view, Agrobanco's ability to closely monitor its portfolio quality is challenged by infrequent amortization payments on large portion of its credits, as well as its remote, rural client base. However, its loan quality is mitigated by a track record of support from Fondo AgroPeru, a government facility that has been important financing a specific sector such as coffee producers.
Agrobanco's funding profile remains a weakness. Without authorization to mobilize deposits, its funding is concentrated and short term. At June 2016, 40.9% of funding was sourced from one lender and 69.4% of funding will mature within 12 months. Roll over risk is partly mitigated by the bank's adequate level of liquidity (25% of its balance sheet) as well as a track record of support from the government and access to lines of credit from state and local banks.
The bank's profitability has been pressured by a combination of factors, including an increase in non-earning assets since 2014, growth in non-accruing loans (approximately 5% of gross loans) and significant loan impairment charges (50% of pre-impairment operating profit in 2015). While operating profits increased in 2015 to 1.2% of assets (compared to 0.8% the year prior), these levels remain significantly below the 2010-2013 period (average of 4.0%).
Agrobanco's capital metrics remain robust, benefitting from the reinvestment of 100% of retained earnings as well as government recapitalizations in recent years. Despite a rapid process of leveraging since 2011, Agrobanco's Fitch Core Capital was 20.8% at June 2016.
The affirmation of the bank's long-term senior unsecured loan in the local currency equivalent of USD45 million at 'A-(emr)' similarly reflects the likelihood of government support, if needed. The subscript 'emr' refers to embedded market risk given that the loan is denominated in local currency while settlement is in USD.
IDRs, SENIOR DEBT AND SUPPORT RATINGS
Agrobanco's IDRs, senior debt ratings and support ratings are sensitive to a change in Peru's sovereign ratings which currently have a Stable Outlook, or to a change in Fitch's view of Agrobanco's strategic importance to government policy.
Fitch takes the following rating actions:
--Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable;
--Short-term Foreign Currency IDR affirmed at 'F2';
--Long-Term Local Currency IDR affirmed at 'A-'; Outlook Stable;
--Short-Term Local Currency IDR upgraded to 'F1' from 'F2';
--Support Rating affirmed at '2';
--Support Rating Floor affirmed at 'BBB+';
--USD45 million Long-Term Local Currency unsecured loan affirmed at 'A-(emr)'