Fitch Affirms Banco Pichincha C.A. y Subsidiarias at 'B'; Outlook Stable
KEY RATING DRIVERS - IDRS and VR
Pichincha's VR, which measures the intrinsic creditworthiness of a financial institution, drives its Long-term IDR. The bank's operating environment highly influence its VR. The bank's VR also factors in a tight but stable capitalization, pressured asset quality, weak profitability, ample liquidity and a strong franchise.
Ecuador's challenging operating environment - low expected growth and rising political risks - along with significant regulatory uncertainty limit the bank's potential growth, profitability and internal capital-generation capacity.
Compared with international peers, Pichincha has limited capital cushion to absorb unexpected losses. However, in Fitch's view, this is mitigated by conservative reserve coverage, moderate asset growth and a strong risk profile. Hindered by low profitability, Fitch Core Capital-to-risk weighted assets stood at 9.6% at first-half 20015 (1H15). Fitch expects that this capital ratio will not improve in the near term, given the unfavorable operating environment which will limit internal capital generation.
Pichincha's impaired loans-to-gross loans ratio continued to compare unfavorably with both the domestic industry average and similarly rated international peers (emerging market commercial banks with a VR of 'b-', 'b', or 'b+'), reflecting loan portfolio seasoning following a period of rapid expansion of the microcredit and consumer portfolios. However, loan loss reserve coverage of non-performing loans (NPLs) exceeds that of peers. Fitch projects that asset quality will continue to deteriorate over the next year in a weak economic environment.
Pichincha's financial performance is weak compared with local and international peers. In Fitch's view, profitability is unlikely to improve in 2015 as a result of the deteriorating economic conditions, which will also hinder credit growth and increase credit costs.
Pichincha's funding structure has benefited from its solid franchise and a wide distribution network, which have allowed the bank to enjoy a well-diversified, stable and relatively low-cost funding base. Fitch expects Pichincha's stable and diversified deposit base to grow at a moderate pace over the medium term while maintaining a sizable amount of liquid assets. Similar to domestic peers, liquidity is conservative and higher than international peers.
KEY RATING DRIVERS - SUPPORT RATINGS
Pichincha's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF', indicates that Fitch believes external support cannot be relied upon due to Ecuador's limited funding flexibility as well as the lack of a lender of last resort.
Pichincha's VR and IDRs have limited upside potential under current economic conditions. However, the bank's ratings could be pressured downward if changes in the operating environment or government intervention result in operating losses or a Fitch Core Capital ratio consistently below 9%, in conjunction with a material decline in excess loan loss reserves.
Ecuador's propensity or ability to provide timely support to these banks is not likely to change given the sovereign's low speculative-grade IDR. As such, the SR and SRF have no upgrade potential.
Fitch has affirmed the following ratings:
Banco Pichincha C.A. y Subsidiarias
--Foreign currency long-term IDR at 'B'; Stable Outlook;
--Foreign currency short-term IDR at 'B';
--Viability Rating at 'b';
--Support at '5';
--Support Floor at 'NF'.