New York, February 09, 2016 — Moody’s Investors Service has today changed the outlook on the long-term local currency deposit and foreign currency deposit and senior unsecured debt ratings of Banco Nacional de Costa Rica (BNCR) and Banco de Costa Rica (BCR) to negative from stable. At the same time, Moody’s affirmed the banks’ long and short-term local currency deposit ratings at Ba1/Not Prime, as well as the foreign currency deposit ratings at Ba2/Not Prime and the foreign currency senior debt ratings at Ba1.
The rating action follows Moody’s outlook change on Costa Rica’s Ba1 government bond rating to negative from stable. For details on this rating action please refer to Moody’s press release “Moody’s changes outlook on Costa Rica’s Ba1 rating to negative from stable; affirms rating”, dated 8 February 2016.
BNCR’s and BCR’s ba2 baseline credit assessments (BCA) and adjusted BCAs are unaffected by this action, as are their Ba1(cr) and Not Prime(cr) long and short term counterparty risk assessments.
The following ratings were affirmed, with the outlook changed to negative from stable:

Banco Nacional de Costa Rica and Banco de Costa Rica:

Long term local currency deposit rating of Ba1

Long term foreign currency deposit rating of Ba2

Long term foreign currency senior debt rating of Ba1
The following ratings were affirmed:

Banco Nacional de Costa Rica and Banco de Costa Rica:

Short term local currency deposit rating of Not Prime

Short term foreign currency deposit rating of Not Prime
RATINGS RATIONALE
Moody’s outlook change on Banco Nacional de Costa Rica’s and Banco de Costa Rica’s long-term deposit and debt ratings to negative from stable is in line with the action taken on the outlook for Costa Rica’s Ba1 government bond rating on 8 February. The negative outlook on the sovereign rating reflects Moody’s expectation that Costa Rica’s high fiscal deficits will continue, leading to a continued increase in government debt.
Both banks’ local currency deposit and foreign currency debt ratings benefit from one notch of uplift from their ba2 BCAs, incorporating Moody’s assumption of full support from the government. This assumption is based on the government’s 100% ownership, its guarantee of the banks’ senior obligations under Article 4 of the Banking Law, the banks’ public policy mandate, and the importance of their deposit and loan franchise within the Costa Rican financial system. The banks’ Ba2 foreign currency deposit ratings are constrained by Costa Rica’s sovereign ceiling for foreign currency deposits. Should Costa Rica’s government bond rating be downgraded and its foreign currency deposit ceiling, which is one notch below the sovereign bond rating, be lowered, BNCR’s and BCR’s deposit and debt ratings would also face downward pressure.
The ba2 BCAs for both issuers capture their modest consolidated capitalization. The BCAs are also limited by their weak profitability, owing to high operating costs and mandatory transfers to government related entities. Earnings generation will be further challenged by declining interest rates and rising credit costs. Asset quality at both banks remains relatively strong, though pressures may arise from increases in unemployment, notwithstanding Moody’s expectation of higher economic growth during 2016.
In addition, “the government’s deteriorating finances may cause it to rely more heavily on both BCR and BNCR to help finance public sector deficits and lend to public infrastructure programs, which could further compress profit margins, as these loans are usually relatively low yield” according to Moody’s analyst Georges Hatcherian. While project financings are also generally relatively high risk and are often large tickets, these types of projects typically carry either explicit or implicit government backing.
While the colon has been much more stable than many other currencies in the region, a significant depreciation would increase risks to asset quality further given the significant amount of foreign currency lending to local currency earners.
WHAT COULD CAUSE THE RATINGS TO MOVE DOWN

Should Costa Rica’s government bond rating be downgraded, BNCR’s and BCR’s deposit and debt ratings would also face downward pressure.
WHAT COULD CAUSE THE RATINGS TO MOVE UP

Upward pressures on the banks’ ratings is limited given the negative outlook on the two issuers and on the sovereign ratings of the Government of Costa Rica. However, the outlook on the banks’ ratings could stabilize if the sovereign outlook stabilizes.
The last rating action on Banco de Costa Rica and on Banco Nacional de Costa Rica was on 3 June 2015 when Moody’s lowered both banks’ BCAs to ba2 from ba1 and affirmed their deposit and debt ratings.
The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
Based in San Jose, Costa Rica, Banco Nacional de Costa Rica reported total consolidated assets of about US$11 billion (CRC 5.8 trillion) and shareholders’ equity of US$1 billion (CRC 535 billion), as of September 2015.
Based in San Jose, Costa Rica, Banco de Costa Rica reported total consolidated assets of around US$9 billion (CRC 4.8 trillion) and shareholders’ equity of US$850 million (CRC 455 billion), as of September 2015.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating