Fitch Ratings-New York-20 May 2016: Fitch Ratings has affirmed Banco Internacional de Costa Rica’s (BICSA) Long-Term Issuer Default Rating (IDR) at ‘BB+’ and its Viability Rating (VR) at ‘bb’ following a peer review of Panama’s midsized banks. Fitch also affirmed BICSA’s National Ratings in Panama. The Rating Outlook for the bank’s IDR and Long-Term National Rating remains Negative. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS – IDRS, VR, NATIONAL RATINGS AND SENIOR DEBT
The IDRs, National and senior debt ratings assigned to BICSA reflect the support that, in Fitch’s opinion, the entity will receive from its main shareholder, Banco de Costa Rica (BCR; ‘BB+’/Outlook Negative), if needed. The bank’s IDR and long-term National rating have a Negative Outlook, which is in line with BCR’s IDR. The affirmation of the bank’s Support Rating reflects Fitch’s view that the probability of support remains unchanged. Fitch believes support would be forthcoming to manage the parent’s reputational risk, if required.

BICSA’s VR reflects its adequate profitability, good capital ratios and low delinquency. The rating also considers the bank’s highly concentrated funding, and tight liquidity that result in a lower financial flexibility compared to its peers.

BICSA is characterized by low delinquency levels under international standards, with non-performing loan (NPL) ratios below 1% over the last four years. In 2015, this metric deteriorated somewhat, to 1.1%, as a result of the deterioration of a small number of debtors. The bank’s delinquency metrics compare below local peers but this is expected given the Costa Rican exposure.

The bank’s financial performance is consistent with its corporate focus, although it did decline in 2015. As of December 2015, BICSA’s return on assets was 0.9%, which is lower than its 2014 level, due to both the downward trend observed in its net interest margin (NIM) and greater provisioning expenses in 2015. Also, the bank’s performance was hit by loan prepayments. The bank’s already low NIM has been declining over the past few years as a result of fierce competition.

BICSA’s funding is highly concentrated, even when compared with other local corporate banks, which, due to the nature of their corporate focus, tend to exhibit higher concentration in their funding than universal banks. Most of the bank’s funding stems from client deposits, primarily term deposits, with 50% of these being concentrated among the bank’s 20 largest depositors.

Liquidity is still at reasonable levels, with cash and equivalents and investments representing 16.6% of total financial liabilities showing a decline from previous years. Short-term refinancing risk is relevant, requiring an active asset-liability management to ensure the renewal of its funding sources. The combination of possible dried up funding sources and lower liquidity in 2016 poses a material challenge for the bank’s financial profile.

Fitch considers BICSA’s capitalization to be good, with a Fitch Core Capital (FCC) of 12.4% as of December 2015. Contributing to the bank’s good capitalization are its asset growth, which is in line with its internal generation of capital, and its zero dividend payout policy. As loan growth recovers in 2016 and 2017, capitalization could decline to around 11%, which would still be considered adequate.

RATING SENSITIVITIES – IDR, VR and National Ratings

The bank’s IDRs, national and senior debt ratings are sensitive to a change, in Fitch’s view, as to BCR’s capacity or willingness to support BICSA. The Negative Outlook on BICSA’s IDR reflects the likelihood that a downgrade of BCR’s IDRs would result in a similar action on BICSA’s IDR and national ratings.

Reductions in the bank’s VR could come from a material increase of the refinancing risk reflected in reductions of funding sources combined with a weak liquidity cushion. Also, a deterioration of the loan portfolio above 2% could put pressure on the VR.

Fitch affirmed BICSA’s ratings as follows:

International ratings
–Long-Term IDR at ‘BB+’; Outlook Negative;
–Short-Term IDR at ‘B’;
–Viability Rating at ‘bb’;
–Support Rating at ‘3’.

National ratings
–Long-term National rating at ‘AA-(pan)’; Outlook Negative;
–Short-term National rating at ‘F1+(pan)’;
–Long-term senior unsecured bonds at ‘AA-(pan)’;
–Commercial paper at ‘F1+(pan)’.