Fitch Ratings has affirmed Peru's Banco de la Nacion's support-driven foreign currency long-term IDR at 'BBB+,' local currency long-term IDR at 'A-', foreign currency short-term IDR at 'F2', Support Rating Floor at 'BBB+' and Viability Rating (VR) at 'bbb-.'
The bank's Issuer Default Ratings (IDR), reflect the potential support from Banco de la Nacion's shareholder, the Republic of Peru ('BBB+/A-'/Outlook Stable).
Banco de la Nacion (BN) is an autonomous government agency and in Fitch's opinion, forms an integral part of the government's operations.
It performs basic government functions, acts as the government's financial agent, finances key government activities, and maintains the country's most extensive branch network through which it provides financial services in remote areas where private banks are not present.
Therefore, support from the government should be forthcoming, if needed. By the same token, BN's support rating and support rating floor, indicate the direct link between the entity's creditworthiness and that of its shareholder, the Republic of Peru.
The bank's VR reflects the bank's healthy asset quality, its stable profitability and adequate capital base.
BN's performance is supported by the positive operating environment, including strong macroeconomic fundamentals, low inflation, a healthy fiscal position and a capable banking regulator.
Despite a deceleration of economic growth in 2014 due to weaker export demand, Peru continues to outperform its peers in the 'BBB' category.
As of Sept. 30, 2014, Fitch forecasts that real GDP growth could decline to 3.7 for 2014, but expects the economy to regain growth momentum averaging 5.6% in 2015-2016.
BN's asset quality ratios are considerably healthier than the Peruvian banking sector average and its international peers.
BN's risk profile is relatively low, as lending is directed primarily to national and subnational governments, public agencies, public servants and government retirees.
Past due loans (PDLs) accounted for a low 0.54% of gross loans and reserve coverage rose to 537.63% at the second quarter of 2014 (2Q'14).
In addition, despite downward pressure on interest rates, BN's profitability has remained relatively stable and strong.
BN reported ROAA of 2.83% at 2Q'14 (2.92% at fiscal year-end 2012 [FYE12]). Profitability continues to be driven by portfolio growth and ample albeit narrowing margins, and growing non-interest revenues.
BN's profitability is expected to remain robust in the near term due to its cost of funds and scope to grow its loan portfolio from existing liquidity.
Fitch Core Capital remains solid but has declined to 18.2% of risk-weighted assets at 2Q'14 from 29.12% at FYE12 mainly due to the bank's steady expansion of its loan portfolio as a greater percentage of assets and its high dividend distribution.
BN continues to benefit from the low-risk weight of its assets (38.75% in cash and 25.7% in government securities at 2Q'14). Regulatory capital remains at 15.36% of risk weighted assets at 2Q'14, significantly higher than the 10% regulatory requirement.
A continuing constraint on the bank's VR is its exposure to potential political influence, given its ownership and role.
Government influence manifests itself primarily in the appointment of directors. Although current directors are highly qualified, currently there are no eligibility standards in place for service on the board.
As a fully state-owned financial institution, deeply integrated within the government, BN's creditworthiness and ratings are directly linked to those of the Republic of Peru. Hence, its ratings should move in line with any potential change in Peru's sovereign ratings.
BN's VR could be pressured by a change in risk appetite, including an expansion into new business segments in which the bank has little underwriting experience or an engagement in activities with increased market risk.
Similarly, BN's VR is also sensitive to a sustained decline in tangible equity below 5% of tangible assets, particularly if such decline resulted from a deterioration of profitability or asset quality.
Conversely, greater protections against political influence, such as stricter eligibility criteria for Directors, would be positive for BN's VR.
However, given the bank's narrow business model and limited scope for franchise development, Fitch sees limited upside potential in its viability rating.
Fitch has affirmed the following ratings:
--Foreign currency long-term IDR at 'BBB+'; Outlook Stable;
--Local currency long-term IDR at 'A-'; Outlook Stable;
--Foreign currency short-term IDR at 'F2';
--Local currency short-term IDR at 'F2';
--Support Rating at '2';
--Support Rating Floor at 'BBB+';
--Viability Rating at 'bbb-'.
(END) RMB/RMB
Published: 10/11/2014