OREANDA-NEWS. Fitch Ratings has affirmed Cooperativa de Ahorro y Credito (FUCEREP)'s long-term Issuer Default Ratings (IDRs) at 'B' and assigned a Viability Rating (VR) of 'b'. The long-term Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS - IDR and VR

FUCEREP's IDR and VR are driven by its adequate asset quality, which benefited from its favorable business model since a high proportion of the total loans are debited directly from the debtors' payroll mitigating credit risk. The ratings factor in the bank's adequate capitalization, good liquidity management and growing deposit base but also reflect the cooperative's weak efficiency ratios and the recent step back in financial performance.

FUCEREP's impaired loan ratio has been historically well contained and manageable (5.94% on average from 2010 - 2014), benefited from its favourable business model since 75% of the loans are debited from the borrower' payroll. In addition, charge offs are low (1.15% at end-2014) and loan loss reserve coverage high (180.66%), concentrations by borrower are not elevated, although there is some concentration per employer. Some pressures could arise from projected growth and planned expansion of the non-payroll deductible loan (NPDL) (NPDL's impairments are 14%).

FUCEREP has sustained solid capital ratios (Fitch Core Capital 34.04% at Dec. 31, 2014) supported by earnings retention and the annual contributions made by its members that have partially offset the net losses suffered in the past two years. Recent changes in regulatory capital requirements for cooperatives could challenge its ability to reach the required levels, although the entity should be able to meet these through new members' contributions.

FUCEREP's financial performance suffered a step back in the past two years. While its operating revenues have increased in line with loan growth and income diversification, it suffered operational losses in the past two years mainly affected by its low efficiency and higher regulatory provisioning requirements, while net losses were additionally affected by the inflation adjustment (UYU10.2 million in 2014). Although FUCEREP is a not for profit entity, its internal capital generation, is important to finance its expansion. During Q12015, the cooperative's revenues continued to grow along with loan growth and its operating income became positive, a trend Fitch expects to continue, although its net income could be undermined at the end of the year if it has to do the inflation adjustment.

FUCEREP's operational cost base is high; staff costs account nearly for two thirds of operating expenses, which have increased since 2013 due to technology expenditures and a new branch opening each year. Fitch believes FUCEREP's has room to improve its cost to income ratio as its operating revenues expand and salaries increases should be lower in the next years given the recent agreements in the sector. However, the agency only expects the ratio to return to its historical average (around 81%) progressively.

The low-cost deposit base is well balanced among savings and term and has steadily grown (13.5% in 2014). Deposit concentration remains high (top 10 depositors represented 20.9%). However this is partially mitigated by FUCEREP's ample liquidity. In addition it has obtained credit lines in four local banks to fund its strong loan growth plans. Liquidity risk is not a major concern given the significant portion of liquid assets that represented 39.8% of the total deposits (considering regulatory requirements) at Dec. 31, 2014.

The cooperative is taking some steps to gradually adapt its business model to non-payroll deducted credits, which rose from 22% in 2013 to 25% in 2014, and to expand operations inside the country. Since 2013, the origination and collection processes were strategically enhanced to direct its tactic to the new market segment.

SUPPORT RATING AND SUPPORT RATING FLOOR

Affirmation of Support Rating and Support Rating Floor of '5' and 'NF', respectively, reflects Fitch's opinion that extraordinary external support if needed, although possible, cannot be relied upon given its small size and deposit market share.

RATING SENSITIVITIES

FUCEREP's VR and IDR ratings could benefit from sustained progresses in its profitability metrics, with ROA consistently remaining above 1%, together with asset quality and capitalization remaining at historic levels. Inability to recover its profitability or material deteriorations in asset quality that lead to its Fitch Core Capital ratio falling and remaining below 15% could generate negative rating actions.

Fitch has taken the following rating actions:

FUCEREP:
--Long-term Foreign Currency IDR affirmed at 'B'; Outlook Stable;
--Long-term Local Currency IDR affirmed at 'B'; Outlook Stable;
--Viability rating of 'b' assigned;
--Support rating affirmed at '5';
--Support rating floor affirmed at 'NF'.