Fitch Affirms Banreservas' IDRs at 'B+'; Outlook Stable
Despite an improving financial performance, Fitch affirmed Banereservas' Viability Rating (VR) at 'b' as some of the bank's financial metrics still compare unfavourably to higher rated domestic (large commercial banks) and international (Latin American commercial banks with a VR of 'b+' and above) peers. The Stable Outlooks on Banreservas' long-term IDRs and National rating are in line with those of the sovereign.
KEY RATING RIVERS
IDRS AND NATIONAL RATINGS
Banreservas' IDRs and National ratings reflect Fitch's expectations of the support the bank would receive from its sole shareholder, the Dominican government (IDR rated 'B+'/Stable Outlook), if needed.
VR
The bank's VR reflects its weak, albeit improving capitalization, and still high asset concentrations. Banreservas' VR also considers positive trends in profitability and a stabilization of private sector loan quality.
With the modification of the bank's organic law in December 2014, the government increased Banreservas' paid-in capital by DOP2 billion before year-end. Banreservas also reinvested DOP2.8 billion of 2014 earnings (about 40% of net income) in early 2015, and still has the authorization to increase paid-in capital by an additional DOP1.7 billion, which would lift paid-in capital to a total of DOP10 billion by 2016. Despite this improvement, with sustained asset growth of around 15% (five-year average), Banreservas' tangible equity/tangible assets ratio will continue to lag that of its domestic and international peers (emerging market commercial banks with highly speculative-grade ratings).
The bank's main asset concentration, including loans and securities, is with a highly speculative-grade sovereign (4.3x equity at 1Q15). However, this exposure has been consistently declining since 2013. In addition, moderate private sector loan concentrations could lead to volatility in loan quality metrics, especially as the proportion of restructured loans remained high relative to local peers at 2.4% as of March 31, 2015. Private sector loan quality ratios have stabilized at a level similar to its peers over the past year due to charge-offs, restructurings and robust private sector loan growth.
The bank's ROAA will come under some pressure in 2015 as credit costs remain high and Banreservas continues to invest in technology and expand its distribution channels. Over the medium term, bank management expects to maintain Banreservas' ROAA between 1.3% and 1.5% as the bank expands to the consumer and small and medium-sized enterprise (SME) segments, focuses on the cross selling of its retail platform and improves efficiency.
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's systemic importance, its role as the government's main paying agent and provider of domestic loans results in an equalization of its Support Rating Floor with the sovereign's LT IDR of 'B+'. Additionally, Fitch believes the government's willingness to support Banreservas should it be required is substantial given its 100% stake in the bank. However, the Dominican Republic's speculative-grade rating limits the sovereign's capacity of support, resulting in a Support rating of '4'.
SUBORDINATED DEBT
Banreservas' outstanding subordinated debt included an international issuance of USD300 million due 2023 and a domestic issuance of DOP10 billion due 2024. The bank's subordinated note ratings are one notch below its supported IDR and national long-term rating, reflecting one notch for loss severity, but no notches for incremental non-performance risk relative to the bank's IDR. In Fitch's view, given the gone concern characteristics of the security, the anchor rating is the IDR, even though there is no explicit government guarantee on the security. According to Fitch's methodology, the subordinated notes do not receive equity credit.
RATING SENSITIVITIES
IDRS AND NATIONAL RATINGS
The bank's IDRs and National ratings are sensitive to a change in Fitch's assumptions around support. Changes in the IDRs are also contingent on sovereign rating actions.
VR
The bank's VRs are sensitive to a change in Fitch's assumptions regarding Banreservas' financial performance.
A stabilization of private sector loan quality indicators, a stronger capital base, as well as a more established track record of meeting strategic objectives could lead to an upgrade of the bank's VR.
An unexpected deterioration in asset quality or profitability, or sustained high disbursements of income to the government that pressures Banreservas' equity/assets ratio below 5.5%, could trigger a downgrade of its viability rating.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are potentially sensitive to any change in assumptions around the propensity or ability of the Dominican government to provide timely support to the bank. This might arise in the event of a sovereign rating action. Currently, the Outlook on the Dominican Republic's long-term local- and foreign-currency IDRs is Stable.
SUBORDINATED DEBT
Banrservas' subordinated debt ratings are broadly sensitive to the same considerations that might affect the banks VR and National long-term rating.
Fitch has affirmed Banreservas' ratings as follows:
--Foreign and local currency IDRs at 'B+'; Outlook Stable;
--Short-term foreign and local currency IDRs at 'B';
--Viability Rating at 'b';
--Support Rating at '4';
--Support Floor at 'B+';
--Long-term subordinated notes at 'B'
--National long-term rating at 'AA+(dom)'; Outlook Stable;
--National short-term rating at 'F1+(dom)';
--National subordinated debt rating at 'AA(dom)'.
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