OREANDA-NEWS. Fitch Ratings has today affirmed Banco Nacional de Costa Rica's (BNCR) Long-Term Issuer Default Rating (IDR) and Support Rating Floor (SRF) at 'BB+'. Fitch has affirmed BNCR's Viability Rating at 'bb+' and affirmed its Support Rating at '3'. The Rating Outlook for BNCR's IDRs remains Negative. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

IDRS, NATIONAL RATINGS AND SENIOR DEBT
The bank's IDRs, National and senior debt ratings are aligned with Costa Rica's Sovereign Ratings (Long-term Foreign and Local Currency IDRs of 'BB+'/Negative Outlook). The alignment reflects the Costa Rican government's explicit guarantee of the senior obligations of state-owned banks, including BNCR. The Republic of Costa Rica is the bank's sole shareholder.

BNCR's Negative Outlook is also aligned with the sovereign Rating Outlook.

VR

The bank's VR reflects the bank's strong local franchise. BNCR is the largest bank in the country with a dominant market position in several business lines. The bank's stable and diversified deposit base benefits from an explicit sovereign guarantee, as well as its extensive geographic coverage. Bank funding also benefits from regulation compelling private banks to make compulsory deposits at state-owned banks.

BNCR's financial performance has historically been below the Costa Rican banking system average, a trend that continued through the first half of 2015. The bank's below-average margins are due in part to below-market pricing on several products. In addition, although the bank has reported significant improvements in operating efficiency, it continues to incur levels of operating expenses above those of domestic and international peers.

Like other state banks and enterprises, BNCR does not distribute dividends but is obligated to allocate a significant percentage of pre-tax earnings (23% at June 2015) to numerous government programs. Such allocations are recorded as expenses on its income statement and therefore distort profitability indicators based on net income.

The bank's future earnings may be challenged by developments in the regulatory and operating environment. These include a change to the calculation of the benchmark Tasa Basica Pasiva rate to which a majority of local currency loans are indexed. The bank may also face a material tax assessment subsequent to audits finalized in 2015. In addition, the government has exerted political pressure on all state banks to lower its pricing in order to stimulate the local economy.

BNCR's capital position is adequate, with a regulatory capital ratio at 12.9% at June 2015, comfortably above the 10% regulatory minimum. However BNCR's tangible common equity is under long-term pressure due to asset growth. BNCR's Fitch Core Capital ratio, which excludes USD 130 million in outstanding Tier II compliant subordinated debt and its non-controlling equity interests, is slightly below that of its direct peers.

BNCR's portfolio composition is well diversified by borrower, geography and sector. Its loan quality indicators have registered a minor deterioration in 2015, consistent with trends in the banking system as a whole. Historically, BNCR's non-performing loan ratios have tracked slightly higher than the banking system, partly reflecting its relatively lower rate of charge offs. Fitch expects that BNCR's loan quality indicators will deteriorate moderately over the long term in response to the bank's strategy to increase its market share in consumer loans and credit cards.

Loan loss reserve coverage has improved significantly due to recent regulations on generic provisioning. Reserve coverage improved from 70.1% of impaired loans at Dec 2014 to 83% at June 2015. Nevertheless, BNCR's reserves remain below those of domestic and international peers.

Like other Costa Rican banks, BNCR tolerates an elevated exposure to currency risk compared to other banks in the region. 37.8% of BNCR's loan portfolio and 32.5% of its customer deposits were denominated in USD at June 2015, maintaining a net short position in USD equivalent to 2% of equity. Its unhedged open position for all foreign currency exposures (excluding the inflation-adjusted Unidad de Desarrollo) was also 2%, well below its internal 6% limit.

SUPPORT RATING AND SUPPORT RATING FLOOR
BNCR's support rating (SR) of '3' reflects Fitch's opinion that there is a moderate probability of support from the state. In Fitch's opinion, the bank has a clear policy roll and the explicit support of the state. Support probability is limited by the sovereign rating. Given the explicit guarantee from the government towards the bank and its systemic importance; the bank SRF is equalized to the sovereign rating.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's IDRs, National ratings, senior debt ratings Support Rating and Support Rating Floor are sensitive to a change in the sovereign rating.

VR
The bank's VRs are sensitive to a change in Fitch's view of the Costa Rican operating environment, which currently constrains the rating. In addition, the VRs are sensitive to sustained deterioration of BNCR's asset quality metrics or its financial performance which would result in a material decrease in BNCR's internal capital generation.

Fitch has affirmed the following ratings:

Banco Nacional de Costa Rica

--Long-term foreign currency IDR at 'BB+'; Outlook Negative;
--Short-term foreign currency IDR at 'B';
--Long-term local currency IDR at 'BB+'; Outlook Negative;
--Short-term local currency IDR at 'B';
--Long-term senior unsecured bonds at 'BB+';
--Viability Rating at 'bb+';
--Support Rating at '3';
--Support Rating Floor at 'BB+';
--Long-term national rating at 'AA+(cri); Outlook Stable;
--Short-term national rating at 'F1+(cri);
--Long-term senior unsecured bonds national rating at 'AA+(cri)';
--Commercial paper national rating at 'F1+(cri)'.