OREANDA-NEWS. Fitch Ratings has affirmed Banco Popular y de Desarrollo Comunal's (BPDC) long-term foreign currency Issuer Default Rating (IDR) and local currency long-term IDR at 'BB+'. The Rating Outlook is Negative. Fitch also affirmed the bank's short-term foreign currency IDR and short-term local currency IDR at 'B', its Viability Rating (VR) at 'bb+', its Support Rating (SR) at '3' and Support Rating Floor (SRF) at 'BB'. A full list of rating actions follows at the end of this press release.

The Negative Outlook reflects the sovereign's high level of influence over the financial sector and the broader operating environment. The bank's IDRs would be downgraded in the event of a Costa Rican sovereign downgrade. Conversely, a revision of the Outlook for the sovereign's IDR to Stable would likely prompt a similar action on the Outlook for the bank's IDR.

KEY RATING DRIVERS

IDRs AND VR
BPDC's VR, which represents Fitch's view as to the intrinsic creditworthiness of an issuer, drives its IDRs. The bank's ratings are at the same level of the Sovereign Rating. As stated in Fitch's rating criteria, banks are rarely rated above the sovereign rating given the high influence of the operating environment over banks' performance. Therefore, downgrade of Costa Rica's sovereign rating will very likely trigger a downgrade of the bank's VR.

BPDC's ratings reflect its company profile as the third largest bank in Costa Rica by assets with a market share of 13.6%. It was established as an autonomous nongovernmental public institution in 1969, is regulated by its own organic law and is the property of the Costa Rican workforce. BPDC's main objective is to provide economic protection and fulfill the financial needs of Costa Rican workers, artisans and micro entrepreneurs.

In line with its origins and nature, BPDC is retail oriented and maintains a strong franchise in retail consumer loans. In Fitch's view, the bank's role in the pension regime as depositary of mandatory savings from Costa Rican workers, and its franchise evidence its systemic importance. The bank also benefits from tax exemptions on investments issued by the government and makes compulsory contributions of up to 15% of profits to different development funds.

BPDC's ratings also consider its ample loss absorption capacity and consistent profitability, adequate asset quality, ample deposit based funding, and moderate tenure mismatches in its asset and liability structure. BPDC's high capital metrics, supported by good profitability as well as the mandatory capital contributions, compare well with local and international peers. These provide an ample buffer over regulatory minimums, sufficient to sustain asset growth.

The bank's solid profitability is commensurate with the riskier profile of its target segment. Profitability is underpinned by sustained growth and ample margins. In Fitch's view, the reductions in the reference interest rate in colones could somewhat pressure the bank's year end profitability, as a moderate proportion of the loan portfolio granted in local currency is linked to the reference interest rate.

Asset quality metrics are adequate. In Fitch's view the relatively higher risk of the bank's loan portfolio, oriented to consumer and mortgage loans, is controlled by adequate collateral coverage, effective collection mechanisms and sufficient reserves coverage for non-performing loans (NPLs). As of June 2015, NPLs remained at their five-year average (2.6%), while reserves covered 1.25 times (x) NPLs. The security investment portfolio is managed in a conservative manner to maintain adequate liquidity support for public deposits. The bank's investment portfolio maintains a high proportion of liquid assets, despite some concentration in sovereign risk.

Funding and liquidity are generally stable. The bank's funding relies on a low cost, deposits based funding structure. Deposits have seen a drop in their relative share of total funding in favor of other funding sources. Liquidity is in line with the bank's liability structure and comprised of local deposits and securities. While the bank has improved the diversification of its investments, the concentration in sovereign instruments is still high.

SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's SR of '3' and SRF of 'BB' reflect the moderate probability of support from the Costa Rican Government despite having no explicit guarantee, given the nature of the bank and its systemic importance.

RATING SENSITIVITIES

DRSs and VR
The upside potential of the bank's national ratings is expected to be limited in the medium term. The Negative Outlook reflects the sovereign's high level of influence over the financial sector and the broader operating environment. The bank's IDR and VRs would be downgraded in the event of a Costa Rican sovereign downgrade. Conversely, a revision of the Outlook for the sovereign's IDR to Stable would likely prompt a similar action on the Outlook for the bank's IDR.

A downgrade of the bank's VR and IDRs could also be driven by a significant deterioration in profitability and asset quality that lead to a substantial drop in capital levels. However, the ratings would not be downgraded to below its support rating floor of 'BB'. Fitch's support rating of '3' indicates the agency's opinion there is a moderate probability of support from the government

SUPPORT RATING AND SUPPORT RATING FLOOR
BPDC's support SR and SRF are sensitive to changes in the sovereign rating. In case the Costa Rican Sovereign Rating is downgraded, the SR and SRF of the bank would also be downgraded.

Fitch has affirmed BPDC's ratings as follows:

--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';
--Viability Rating at 'bb+';
--Support Rating at '3';
--Support Rating Floor at 'BB'.