OREANDA-NEWS. Fitch Ratings has affirmed Banco de Desarrollo Rural S.A.'s (Banrural) Issuer Default Rating (IDR) at 'BB', short-term IDR at 'B', and Viability Rating (VR) at 'bb'. Banrural's National Ratings were also affirmed. The Rating Outlook is Stable. See the full list of rating actions at the end of this release.

KEY RATING DRIVERS

VR, IDRS, NATIONAL RATINGS

The bank's VR drives its IDR and National Ratings. The operating environment has a high influence on the bank's performance. The VR is also closely linked to the sovereign, as Banrural maintains a moderate exposure to public sector deposits (24.5% of total deposits), and significant concentration in government bonds. The Guatemalan government also holds a 17.2% stake in Banrural. The bank's VR also considers its solid credit quality metrics, high profitability and good capitalization.

The Stable Outlook reflects Fitch's expectation of no material changes in the bank's overall financial profile over the rating horizon.

Banrural's good underwriting standards, effective incentive schemes, and timely restructuring of loans that may present payment difficulties support the bank's consistent asset quality and controlled credit costs, and signal a moderate risk appetite.

Banrural's asset quality is adequate and comparable with corporate-oriented peers; delinquency levels are consistently below 1% and reserve coverage is ample. The investment portfolio is concentrated in sovereign risk, and loan book composition and growth have been stable and consistent with its strategy. The loan portfolio maintains a strong focus on SMEs and consumer loans in rural areas.

Banrural's profitability consistently exceeds that of the Guatemalan market average, buttressed by its ample net interest margin. Banrural's high margins in the SME and consumer sector in rural areas compensate for moderate income diversification and relatively weak efficiency ratios. This solid capital generation capacity and moderate dividend payments underpin its good capital levels.

Banrural's funding structure, based on a diversified, low-cost deposit base, is generally stable. Liquidity coverage is adequate although term mismatches are present as a result of the high proportion of savings deposits. However, the bank's liquidity and deposit stability came under stress following a rumor disseminated in May 2015 that prompted significant deposit withdrawals at rural branches. Banrural successfully managed the situation and made further enhancements to its policies, including its liquidity contingency plan, in order to avoid this risk in the future.

In Fitch's view, Banrural's importance within the banking system reflects its large size in the local market, wide geographic coverage, and focus on SME and individual consumer deposits and loans. Banrural's franchise is strong in its core market. It is the second largest bank in Guatemala in terms of assets, with a market share of 19.8% of total assets and 21.5% of total deposits as of December 2015. The bank has a relative competitive advantage and pricing power in its main segment, strengthened by its presence in the entire territory and its unique ability to address the needs of a rural population.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

Banrural's support rating (SR) of '3' reflects Fitch's opinion that there is a moderate probability of support from the state, given Banrural's systemic importance in the banking system. This probability is limited by Guatemala's sovereign rating of 'BB'/Outlook Stable. The bank's Support Rating Floor (SRF) is one notch below the sovereign rating at 'BB-'. The bank's SRF reflects the moderate financial flexibility of the government to provide support to systemically important banks in the country and the significant presence of foreign currency funding.

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS
Banrural's IDRs and VR are at the same level as Guatemala's sovereign rating. Given the operating environment's strong influence on Banrural's VR as well as its concentrations with the government, changes in the sovereign's ratings may result in a similar action on Banrural's ratings. Banrural's National Ratings reflect the bank's relative strength in the local market.

Ratings would be downgraded in the unlikely scenario of a sharp decline in capitalization (below 10%), and a period of sustained low earnings (operating ROAA close to 1%). These changes may result in a VR downgrade which would also imply a downgrade of its IDR.

SUPPORT RATING AND SUPPORT RATING FLOOR
The SR & SRF are potentially sensitive to changes in Fitch's assessment of the sovereign's ability and/or propensity to support Banrural.

Fitch has affirmed the following:

Banco de Desarrollo Rural, S.A.
--Foreign Currency Long-term IDR at 'BB'; Outlook Stable;
--Foreign Currency Short-term IDR at 'B';
--Local currency long-term IDR at 'BB'; Outlook Stable;
--Local currency short-term IDR at 'B';
--Viability Rating at 'bb';
--Support Rating at '3';
--Support Rating Floor at 'BB-';
--National long-term rating at 'AA+(gtm)'; Outlook Stable;
--National short-term rating at 'F1+(gtm)'.