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 has 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'. The national ratings in Costa Rica and of the bank issuances in El Salvador and Panama were also affirmed. 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, NATIONAL RATINGS AND SENIOR DEBT
BPDC's VR drives its IDRs and National Ratings. The bank's ratings are at the same level of the sovereign rating, reflecting the high influence of the operating environment over the bank's performance. BPDC's ratings also consider the bank's company profile. Its financial performance is underpinned by its public nature and the benefits granted by law, such as mandatory capitalization and inflow of deposits. In Fitch's view, the bank's role in the pension regime as depositary of mandatory savings from Costa Rican workers, its market share in consumer lending and its franchise evidence its systemic importance. The national ratings of the senior unsecured debt ratings in El Salvador and Panama reflect the relative strength of the Costa Rican bank relative to other issuers in those countries.

Ratings also consider BPDC's ample loss absorption capacity and consistent profitability, adequate asset quality, ample deposit based funding, and moderate tenure mismatches in its asset and liability structure.

In Fitch's view, BPDC's solid capital position is its core strength, with a Fitch core capital ratio of 22% outperforming most national and international peers. Capital ratios mark a downward trend driven by strong asset growth. However, in Fitch's opinion, BPDC's loss absorption capacity remains ample and sustainable, benefitted by robust profitability, commensurate with the rating.

The bank's profitability is commensurate with the riskier profile of its target segment. The bank's high profitability is underpinned by sustained growth and ample margins. In Fitch's view, the reductions in the reference interest rate in local currency 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). 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 since 2014. Funding is well diversified but long term tenor mismatches are present. Liquidity is in line with the bank's liability structure and comprised of local deposits and securities.

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

IDRS, NATIONAL RATINGS AND SENIOR DEBT
Potential upgrades of the bank's IDRs and VR are limited over the ratings horizon. The Negative Outlook reflects that BPDC's IDR and VRs would be downgraded in the event of a Costa Rican sovereign downgrade. Conversely, a revision of the sovereign's IDR Outlook to Stable would likely prompt a similar action on the bank's IDR Outlooks.

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'.

National Ratings

Costa Rica
--Long-term national rating at 'AA+(cri)'; Outlook Stable;
--Short-term national rating at 'F1+(cri)';
--Long-term senior unsecured debt in local currency and foreign currency at 'AA+(cri)';
--Short-term senior unsecured debt in local currency and foreign currency at 'F1+(cri)'.

El Salvador
--Long-term senior unsecured debt at 'AAA(slv)'; Outlook Stable;
--Short-term senior unsecured debt at 'F1+(slv)'.

Panama
--Long-term senior unsecured debt at 'AA-(pan)';
--Short-term senior unsecured debt at 'F1+(pan)'.