Fitch Affirms Banco Pichincha C.A. y Subsidiarias IDR at 'B-'; Stable Outlook
Fitch Ratings has affirmed Banco Pichincha C.A. y Subsidiarias' (Pichincha) long-term Issuer Default Rating (IDR) at 'B-'. The Rating Outlook is Stable. A full list of Pichincha's ratings follows at the end of this release.
Pichincha's Viability Rating (VR) drives its long-term IDR. The bank's VR reflects its strong franchise and market share, broad deposit base and ample liquidity. Nevertheless, Ecuador's political and regulatory uncertainty and a challenging operating environment continue to burden the bank's ratings. Pichincha's ratings are constrained by the sovereign's ratings and government intervention that could negatively affect the bank's performance.
Despite having the largest deposit market share, Fitch believes that Pichincha cannot rely upon government support, should it be necessary, due to Ecuador's weak fiscal stance and the lack of a lender of last resort, underpinning both the bank's support rating of '5' and support floor rating of 'NF'.
An upgrade of the sovereign's ratings could lead to an upgrade of Pichincha's ratings if the bank sustains adequate capital, asset quality, and profitability ratios. The Rating Outlook on Ecuador's IDR is currently Positive. Severe asset quality deterioration, weak financial performance, or government intervention that negatively affects the bank's liquidity or balance sheet to a level that is no longer consistent with the bank's current ratings could pressure creditworthiness.
Asset quality deteriorated during the first half of 2012 mostly reflecting the maturation of Pichincha's rapidly growing microcredit and consumer portfolio. At June 30, 2012, Pichincha's impaired loans/total loans ratio of 3.5% compared unfavorably to both the domestic peer median of 2.2% and the international peer median of 1.5%, a trend that is likely to continue given the bank's higher proportion of retail lending. However, management expects charge-offs and recoveries to reduce the bank's impaired loans/total loans ratio to a level similar to year-end 2011 (YE11) by YE12. Loan loss reserve coverage of impaired loans exceeds the domestic peer median and is in line with international peers.
Pichincha's profitability weakened in the first half of 2012. As a result, the bank's annualized ROAA reached around 0.9% at June 30, 2012, comparing unfavorably to both domestic and international peers. Given recent and potential regulatory changes, Fitch believes that profitability may weaken in the near term, but will continue to underpin sufficient capital growth over the medium term.
As is the case with other Ecuadorean banks, Pichincha needs to maintain its net interest margin, moderate credit growth and enhanced efficiency to sustain key profitability ratios over the medium term, particularly in light of new fee restrictions, challenges to diversifying non-interest income with the recent divestment of nonfinancial subsidiaries and increased credit costs. Internal capital generation could be further challenged if the government's proposal to fund an increase in social expenditures with the private banks' profits, most likely through higher taxation, is approved by Congress.
Pichincha's capitalization ratios declined relative to levels reported before 2010 due to stronger asset growth. Although capitalization is lower compared to large domestic and international peers, Fitch believes Pichincha's capital ratios are adequate in light of the bank's risk profile. Furthermore, strong reserve coverage of impaired loans somewhat mitigates lower capitalization.
Pichincha is Ecuador's largest bank with about 29% of the system's assets at end-June 2012. Incorporated in 1906, the group offers a wide array of services to corporate, middle market, and retail customers. Pichincha is tightly controlled by its main shareholder Fidel Egas Grijalva, who holds 61% of the company's stock.
Fitch has affirmed Pichincha's ratings as follows:
--Foreign currency long-term IDR at 'B-'; Stable Outlook;
--Foreign currency short-term IDR at 'B';
--Viability rating at 'b-';
--Support rating at '5';
--Support Floor at'NF'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria', Aug. 15, 2012.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
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