Market Overview

Fitch Affirms Banco de la Produccion S.A. y Subsidiarias' (Produbanco) IDR at 'B-'; Outlook Stable

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed Banco de la Produccion S.A. y Subsidiarias' (Produbanco) long-term Issuer Default Rating (IDR) at 'B-'. The Rating Outlook is Stable. A full list of Produbanco's ratings follows at the end of this release.

Produbanco's Viability Rating (VR) drives its long-term IDR. The bank's VR reflects its strong franchise, experienced management, good asset quality and solid liquidity. Nevertheless, Ecuador's political and regulatory uncertainty, loan and investment concentration and a challenging operating environment continue to weigh on the bank's ratings. Produbanco's ratings are constrained by the sovereign's ratings and government intervention that could negatively affect the bank's performance.

Despite having the fourth largest deposit market share, Fitch believes that Produbanco cannot rely upon government support, should it be necessary, given Ecuador's weak fiscal stance and the lack of a lender of last resort. This underpins both the bank's support rating of '5' and support rating floor of 'NF'.

An upgrade of the sovereign's ratings could lead to an upgrade of Produbanco's ratings, if the bank maintains adequate capital, asset quality and profitability ratios. The 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.

As was the case with other Ecuadorean banks, asset quality deteriorated during the first half of 2012. However, at 1.6%, Produbanco's impaired loans/gross loans ratio continued to compare favorably to both the domestic industry average as well as similarly rated international peers (emerging market commercial banks with a VR of 'b-', 'b' or 'b+').

Although loan loss reserve coverage of impaired loans (186% at end-June 2012) is below the domestic industry average, it continued to compare favorably with international peers and should be viewed within the context of the bank's lower risk, predominately corporate loan portfolio. Given still moderate loan concentration, Fitch views this level as adequate.

Deposits are stable and diversified, accounting for an average of 90% of total funding over the past five years. Liquid assets covered 43% of deposits and short-term funding at end-June, comparing favorably to both domestic and international peers. As such, Fitch views Produbanco's liquidity as adequate for its operating environment.

Despite a stronger NIM, profitability deteriorated slightly in the first half of 2012, mostly reflecting higher credit costs. Key profitability ratios remain weak relative to peers' given the bank's corporate focus. Furthermore, Fitch expects Ecuadorean banks to see lower profits in the remainder of this year due to recent bank resolutions that will curb fee and commission income and slow down retail credit growth.

As is the case with other Ecuadorean banks, Produbanco 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.

Produbanco's Fitch core capital/weighted risks ratio declined to 11.1% at end-June 2012 as internal capital generation has not kept pace with asset growth. Absent a marked deceleration in growth, Fitch considers that capital ratios could remain under pressure in the near term. While capitalization is in line with domestic peers, it is tight relative to international peers. Nevertheless, adequate reserve coverage of impaired loans somewhat mitigates this risk.

Incorporated in 1978, Produbanco is Ecuador's fourth largest bank by assets (9% of the system's assets at June 2012). Historically focused on corporate banking, it has expanded into retail banking over the past few years.

Fitch has affirmed Produbanco'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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

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