Overview -- Bolivia-based Banco Mercantil Santa Cruz has maintained a steady growth path and good credit quality despite intense competition. -- We are affirming our 'BB-/B' issuer credit ratings on the bank. -- The stable outlook reflects our expectation that the bank will preserve its leading position in the market and expand its activities while maintaining asset quality and good liquidity. Rating Action On Dec. 10 2012, Standard & Poor's Ratings Services affirmed its 'BB-' long-term and 'B' short term issuer credit ratings on Banco Mercantil Santa Cruz S.A. (BMSC). The outlook is stable. Rationale The ratings on BMSC reflect its "strong" business position, "weak" capital and earnings, "adequate" risk position, "above average" funding, and "adequate" liquidity (as our criteria define the terms). Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating in Bolivia is 'bb-'. Our economic risk of '8' reflects Bolivia's developing economy, limited economic diversification, and tense and fragmented political landscape. Our industry risk of '7' reflects Bolivia's banking system regulation, which is more relaxed than international standards. Also, we believe that the Bolivian financial system is highly exposed to political interference, which could harm the country's business environment. Despite some erosion in its market share, BMSC maintains a leading position in the Bolivian financial system, which contributes to our assessment of its business position as "strong." With about $2 billion in assets, BMSC is the largest among the 12 banks operating in Bolivia in terms of loans and deposits, with market shares of about 17% and 18%, respectively, as of September 2012. The bank offers a broad range of financial products, with a presence throughout the country and all market segments, with special focus in corporate and small and medium size enterprises and in mortgages. We assess BMSC's capital and earnings as "weak." We base this on our view that the bank's capitalization has been historically low, with a projected risk-adjusted capital (RAC) ratio of below 5% for the next two years. The bank's earnings ratios are rather in line with the industry average, given its diverse revenue structure and adequate interest margins, despite high competition. We will closely monitor the effects of a new law on financial institutions and regulations on the sector. Our risk position assessment for BMSC is "adequate," because of its relatively conservative underwriting standards and good management of mismatches. We expect BMSC's loan portfolio to perform satisfactorily, as the bank hasn't offered new products, served new clients, or entered new market activities beyond its traditional area of expertise. The ratio of nonperforming assets was about 3.6% as of September 2012, down from 4.6% at the end of 2010, but still above the industry average. We expect ratios to continue improving in the coming quarters more in line with its peers. We believe that BMSC's risk position benefits from focusing its operations (about 66 of BMSC's 75 branches) on the La Paz-Cochabamba-Santa Cruz area, where approximately 70% of the country's GDP is concentrated. In our opinion, BMSC's funding is "above average" and liquidity "adequate." The bank benefits an ample branch network that provides a well-diversified and low-cost customer deposit base, which accounts for 97% of the bank's total funding base as of September 2012. Deposit base has some concentration, which is partly mitigated by the bank's sound franchise value. We consider the bank to have adequate liquidity with cash on hand plus liquid securities accounting for 35% of its total assets and 41% of total deposits as of September 2012, levels that are in line with system average metrics. In addition, the bank has available unused committed lines for foreign trade loans for almost $80 million. We believe there is a low likelihood of government support, because although BMSC is has a high systemic importance in Bolivia, our assessment of Bolivian government to provide support is uncertain. The issuer credit rating is currently at the same level as the bank's stand-alone credit profile. Outlook The stable outlook reflects our opinion that BMSC will maintain its position as the largest bank in Bolivia while it expands its activities with adequate liquidity, conservative underwriting standards, and good management of mismatches. An upgrade is possible if both the sovereign rating and BICRA of Bolivia improve. We could lower the ratings if the bank's business position, capitalization, and/or liquidity deteriorates significantly. This could arise from a higher-than- projected impact from the new banking law. Ratings Score Snapshot Lead Bank Rating BB-/Stable/B SACP bb- Anchor bb- Business Position Strong (+1) Capital and Earnings Weak (-1) Risk Position Adequate (0) Funding And Liquidity Average and Adequate (0) Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 Additional Factors 0 Related Criteria And Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment Methodology and Assumptions, Nov. 9, 2011 -- Bank Capital Methodology and Assumptions, Dec. 6, 2010 Ratings List Ratings Affirmed Banco Mercantil Santa Cruz S.A. Counterparty Credit Rating BB-/Stable/B Certificate Of Deposit BB-/B Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.