December 13, 2016 / 10:00 PM / a year ago

Fitch Affirms Banco Occidental de Descuento's IDR at 'CCC'

(The following statement was released by the rating agency) NEW YORK, December 13 (Fitch) Following a peer review, Fitch Ratings has today affirmed Banco Occidental de Descuento, Banco Univeral C.A.'s (BOD) foreign and local currency Issuer Default Ratings (IDRs) at 'CCC'. No Rating Outlook is assigned at this rating level. A full list of rating actions is at the end of this release. The ratings were affirmed as there has been no material change in BOD's company profile or performance since the last review. KEY RATING DRIVERS IDRS, VR AND NATIONAL RATINGS As with other emerging market commercial banks in non-investment grade rating categories, the operating environment highly influences BOD's ratings. Like all Venezuelan banks, the sovereign's creditworthiness constrains BOD's ratings due to exposure to public sector (mostly sovereign) securities, as well as vulnerability to the government's economic and regulatory policy choices. Venezuela's IDR is currently rated 'CCC' by Fitch. High inflation distorts the comparison of financial metrics with regional peers (Latin American commercial banks with a Viability Rating of 'b+' and below). BOD's capitalization also highly influences its credit profile. Despite capital contributions in 2012 and 2013, stronger internal capital generation since 2014, and the full amortization of goodwill related to the Corp Banca merger in 2015, the bank's tangible common equity/tangible assets ratio has remained below 7% since 2013 due to rapid nominal asset growth. This ratio compares unfavorably to both domestic and Latin American peers. Furthermore, the bank's regulatory capital/risk weighted assets ratio stood at 12.1% at end-June 2016, very close to the minimum of 12% required in Venezuela. Fitch is concerned that these tight capital ratios will reduce BOD's financial flexibility and increase regulatory uncertainty for the bank. Given BOD's high level of liquid assets, the large negative mismatch between short-term assets and liabilities is manageable as long as domestic monetary market conditions remain liquid and any potential liberalization of capital controls is measured. Most liquid assets consist of cash and bank deposits (91% of total) and covered 31% of deposits and short-term funding as of Sept. 30, 2016. Fitch views a greater proportion of cash favorably, as public sector securities may be of limited liquidity in a stress scenario given the shallow domestic debt market. Even with reduced funding costs, the weight of increased credit costs and the additional burden on the bank's cost structure imposed by operating in a country with the highest inflation levels in the world as well as heavy regulation have made it difficult for BOD to maintain an improving trend in its profitability ratios. As a result, BOD's profitability ratios once again lag those of larger Venezuelan banks. As is the case with other Venezuelan banks, Fitch expects operating, credit and tax expenses to pressure profitability over the medium term. BOD has the weakest loan quality indicators among domestic peers (commercial banks with market shares exceed 5% of financial system assets). A growing proportion of retail and compulsory loans also increases the vulnerability of the bank's loan quality indicators to the current economic crisis. SUPPORT RATING AND SUPPORT RATING FLOOR The banks' Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF' reflect Fitch's expectation of no support. Despite BOD's systemic importance, support cannot be relied upon given Venezuela's sub-investment grade rating and lack of a consistent policy on bank support. RATING SENSITIVITIES IDRS, VR AND NATIONAL RATINGS A downgrade of the sovereign's IDRs would result in a similar action on the IDRs and VRs of this bank, which is currently capped at the sovereign. A decline in capitalization below regulatory minimums would also pressure BOD's ratings. Additional government intervention that pressures financial performance could negatively affect the bank's IDRs, VR and National ratings. While not Fitch's base case due to capital controls and high domestic market liquidity, a persistent decline in deposits would pressure ratings. There is no upside potential to the bank's ratings in the near term in light of the current economic crisis. SUPPORT RATING AND SUPPORT RATING FLOOR Venezuela's propensity or ability to provide timely support BOD is not likely to change given the sovereign's very low speculative-grade ratings. As such, the SR and SRF have no upgrade potential. Fitch has affirmed BOD's ratings as follows: --Long-term foreign and local currency IDRs at 'CCC'; --Short-term foreign and local currency ratings at 'C'; --Viability Rating at 'ccc'; --Support at '5'; --Support Floor at 'NF'; --Long-term national-scale rating at 'BBB-(ven)'; --Short-term national-scale rating 'F3(ven)'. Contact: Primary Analyst Theresa Paiz Fredel Senior Director +1-212-908-0534 Fitch Ratings, Inc. 33 Whitehall Street Secondary Analyst Larisa Arteaga Director +1-809-563-2481 Committee Chairperson Alejandro Garcia Managing Director +1-212-908-9137 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Summary of Financial Statement Adjustments Under Venezuelan banking regulation, compulsory loans are weighted at 50%. For the purposes of analyses and international peer comparison, Fitch adjusts the weightings of such loans to 100%. 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