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Fitch Affirms Banco Agromercantil and Mercom Bank's Ratings Following Peer Review; Outlook Stable
May 15, 2015 / 9:23 PM / 2 years ago

Fitch Affirms Banco Agromercantil and Mercom Bank's Ratings Following Peer Review; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, May 15 (Fitch) Fitch Ratings has affirmed Banco Agromercantil de Guatemala's (BAM) Long-term Issuer Default Rating (IDR) at 'BB'; Short-term IDR at 'B' and Viability Rating (VR) at 'bb'; all following Fitch's peer review of Guatemala's largest banks. Fitch also affirmed BAM's and Mercom Bank Limited's (Mercom) national ratings. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release. KEY RATING DRIVERS - BAM's IDRs & VR The bank's intrinsic credit profile, as indicated by its Viability Rating (VR), drives the IDR and national ratings. BAM's operating environment and sound loss-absorption buffers highly influence its ratings. The bank's stable liquidity and funding, narrower franchise relative to larger domestic banks, aggressive credit growth, material borrower concentration and pressured earnings also weigh on the ratings. Like all major local banks, BAM has a significant exposure (2.0x Fitch core capital ) to the Guatemalan sovereign (local-currency and foreign-currency IDRs of 'BB') through the holding of large securities portfolios. Fitch does not expect this to change due to limited investment options in the country. BAM's capital buffers, together with strong loan-loss reserves, are a strength that enables it to compete with local banks of a significantly larger size. Capitalization remains above industry averages, but it has declined as lending volumes increased. Fitch expects that the bank will be able to maintain a sound equity position (FCC above 13% of risk-weighted assets) over the medium term. The bank's management expects a moderation in loan growth to levels more commensurate with internal capital generation rates. In the agency's opinion, maintaining a sound loss-absorption cushion is necessary for the bank to offset concentration risks and sustain business growth. BAM's funding profile consists of a diversified and stable base of short-term household deposits. To reduce liquidity gaps, the bank has increased the use of wholesale funds to extend the maturity of its liabilities. The bank successfully accessed international debt markets through the issuance of a senior unsecured loan participation note. Additionally, the bank had 19 credit lines approved from correspondent banks. Fitch views BAM's liquidity buffers, which consist of cash due from banks and Guatemalan sovereign securities, as adequate. The expansion of borrowed funds drove an increase in the bank's loan to deposit ratio, but this should decrease to acceptable levels as credit growth slows down. Tighter underwriting criteria and a stricter collection process will continue driving BAM's sound loan quality. The agency anticipates some credit quality deterioration as the loan portfolio seasons, but this will be easily manageable for the bank. BAM employs provisioning policies that are more conservative than those required by local regulations.. This has significantly increased coverage of impaired loans. BAM's corporate orientation explains the material obligor concentration, which is the largest source of credit risk. Fitch does not expect a material decline in concentration levels due to the relatively limited corporate market in Guatemala, dominated by conglomerates and family-owned groups. The top 20 loans accounted for 23% of gross loans and 1.71x FCC; all of these exposures were performing well and of very high credit quality. Margin compression, due to increased funding costs and heightened competition in BAM's target segments, led to lower profitability indicators in 2014. Fitch expects that improving operating efficiency may provide a modest upside potential to improve core earnings in the short term, but convergence with peers is no longer the agency's base case. Although ratings do not factor in explicit support, Fitch views Bancolombia's ('BBB'/Outlook Positive) 40% shareholding stake positively. Bancolombia, together with domestic shareholders, has supported BAM's capitalization and is now in the process of integrating key risk management functions. Fitch believes Bancolombia has the financial capacity to support BAM if required; however, potential mechanisms of support require approval from BAM's current majority shareholders. KEY RATING DRIVERS - MERCOM's NATIONAL RATINGS In Fitch's opinion, the institutional support from BAM underpins Mercom's ratings. Mercom is totally integrated with BAM and operates in complementary market segments enhancing its business model. As a result its national scale ratings are equalized with BAM's credit profile. RATINGS SENSITIVITIES - BAM's IDR, VR AND NATIONAL RATINGS The Stable Outlook reflects Fitch's expectation of no substantial changes in BAM's risk profile in the foreseeable future. Downward pressure to the ratings would occur if the bank increases its risk appetite to pursue more aggressive loan growth, which leads to a significant deterioration of asset quality and/or capitalization (FCC ratio below 11.5%). BAM's IDRs and VR are at the same level as Guatemala's sovereign rating. Given the operating environment's high influence on BAM's VR, negative changes in the sovereign's ratings may result in a similar action on BAM's VR and IDRs. Potential for positive rating action in the VR is limited given the bank's moderate franchise which can limit pricing power and access to funding in periods of market stress relative to larger domestic banks. However, the IDRs could be upgraded if Bancolombia becomes the majority shareholder. Conversely, a material breach in the shareholding agreement with Bancolombia that weakens capital could result in a downgrade of BAM's ratings. KEY RATING DRIVERS - AGROMERCANTIL SENIOR TRUST (AST) Agromercantil Senior Trust's (AST) rating is in line with BAM's VR reflecting that the senior unsecured obligations rank equally to the bank's unsecured and unsubordinated obligations. AST'S RATINGS SENSITIVITIES Changes in the notes' rating would move in tandem with BAM's VR. KEY RATING DRIVERS & RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that while support from the authorities is possible, it cannot be relied upon given BAM's limited systemic importance. The Support Rating and Support Rating Floor are sensitive to any change in assumptions around the propensity or ability of the Guatemalan government to provide timely support to the bank. Fitch has affirmed the following ratings: Banco Agromercantil de Guatemala, S.A. --Long-term foreign currency IDR at 'BB'; Outlook Stable; --Short-term foreign currency IDR at 'B'; --Long-term local currency IDR at 'BB'; Outlook Stable; --Short-term local currency IDR at 'B'; --Viability rating at 'bb'; --Support at '5'; --Support Rating Floor at 'NF'; --National scale long-term rating at 'A+(gtm)'; Outlook Stable; --National scale short-term rating at 'F1(gtm)'. Agromercantil Senior Trust --Long-term foreign currency loan participation notes at 'BB'. Mercom --National scale long-term rating at 'A+(gtm)'; Outlook Stable; --National scale short-term rating at 'F1(gtm)'. Contact: Primary Analyst (BAM & AST) Diego Alcazar Director +1-212 908 0396 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Primary Analyst (Mercom) Director +503 2516-6619 Edificio Plaza Cristal, Tercer Nivel 79 Ave. Sur y Calle Cuscatlan Col. Escalon. San Salvador, El Salvador. Secondary Analyst (BAM, AST & MERCOM) Luis Ayala Associate Director +503 2516 6622 Committee Chairperson Theresa Paiz Fredel Senior Director +1 212-908-0534 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria and Related Research: --'Global Bank Rating Criteria' (Mar. 20, 2015); --'Bancolombia' (Feb. 17, 2015); --'2015 Outlook: Central America and Dominican Republic Banks' (Jan. 8, 2015); --'2015 Outlook: Latin America Loan Quality Trends (Sound Loss Absorption Capacity Eases Loan Quality Pressures)' (Jan. 12, 2015) --'Understanding Latin American Capital Ratios ' (Sep. 4, 2014) --'Guatemala' (June 20, 2014). Applicable Criteria and Related Research: Guatemala here Understanding Latin American Capital Ratios here 2015 Outlook: Latin America Loan Quality Trends (Sound Loss Absorption Capacity Eases Loan Quality Pressures) here 2015 Outlook: Central America and Dominican Republic Banks here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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