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Fitch Affirms Banesco USA's LT IDR at 'B+'; Outlook Revised to Positive
December 20, 2016 / 8:41 PM / 9 months ago

Fitch Affirms Banesco USA's LT IDR at 'B+'; Outlook Revised to Positive

(The following statement was released by the rating agency) NEW YORK, December 20 (Fitch) Fitch Ratings has affirmed Banesco USA's (BNSC) Long- and Short-Term Issuer Default Ratings (IDRs) at 'B+'/'B'. The Rating Outlook has been revised to Positive from Stable. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRS AND VIABILITY RATINGS Today's action reflects BNSC's improvements in business and financial performance. To date, the company has exhibited improving trends across asset quality, profitability and capitalization measures. Further, the company continues to build its South Florida franchise by focusing on domestic lending and deposit-gathering activities. The Rating Outlook has been revised to Positive from Stable to reflect our expectation that the company will demonstrate sustained improvement in financial measures, particularly earnings and asset quality. Furthermore, Fitch would expect continued execution of strategic initiatives such as diversification of the deposit base and targeted growth in foreign correspondent banking relationships. Strategic initiatives include leveraging affiliated Banesco companies such as ABANCA (BB+/bb+/Stable) in Spain to grow loans and deposits within the Spanish-speaking community in Florida and gain additional foreign correspondent banking relationships. BNSC has also started an online deposit platform, providing an additional source of funding. Fitch's rating action incorporates the view that the bank has made improvements in risk management, controls, and oversight across its major risk exposures following the Consent Order in 2013 related to the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) deficiencies. Such improvements include a formal board-approved enterprise risk management (ERM) policy and the implementation of BSA/AML oversight tools and processes to monitor and manage potential high risk activities. As these improvements season, they should help to inculcate a compliance-focused culture across the BNSC organization. In April 2016, the bank's Consent Order related to deficiencies in its compliance with BSA and AML laws and regulations was lifted by the FDIC and the Florida Office of Financial Regulation. Fitch believes BNSC's current and expected earnings are satisfactory, and are in line relative to many other Fitch rated community banks. During 2016, the company improved its ROA and ROE measures to 57bps and 6.1%, respectively. In our view, this trend is likely sustainable over the very near term, as the company continues to report positive operating leverage driven by a significant reduction in costs associated with efforts to support its BSA/AML remediation. Over the medium term, the cost reductions noted above are likely to be tempered by a flat net interest margin (NIM). Looking forward, we believe large gains in profitability are limited, as the bank focuses on diversifying its deposit mix by adding more domestically-sourced deposits, which are higher cost. We expect that 2017 earnings measures will be in line with current levels. Fitch views BNSC's credit performance to date as commensurate with the current rating level and continue to expect improvement. Fitch calculates BNSC's NPAs (non-performing assets; includes loans 90 days past due and still accruing, accruing TDRs, and OREO) at 1.76% as of third quarter 2016 (3Q16). We also note that a reduction in NPAs during 2016 has not come with higher credit costs as evidenced by near-zero NCOs-to-average assets over the past five quarters. However, BNSC's strong growth in recent years, its concentration in commercial real estate (CRE), and its geographic concentration in South Florida are viewed by Fitch as rating constraints relative to similarly rated peers. Fitch recognizes, however, that CRE concentration in local markets such as South Florida tends to be above community bank averages. In addition, the CRE concentration could drive some modest volatility in NPA measures, but at this stage Fitch believes credit losses should be manageable. The company is expanding its foreign correspondent bank activities in select countries including the Dominican Republic and Spain as well as growing CRE and commercial & industrial (C&I) loans. BNSC's capitalization is appropriate for its risk profile; however, the lack of access to external capital is considered a rating constraint. As of Sept. 30, 2016, the bank's Fitch core capital/risk-weighted assets ratio was 12.35% and its tangible common equity/tangible assets ratio was 9.75%. Although Fitch considers the capital base sufficient to support risks within the business mix, a return to high loan growth coupled with limited profitability may impact capital ratios. Although BNSC is affiliated with the Banesco Group and shares common ownership, BNSC does not have a holding company structure and there is no direct ownership linkage to Banesco Banco Universal (BBU) in Venezuela. BNSC benefits from the "Banesco" brand, its strong recognition in Latin America, and BBU's market-leading position in Venezuela. BBU is Venezuela's largest privately held bank in terms of deposits and assets. In Fitch's opinion, contagion risk from BBU, which shares the same brand, is limited at this time. The company's liquidity profile is driven by its large core deposit base that relies on a high volume of international deposits, which make up about 50% of total deposits. The majority of international funding is sourced from Venezuelan depositors who have turned to U.S. banks as a safe haven. These deposits typically have a very low attrition rate, limited rate sensitivity, and provide a stable source of low-cost funding. However, deposit inflows are expected to be limited and the company may experience some outflows driven by rising inflation in Venezuela. In an effort to reduce reliance on Venezuelan funding, management has been working to grow domestic deposits in conjunction with loan growth. Fitch views the diversification of funding sources positively. Furthermore, BNSC maintains a high level of cash and liquid assets as well as secondary liquidity sources to support immediate liquidity needs. Fitch notes that there may be risks to BNSC's Venezuelan depositors seeking other U.S.-based banking institutions in which to deposit their monies in the event there are concerns regarding BNSC or the Banesco Group. However, to date, BNSC has actually benefited from its association with the Banesco brand, despite volatility in Venezuela, as demonstrated by its relatively stable deposit base overall. Fitch notes that depositor behavior has thus far been manageable; however, should a significant change in depositor behavior become evident, BNSC's ratings may be impacted. SUPPORT RATING AND SUPPORT RATING FLOOR BNSC has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, BNSC is not systemically important and, therefore, the probability of support is unlikely. The IDRs and Viability Ratings (VRs) do not incorporate any support. Historically, BNSC's principal shareholders have demonstrated a willingness to provide capital; however, Fitch's rating analysis does not assume capital support from the shareholders. LONG- AND SHORT-TERM DEPOSIT RATINGS BNSC's uninsured deposit ratings are rated one-notch higher than the company's IDR because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. RATING SENSITIVITIES IDRS AND VRS BNCS's ratings may be upgraded with continuing improvement in financial performance, particularly earnings and asset quality measures, and demonstrated execution of its deposit diversification and loan growth strategies within the context of its enhanced risk management function. The Rating Outlook could return to Stable or the rating could even be downgraded should the company exhibit aggressive organic loan growth. This risk is further accentuated given Banesco's already significant growth in CRE and commercial C&I loans through a relatively benign credit environment. Should credit losses deteriorate significantly, thereby impacting capital, negative rating action could ensue. While not anticipated, given BNSC's ties to the Banesco Group and considerable Venezuelan deposit base, material changes in deposit behavior leading to unexpected deposit outflows could also result in negative rating action. SUPPORT RATING AND SUPPORT RATING FLOOR BNSC's SR and SRF are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need. Since BNSC's SR and SR Floor are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. LONG- AND SHORT-TERM DEPOSIT RATINGS The ratings of long- and short-term deposits issued by BNSC are primarily sensitive to any change in BNSC's Long- and Short-Term IDRs. PROFILE Banesco USA was established in 2006 by the principal shareholders of the Banesco Group and provides traditional banking services, primarily real estate financing, to retail clients as well as to small-to-medium-sized companies. Services are offered via a total of five branches with two in Miami-Dade County, two in Broward County and one in San Juan, Puerto Rico. Banesco USA is based in Coral Gables, FL. Fitch has affirmed the following ratings: Banesco USA (BNSC) --Long-Term IDR at 'B+'; Outlook revised to Positive from Stable; --Short-Term IDR at 'B'; --Long-term deposits at 'BB-'; --Short-term deposits at 'B'; --Viability Rating at 'b+'; --Support at '5'; --Support Floor at 'NF'. Contact: Primary Analyst Stefan Kahandaliyanage Associate Director +1-646-582-4918 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Doriana Gamboa Senior Director +1-212-908-0865 Committee Chairperson Justin Fuller Senior Director +1-312-368-2057 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 Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016818 Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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