Fitch Ratings affirmed Banco General, S.A. (BG) Issuer Default Rating (IDR) at ‘BBB+’ with a Negative Outlook, its Short Term IDR at ‘F2’, and its Viability Rating (VR) at ‘bbb+’. Fitch also affirmed BG support rating (SR) at ‘5’ and its support rating floor (SRF) at ‘NF’.
BG’s Negative Outlook is mirroring the Negative Outlook of the sovereign but mainly reflects the deteriorating operating environment in Panama for the banking system. The uplift of one notch above the sovereign is unlikely to widen. Conversely, a downward revision of the operating environment, currently assessed at ‘bbb-‘, would pressure the quantitative rating factors of the bank’s VR.
BG’s ratings one notch above the sovereign rating of Panama also reflects Fitch’s opinion that BG retains the capacity to service its obligations in the relevant currency following a sovereign default. As reflected in Panama’s country ceiling of ‘A’, three notches above the sovereign rating, Fitch views exchange and convertibility risks as negligible due to Panama’s well-entrenched dollarization.
KEY RATING DRIVERS
The bank’s IDRs and senior debt ratings reflect with high importance its company profile and operating environment. BG is the largest banking operation in Panama and has a strong domestic franchise with market shares of about 19.2% of local private loans and 21.4% of local deposits.
The Panamanian operating environment has a strong influence on BG’s performance and prospects. Fitch expects the reduced economic activity to have a negative impact on profitability and asset quality, mostly over the second half of 2020. The recent measures to prevent the coronavirus pandemic which have sharply decreased economic activity and increased unemployment will drive loan book contractions, asset-quality deterioration and lower profits over 2020.
In Fitch’s view, BG’s underwriting standards and provisioning policies are prudent; as a result, BG’s asset quality is strong and compares well with the Panamanian banking system average. Impaired loans rates maintain a modest increasing trend consistent with the Panamanian banking system. The bank is applying some of the measures approved by the superintendence, adopting three-month grace periods for mortgage, consumer, corporate and SMEs loans, and suspended minimum payments in a number of credit card clients. In Fitch’s opinion, these measures are likely to reduce the pressure from asset quality deterioration and additional loan loss reserves in the near term; however, a marked deterioration in the loan portfolio is expected in the medium term and liquidity decrease from deferrals remains as a potential risk.
BG’s capital metrics are sound and consistent. At 18.70% BG’s CET1 stands out among local and international peers. Downward pressures to the bank’s capital metric will arise from lower profitability while mark-to-market valuation on securities due to market volatility may also impact its capital position. Lower asset growth and some regulatory measures that decrease risk weights for some non-performing loans may partly offset such pressures and sustain BG’s capital metrics above peers.
BG’s profitability has a long track record outperforming the banking system and relevant peers, supported by controlled operating and credit costs. As of December 2019, operating profits to RWA stood at to 4.4%. Fitch forecasts a reduction in profitability to be driven by lower business volumes and reduced fee income, as well as from the increase in loan provision expenses as the deterioration of the loan book becomes more evident.
BG has an ample and stable deposit base and adequate liquidity management. The deposit base growth supports asset growth and a loan to deposits core metric of 96%. In Fitch’s opinion, the bank’s liquidity policies are prudent as shown by the high proportion of highly rated liquid assets. BG also maintains an ample buffer above the Panamanian regulatory liquidity requirement of 30% with a 40.45% ratio and a LCR of 176.37%, both figures as of March 2020. In Fitch’s view, BG’s liquidity is high in response to the challenges of an economy lacking a lender of last resort.
SUPPORT RATING AND SUPPORT RATING FLOOR
BG’s support rating (SR) of ‘5’ and support rating floor (SRF) of ‘NF’ reflects Fitch’s opinion that external support for GB, while possible, cannot be relied upon, given Panama’s longstanding dollarized economy and lack of a lender of last resort.
SENIOR DEBT
BG’s senior unsecured notes are rated at the same level as the bank’s IDR because Fitch views its likelihood of default as the same as the likelihood of default of the bank, as reflected by the Long-Term IDR.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–A prolonged and severe economic disruption from the coronavirus pandemic could lead to a lower operating environment score for Panama’s banks, which would pressure the bank’s VR;
–BG’s IDR and VR would be downgraded should the sovereign be downgraded.
–BG’s ratings could be negatively affected by a sustained and material deterioration of asset quality that could pressure its financial performance (operating ROAA below 1.5%) and/or a decline in capitalization (FCC ratio below 12%).
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–The negative outlook makes an upgrade highly unlikely over the near term.
– BG is currently rated one notch above Panama’s sovereign rating; hence, Fitch considers that there is no upside potential.
–The Negative Rating Outlooks on BG’s ratings would be revised to Stable if the operating environment assessment is maintained in the ‘bbb’ range, and its outlook changed to Stable.
–Senior unsecured debt obligations would move in tandem with the bank’s ratings.
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