Banconal’s IDR and national scale ratings are driven by the potential support it would receive from the Republic of Panama (BBB-/Negative). Banconal’s ratings alignment with those of its owner, reflect a general subsidiary state guarantee for all of its liabilities established under Banconal’s Organic Law (Article 3). Fitch’s view on the propensity of support is supported by the bank’s systemic importance and liability structure, as Banconal holds close to 83.7% of the banking system’s government related deposits as of December 2020.
The Negative Outlook on the IDR mirrors the sovereign Outlook. The Stable Outlook on the National Scale rating reflects Fitch’s view on the relative strengths and weaknesses of Banconal in its specific jurisdiction.
In addition to its universal banking services, Banconal’s policy role has been reinforced amid the pandemic and the absence of a central bank in Panama. Banconal and the Ministry of Economy and Finance established a USD1 billion COVID-19 trust fund for potential liquidity requirements and financing needs, an additional program to support SMEs impacted by the pandemic, as well as previously established repo facilities to the financial system.
Viability Rating
Banconal’s ‘bbb-‘ VR is highly influenced by the Panamanian operating environment, rated ‘bb+’. The negative trend was a result of the estimated 17.9% economic contraction in 2020, and remaining uncertainty surrounding the pandemic and challenges to GDP recovery in 2021.
Fitch expects Banconal to maintain its good asset quality metrics as the bank entered the crisis with low NPLs (December 2019: +90 days past due loans 0.9% of gross loans), limited exposure to the most impacted economic segments and debtor concentration, as well as Banconal’s higher proportion of liquid assets (50% of assets) and investment portfolio (19% of total), mainly comprised of investment grade securities. As of December 2020, +90 days past due loans were 1.7% (stage 3 loans: 1.7%), which represented an unprecedented 107.6% yoy increase.
While NPLs are expected to increase in 3Q21 following the end of the moratoria (June 2021), potential deterioration will likely be limited by the manageable levels of modified loans (12.6% of gross loans), which have mostly remained current on their payments (86% of modified loans) although unexpected lockdowns could result in further deteriorations.
Fitch expects profitability in 2021 to remain below pre-pandemic levels (Operating Profit/RWA 2019-2016: 3.1% average), but remain above most direct peers (December 2020: 2.3%), given the more manageable impact of increasing loan impairment charges (LICs). As of December 2020, LICs accounted for 27.7% of pre-impaired profits, providing additional capacity to absorb further losses (pre-impairment profits accounted for 3.5% of gross loans).
Capitalization has improved with a CET1 of 16.5% as of December 2020 that provides an adequate loss absorption capacity. Capital metrics have been sustained by decreased, but consistent, internal capital generation and a defined dividend policy (2019-2022) that limits the payout ratio to 50%.
The loan/deposit ratio remained low (35.7%), reflecting high levels of liquidity on the balance sheet, as government related deposits have proven stability despite high concentration. Liquid assets excluding the highly liquid investment portfolio at amortized cost accounted for 61.2% of deposits and 78.7% of the 20 largest depositors (public sector). Banconal’s funding profile has strengthened through higher diversification, with a USD1 billion international debt issuance and a guarantee from the Multilateral Investment Guarantee Agency (MIGA) covering loan facilities totaling US$510 million.
Support Rating and Support Rating Floor
The bank’s SR of ‘2’ reflects the sovereign’s high probability and propensity to provide support, if required. The SRF is equalized to the sovereign rating indicates the minimum level to which the entity’s Long-Term IDR could fall if Fitch does not change its view on potential sovereign support.
Senior Debt
Senior unsecured debt is rated at the same level as Banconal’s Long-Term IDR. Fitch views the default risk of the senior notes and the bank as equivalent, and believes the senior obligations have average recovery prospects. The subsidiary guarantee enforceable under Panamanian law is not a direct guarantee of the notes, which are governed by the law of the state of New York.
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