Fitch Ratings has upgraded Banco Nacional de Panama’s (Banconal) Viability Rating (VR) to ‘bbb-‘ from ‘bb+’. At the same time, Fitch has affirmed Banconal’s Issuer Default Rating (IDR) at ‘BBB’. The Rating Outlook on the Long Term IDR is Stable. A complete list of rating actions follows at the end of this press release.

The upgrade of Banconal’s VR reflects Fitch’s view of the bank’s track record in its continuous improvement in asset quality, enhancement of its operative infrastructure, and observance of the bank’s long-term objectives through different presidential periods. Fitch expects the entity to be better prepared to compete with the industry leaders while maintaining its financial performance metrics.

KEY RATING DRIVERS – IDRs, SR, and SRF

Banconal’s IDRs, Support Rating (SR) and Support Rating Floor (SRF) are driven by the support of the Panamanian government (rated ‘BBB’, Stable Outlook by Fitch). In Fitch’s view, the Panamanian government has the willingness and capacity to provide timely and sufficient support to Banconal, providing a subsidiary guarantee of all its liabilities, according to the bank’s inception law. Banconal plays an important role as the government’s treasurer in charge of the check-clearing and compensation process, payroll and tax collection services, pensions, vendor, and services, and government debt payments. Banconal is also considered systemically important as evidenced in its market share as the second largest bank by assets (10%).

KEY RATING DRIVERS – VR

Banconal’s VR is driven by its ample liquidity cushion, good asset quality, stable funding base, adequate capital and moderate profitability. The bank’s VR also considers the low revenue diversification from recurrent sources and business lines concentrations.

Banconal boasts an ample liquidity cushion in the form of deposits, low-risk securities and cash. The liquidity cushions provide coverage of 60.4% of total deposits. In Fitch’s view, the bank’s liquidity represents a strategic reserve for the government in the event of stress in the banking system, although it’s not legally enforceable. Also, the bank’s role as state treasurer shapes the funding structure of the bank, comprised exclusively of deposits, most of them from the government. Governmental depositors guarantee low-volatility funding, given that they are not profit-seeking entities and, based on internal practices, allocate funds mostly to Panama’s public banks.

Banconal’s asset quality has improved consistently in previous years, supported by the favorable economic environment coupled with reinforcement of the bank’s risk management. As of June 2014, past due loans represented 0.6% of total assets (similar to the Panamanian banking system: 0.7%).

Despite recent contraction, bank capitalization is still considered adequate to bear most of the bank’s risk exposures. As of June 2014, Fitch Core Capital (FCC) ratio stood at 14.6% and capital adequacy was 13.7%. In recent years the FCC ratio has fallen from the 20% level due to asset growth above the low internal capital generation. The bank’s management projects that capital adequacy will remain close to 12%.

RATING SENSITIVITIES – IDRs, SR, and SRF

Banconal’s IDRs, SR and SRF ratings should move in line with those of Panama. The downside potential is considered limited given Panama’s sound economic prospects.

RATING SENSITIVITIES – VR

Banconal’s VR would benefit from an improvement on internal capital generation that provides reinforcement of current capitalization. Additionally, improvements in funding diversification that delivers greater financial flexibility to the bank would have a positive impact on the VR.

On the other hand, declining asset quality and/or weaker profitability which would erode the capital/reserve cushion, would place downward pressure on the VR. Downgrades of the VR could also come from changes in strategic objectives that introduce greater risk to the balance sheet.