Fitch Affirms Banco Agromercantil's Ratings; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Banco Agromercantil de Guatemala's (BAM) long-term Issuer Default Rating (IDR) at 'BB'. 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 standalone creditworthiness, as indicated by its Viability Rating (VR) drives the IDR. The operating environment and sound capitalization highly influence the bank's ratings. BAM's ratings also reflect its stable liquidity and funding. In Fitch's view, the bank's limited pricing-power, above market average credit growth rates that can imply heightened risk appetite, loan concentration risks, modest profitability, and high exposure to the sovereign (2x Fitch Core Capital or FCC) weigh on BAM's ratings. Like all major local banks, BAM has a sizeable exposure to Guatemalan sovereign securities (LC and FC IDRs of 'BB'). Fitch does not expect this to change due to limited investment options in the country.

BAM's sound capital buffers enhance its competitive positive relative to larger corporate-oriented banks. As Fitch expected, capitalization declined due to increasing business volumes, but it will likely remain above industry averages in the foreseeable future. BAM's capital is of high quality as it consists mostly of common equity and retained earnings. Fitch's base scenario is that the bank will maintain an FCC above 13% over the medium term as credit growth moderates. In the agency's opinion, maintaining sound loss-absorption cushions is necessary given high loan growth and concentration risks.

A granular and stable base of retail, short-term deposits comprise the bulk of BAM's funding. To address liquidity gaps, the bank has been seeking to extend the maturity of its funding through a larger participation of wholesale funds. It successfully accessed international capital markets through the issuance of a senior unsecured loan participation note. Additionally, BAM 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.

Loan quality indicators are sound and impaired loan ratios have decreased consistently in recent years as the bank applied tighter underwriting criteria, more effective collection processes and stricter work-out tools, such as write-offs and loan restructuring. Fitch expects that the seasoning of recent fast loan growth will lead to credit quality deterioration, but this will be largely manageable for the bank. BAM applies conservative provisioning policies, where impairment trigger is set at loans overdue by 30 days, as per Colombian regulations. This has driven a material increase in coverage of impaired loans.

Currently, the largest source of credit risk is the material obligor concentration, which increases sensitivity to sharp fluctuations in loan quality. Top 20 loans accounted 23% of gross loans and 1.71 times FCC; all of these exposures were performing and of good quality. Fitch does not expect concentration levels to decline in the short term given BAM's corporate orientation.

Pressure on margins, 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 explicit support, Fitch views Bancolombia's ('BBB'/Outlook Positive) 40% shareholding stake positively. Bancolombia has supported BAM's capitalization and is now in the process of integrating key risk management functions. Fitch believes Bancolombia has incentives to provide financial assistance to BAM if required, but potential mechanisms of support require approval from BAM's current majority shareholders. Therefore, the agency believes that support cannot be relied upon until Bancolombia increases its shareholding; this is expected within five years.

RATINGS SENSITIVITIES - BAM'S IDR AND VR

The Stable Outlook reflects Fitch's expectation of no substantial changes in BAM's risk profile in the foreseeable future. The IDR and VR are sensitive to bank maintaining a sound capitalization, as measured by a FCC ratio above 11.5%.

Downward pressure to the ratings would occur if the bank increases its risk appetite in order to pursue more aggressive loan growth, which leads to a significant deterioration of asset quality and/or capitalization.

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, changes in the sovereign's ratings may result in a similar action on BAM's ratings.

Potential for positive rating action in the VR is limited given the bank's moderate franchise and lower financial flexibility relative to peers. However, the IDRs could be upgraded if Bancolombia becomes the majority shareholder.

Conversely, a breach in the shareholding agreement with Bancolombia that weakens capital and/or liquidity 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 IDR 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 those of BAM.

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';

Agromercantil Senior Trust

--Long-term foreign currency loan participation notes at 'BB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'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' (Sept. 4, 2014);

--'Guatemala' (June 20, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

2015 Outlook: Central America and Dominican Republic Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=847229

2015 Outlook: Latin America Loan Quality Trends (Sound Loss Absorption Capacity Eases Loan Quality Pressures)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=836468

Understanding Latin American Capital Ratios

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=762728

Guatemala

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750931

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981509

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.

Fitch Ratings
Primary Analyst
Diego Alcazar, +1-212-908-0396
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Luis Ayala, +503 2516 6622
Associate Director
or
Committee Chairperson
Theresa Paiz Fredel, +1-212-908-0534
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Is the global equity rally broadening? UBS weighs in
• Why this strategist thinks longer-term outlook for stocks is "unfavorable"
• Investing.com’s stocks of the week