Fitch Affirms Banco Exterior’s Ratings

Proquest LLC

Fitch Ratings has affirmed Banco Exterior, C.A. Banco Universal's (Exterior) long-term Issuer Default Rating (IDR) at 'B+.' The Rating Outlook is Negative.

In a release on March 14, Fitch noted that it has affirmed Exterior's ratings as the bank remains positioned to deliver strong financial results (even when adjusting for inflation) despite the high degree of government intervention in the banking business. In Fitch's opinion, the bank's focus on risk management, its stable profitability and solid asset quality ratios, combined with its competitive advantage serving the small- to medium-sized business segment will continue to underpin the resilience of Exterior's credit profile, even with the expected weakening of the operating environment this year.

Key Rating Drivers - VR, IDRS and National Ratings

Exterior's Viability Rating (VR) drives its IDR. The operating environment has a material influence on the bank's ratings. Additionally, high inflation, which reached 56.2 percent at year- end 2013, distorts financial ratios.

The Negative Outlook is in line with the Outlook of the sovereign and reflects the challenging economic and regulatory environment. Exterior's ratings are constrained by the creditworthiness of the sovereign due to the bank's substantial holdings of sovereign bonds, the high level of government intervention in terms of pricing and compulsory lending, as well as the expected deterioration in the operating environment due to the evolving exchange rate regime.

Exterior's capital base remains adequate and high quality, with no subordinated debt or preferred shares. However, consistently high year-over-year growth has led to a steady increase in leverage as asset growth has outpaced growth in retained earnings. In addition, in September 2013, the local regulator increased the minimum capital required as a percentage of total assets (less securities issued or guaranteed by the government). A widely expected devaluation of the currency in 2014 should largely help Exterior meet the new requirement. However, nominal asset growth may also have to decelerate in 2014.

Exterior's liquidity ratios were weaker than those of its domestic peers (private sector universal banks with market share of assets greater than 4.5 percent). The bank's strong franchise helps compensate for this risk, as Exterior has historically acted as a safe haven for depositors in times of systemic stress. Like other Venezuelan banks, Exterior had a large negative mismatch between short-term assets and liabilities. However, this mismatch is currently manageable under Venezuela's foreign exchange controls.

Exterior continues to exhibit robust asset quality ratios. Impaired loans as a percentage of gross loans have remained below 0.5 percent since 2011, comparing favorably with both domestic and international peers (emerging market commercial banks with VR of 'b- /b/b+'). However, Fitch notes that credit growth significantly exceeded that of its peers. Net charge-offs also remained stable. Fitch believes that asset quality ratios could deteriorate in the short term due to a moderation of credit growth, a seasoning of outstanding loans, and a deteriorating business environment.

Exterior has a track record of higher than average profitability among domestic banks underpinned by a growing base of low-cost demand deposits, strong credit growth and better efficiency. ROAA averaged 4.66 percent for 2010-2013. Fitch expects that moderating credit growth and higher credit and operating costs will pressure earnings in 2014.

Rating Sensitivities - VR, IDRS and National Ratings

The bank's ratings are sensitive to further government intervention that pressures Exterior's financial performance. There is no upside potential to the bank's international ratings in the near term as the IDRs currently have a Negative Outlook, in line with those of the sovereign. Future rating actions will mirror those of the sovereign.

Additionally, the bank's ratings are sensitive to a sustained deterioration in profitability or asset quality that pressures capitalization ratios to levels that are no longer consistent with its current rating.

Key Rating Drivers - Support Rating and Support Rating Floor

The IDRs and national ratings do not incorporate any external support. Fitch believes that the shareholders' willingness to provide support should it be required is possible, though it cannot be relied upon due to the governments interference with the banking system, which underpins Exterior's Support rating of '5'. Exterior's support floor of 'No Floor' (NF) reflects Venezuela's speculative- grade rating, and the government's mixed history in providing bank support.

Rating Sensitivities- Support Rating and Support Rating Floor

There is limited upside to the bank's Support Rating and Support Floor over the medium term given the sovereign's current ratings and Outlooks and the government's propensity to intervene in the banking business and overall private sector activities. Additionally, Exterior's size and the lack of systemic importance also makes it unlikely that it would receive any support.

Fitch affirms the following ratings:

Banco Exterior, C.A. Banco Universal

--Long-term foreign and local currency IDR at 'B+'; Outlook Negative;

--Short-term foreign and local currency IDR at 'B';

--Viability at 'b+';

--Support at '5';

--Support floor at 'NF';

--Long-term national scale rating at 'AA(ven)'; Stable Outlook;

--Short-term national scale rating at 'F1+(ven)'.

Additional information is available on fitchratings.com.

Applicable Criteria and Related Research:

--'Outlook 2014: Andean Banks' December 16, 2013;