Fitch Ratings has affirmed Banco de Costa Rica’s (BCR) long-term Issuer Default Rating (IDR) at ‘BB+’ and Viability Rating (VR) at ‘bb+’. The Rating Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.

logo_bcr_0The bank’s IDRs, senior debt ratings, support rating, support rating floor, and national ratings are driven by the potential support of the Costa Rican government (rated ‘BB+’, Stable Outlook), as stated in the National Banking System Law.

According to this law, all state-owned banks have the guarantee and full collaboration of the state. The explicit guarantee is reflected in BCR’s support rating of ‘3’ and allows BCR’s long-term IDR and senior debt ratings to be equalized with the sovereign rating.

he Stable Outlook reflects that Fitch does not anticipate changes in the bank’s ratings in the medium term. However, the bank’s IDRs and senior debt rating are sensitive to changes in the Costa Rica sovereign rating and to changes in the bank’s VR. An upgrade in the bank’s IDRs would reflect positive sovereign rating actions for Costa Rica.

A sustainable improvement in BCR’s stand-alone risk profile could also lead to an upgrade in the bank’s VR and thus in its IDRs – yet this is an unlikely scenario. In turn, a downgrade in the bank’s IDR would reflect a negative rating action on both Costa Rica’s sovereign rating and the bank’s standalone financial profile.

The bank’s VR balances the bank’s strong franchise and adequate capital position with its modest profitability and adequate asset quality. Customers’ perception of the sovereign guarantee, combined with BCR’s extensive branch network and ample deposit base, place the bank as one of the strongest competitors in the Costa Rican banking system.

BCR’s capital generation remains sufficient to sustain asset growth and to maintain adequate capital ratios. In Fitch’s opinion, the bank’s capital ratios are likely to remain in line with similarly rated international peers, despite the recent regulatory changes regarding risk weighted asset calculations.

As a corporate-oriented state-owned bank, BCR maintains a modest net interest margin (NIM), comparatively lower than those of its international peers. The bank’s lower margins were pressured further in 2013 by the decreasing trend in the reference interest rate and by the loan growth restriction imposed by the central bank. Fitch’s performance outlook for BCR in 2014 contemplates higher loan growth across as well as adjustments in the funding costs that will allow for a wider NIM. As a result profitability will improve but it is likely to remain modest and below international peer’s.

In Fitch’s opinion, BCR’s loan portfolio is well diversified with a moderate exposure to exchange rate risk. The bank’s past due loans-to-total loans ratio remains below the ‘bb+’ VR rating category median, although with a negative trend since 2012, and reserve coverage is low compared to the ‘bb+’ rating category median and unlikely to increase under the current regulatory guidelines.