SAN SALVADOR, El Salvador & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded CABEI's Long-term Issuer Default Rating (IDR) to 'A' from 'A-'. At the same time, Fitch has upgraded the Short-term IDR to 'F1' from 'F2'. The Rating Outlook remains Stable. A detailed list of rating actions follows at the end of this press release.
The upgrade of CABEI's IDRs reflects progress on implementing the bank's strategy to focus its lending primarily to public sector projects and recently enhanced credit risk policies. The upgrade also reflects CABEI's stronger ALM with debt maturities properly scattered along time.
CABEI's current ratings balance the bank's solid financial profile and preferred-creditor status and privileges conferred on it by its member countries against significant loan concentration in low-rated sovereigns and the volatile economic environment in some of the countries in which the institution operates.
The Stable Outlook reflects Fitch's expectation that CABEI's risk profile will not substantially change in the foreseeable future. Further loan diversification or a material enhancement of its capital base could benefit creditworthiness over the medium-term. Unexpected severe deterioration of the bank's financial fundamentals and/or sudden erosion of its member countries' willingness to provide support could result in downward pressure on CABEI's ratings.
As anticipated by CABEI's management, public sector exposure increased as a proportion of total loans in 2011. CABEI's increased appetite for public sector lending along with higher loan demand from the Central American governments to support counter-cyclical fiscal policies, has underpinned an increase of public sector credits to 74% of total loans at end-2011. The bank's management expects the proportion of public sector loans to continue increasing up to 80% by end-2013, which in Fitch's view should contribute to sustained healthy credit quality.
CABEI recently enhanced its risk management policies as a response to the poor performance that private sector loans exhibited lasting recent years. Updated credit risk policies included new internal lending limits to private sector loans by individual, economic group, and economic sector. A combination of enhanced credit risk policies, discounted loan sales, write-off, and foreclosed assets drove a decline in non-performing loans to 0.6% of total loans at end-2011 from a peak of 3.2% at end-2010. Non-accruals have been recorded only in the private-sector portfolio. Despite the still fragile economic recovery in some of the beneficiary countries, Fitch expects delinquency ratios to remain low.
Loan-loss reserve coverage of non-accrual loans bounced back to pre-crisis levels, reaching an elevated 596.3% at end-2011 from 129% at end-2010. Although loan-loss reserve coverage proved to be sensitive to the economic cycle given the relatively high loan concentration, Fitch believes that CABEI's strong capitalisation helped mitigate unexpected losses.
The bank's funding structure has evolved in recent years, thanks to its active participation in international capital markets of America, Europe, and Asia. This strategy has allowed the bank to extend the maturity profile of its funding, which reached a weighted average of more than three years at end-2011.
As of today, CABEI is the Central American financial institution with the most participation in international capital markets and issuance now accounts for more than 55% of total funding. CABEI expects to maintain the current composition of total funding (around 60% bonds vs. 40% credit lines) over the long term.
As CABEI is the main provider of long-term funding the region, Fitch considers that its shareholders have a vested interest in supporting it, should it run into difficulties. Some doubts remain, however, with the shareholders' ability to provide such support as most are sub-investment grade sovereigns with structurally weak fiscal positions.
CABEI's fundamentals also include ample liquidity and a sound capitalisation by sub-regional multilateral development institution standards. The bank's equity to asset ratio stood at a comfortable 29.2% at end-2011 while usable capital/required capital coverage remained adequate at 2.4 times (x). An established track record of self sustained profitability has contributed to support the bank's sound capital position. Going forward, CABEI's capital is expected to strengthen with the approval of an authorized capital increase to USD5 billion.
CABEI is a Multilateral Development Bank, established in 1960 to stimulate economic growth and promote the integration of the five founding member countries: Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica. CABEI was established under a 'Constitutive Agreement' signed by founding members, which confers on the bank the status of a supranational institution and grants CABEI several immunities and privileges, including preferred creditor status.
Fitch upgraded CABEI's ratings as follows:
--Long-term IDR to 'A' from 'A-'; Stable Outlook;
--Short-term IDR to 'F1' from 'F2';
--Senior unsecured debt to 'A' from 'A-';
At the same time, Fitch affirmed CABEI's national ratings as follows:
--Long-term national rating in El Salvador at 'AAA(slv)'; Stable Outlook;
--Short-term national rating in El Salvador at 'F1+(slv)';
--Senior unsecured long-term debt in El Salvador at 'AAA(slv)';
--Long-term national rating in Honduras at 'AAA(hnd)'; Stable Outlook;
--Short-term national rating in Honduras at 'F1+(hnd)';
--Long-term national rating in Costa Rica at 'AAA(cri)'; Stable Outlook;
--Short-term national rating in Costa Rica at 'F1+(cri)';
--Senior unsecured long-term debt in Costa Rica at 'AAA(cri)';
--Senior unsecured short-term debt in Costa Rica at 'F1+(cri)';
--Senior unsecured long-term debt in Dominican Republic at 'AAA(dom)';
--Senior unsecured long-term debt in Mexico at 'AAA(mex)'.
Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Multilateral Development Banks and Other Supranationals' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Rating Multilateral Development Banks - Revised Criteria and Scoring Framework
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=672512
National Ratings for Uniao de Bancos Brasileiros (UNIBANCO)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=117589
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