Fitch Upgrades Banco Occidental de Descuento's IDRs to 'B'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the long-term IDRs of Venezuela-based Banco Occidental de Descuento (BOD) to 'B' from 'B-'. The Ratings Outlook has been revised to Stable from Positive. Fitch has also upgraded the bank's national long-term rating. A full list of rating actions is provided at the end of this release.

The upgrades reflect sustained improvements in capitalization due to fresh capital injections and higher retained earnings, as well as an improving trend in asset quality and profitability ratios. Despite a weak operating environment, Fitch expects BOD to maintain a similar financial profile over the next two years, underpinning the Stable Outlook.

KEY RATING DRIVERS - IDRs, VR and National Ratings

BOD's financial profile, as reflected in its VR, drives the bank's IDRs and national ratings. BOD's ratings reflect a history of volatile profitability, capitalization and asset quality indicators relative to both domestic (universal and commercial banks) and international (emerging market commercial banks with a Viability Rating of 'b-', 'b' or 'b+') peers. The ratings also factor in a challenging operating environment.

A capital infusion of VEN1.75 billion in 2011 and retained earnings strengthened BOD's Fitch Core Capital to weighted risks ratio to 16% by end-March 2013 from a low of 1.2% at YE10. This ratio is now in line with the median of both domestic and international peers, even with the deduction of goodwill related to the acquisition of a local bank (Corp Banca) in 2009. Fitch expects BOD to sustain current capital ratios under a scenario of low growth (in real terms), modest profitability, and the absence of sudden changes in the operating environment.

Asset quality metrics remain weak relative to other large and medium-sized Venezuelan banks. However, the impaired loans/gross loans ratio improved to 2% at end-March 2013 from 4.8% at YE10 and is now in line with international peers. Nevertheless, BOD's indicator deteriorated slightly in 2012 as loan growth decelerated sharply while impaired loans ticked up. Fitch expects this deteriorating trend to continue over the next year against a backdrop of economic weakness and a seasoning of the loan portfolio.

Furthermore, reserve coverage of impaired loans also deteriorated in the first quarter of this year, mostly due to higher net charge-offs in 2011 and 2010, a nominal increase in impaired loans as well as lower provisioning expenses.

BOD's ROAA strengthened in 2012 reflecting a higher net interest margin, sustained asset growth, stronger non-interest income, as well as improvements in efficiency. However, Fitch expects profitability to decline in 2013 due to a deceleration in nominal asset and loan growth and potentially higher credit costs.

Fitch expects the merger with Corp Banca to have a limited impact on BOD as the banks have similar financial profiles. Profitability could benefit from the higher proportion of retail lending on Corp Banca's balance sheet. The merger is still pending regulatory approval.

BOD was Venezuela's sixth largest bank at the end of June 2013 (fourth largest considering only private sector banks). It has a privileged market share in Venezuela's leading oil-producing region, Zulia state. The bank is controlled by the bank's president through a holding company named Cartera de Inversiones with interests in an ample array of financial and non-financial companies mostly in Venezuela.

RATING SENSITIVITIES - IDRs, VRs and National Ratings

Fitch's Stable Outlook for BOD is based on its assumption of the successful integration of Corp Banca's operations following regulatory approval.

There is no upside potential for BOD's ratings as the sovereign currently has a Negative Outlook. By contrast, the bank's ratings could be pressured by lower spreads or a deterioration of asset quality ratios that leads to reduced profitability and capital ratios.

KEY RATING DRIVERS - Support and Support Rating Floor

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 is what results in BOD's Support Rating of '5'. BOD's Support Rating Floor of 'No Floor' (NF) reflects Venezuela's speculative-grade rating, and the government's mixed history in providing bank support. The IDRs and national ratings do not incorporate any external support.

RATING SENSITIVITIES - Support and Support Rating Floor

There is limited upside to the bank's Support Rating and Support Rating 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, BOD's size and the lack of systemic importance also make it unlikely that it would receive any support.

Fitch has taken the following rating actions:

--Foreign currency upgraded to 'B' from 'B-', Outlook revised to Stable from Positive;

--Local currency IDR upgraded to 'B' from 'B-', Outlook revised to Stable from Positive;

--Short-term foreign currency IDR affirmed at 'B';

--Short-term local currency IDR affirmed at 'B';

--Viability Rating upgraded to 'b' from 'b-';

--Support Rating affirmed at '5';

--Support Rating Floor affirmed at 'NF';

--National long-term rating upgraded to 'BBB(ven)' from 'BBB-(ven)';

--National short-term rating affirmed at 'F3(ven)'.

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

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);

--'National Ratings Criteria' (Jan. 19, 2011);

--'Outlook 2013: Andean Banks' (Dec. 14, 2012).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

2013 Outlook: Andean Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696215

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=798205

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.

Contacts

Fitch Ratings
Primary Analyst:
Theresa Paiz Fredel, +1-212-908-07534
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Pedro El Khaouli, +58-212-286-3844
Senior Director
or
Committee Chairperson:
Rita Goncalves, +1-55-21-4503-2621
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Theresa Paiz Fredel, +1-212-908-07534
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Pedro El Khaouli, +58-212-286-3844
Senior Director
or
Committee Chairperson:
Rita Goncalves, +1-55-21-4503-2621
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com