TEXT-S&P affirms Banco Continental S.A.E.C.A.
(The following statement was released by the rating agency) Overview -- We believe that Paraguay-based Banco Continental has a strong business position, weak capital and earnings, adequate risk position, average funding structure, and adequate liquidity profile. -- We are assigning our global scale 'BB-' issuer credit ratings to Banco Continental. -- The stable outlook reflects our expectation that the bank will continue to expand its operations within the Paraguayan financial system while maintaining healthy financial metrics. Rating Action On May 29, 2012, Standard & Poor's Ratings Services assigned its global scale 'BB-' long-term issuer credit rating to Banco Continental S.A.E.C.A.. The outlook is stable. Rationale The ratings on Banco Continental reflects the bank's strong business position in the Paraguayan banking system, weak capital and earnings, adequate risk position, average funding, and adequate liquidity. The 'BB-' issuer credit rating on Banco Continental is the same as its 'bb-' stand-alone credit profile (SACP), because it does not incorporate external support. Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in Paraguay is 'b+'. Our economic risk score on Paraguay is '10', based on our view that Paraguay's economy depends largely on agriculture and international trade, and its monetary flexibility is limited. Our industry risk score on Paraguay is '7', reflecting our belief that the Paraguayan financial system has an aggressive risk appetite, as demonstrated by rapid credit growth, and that the scope of supervision is limited. Despite a significant increase in domestic credit during the past four years, the economy still has relatively low leverage. We classify the Paraguayan government as "support uncertain" toward domestic banking. We view Banco Continental's business position as "strong", given the bank's market position as one of the largest entities in the country. As of Dec. 31, 2011, Banco Continental was the second-largest bank in terms of loans and deposits with a market share of 16.5% and 15.8%, respectively, and third-largest in terms of assets. The bank offers a wide range of products through its 52 branches. It focuses on the corporate segment, especially small and medium size enterprise (SME) segment, which accounted 85% of total loans as of Dec. 31, 2011. Consumer loans accounted 10% of the bank's loans, compared with 15% of the average banking system. Over the short to medium term, we expect the bank to continue to focus on the SME sector and maintain a stable presence in the consumer loan segment. Our assessment of the bank's capital and earnings as weak is based on our expectation that its risk adjusted capital ratio (RAC) ratio, under our methodology, will be about 4.5% during the next 12 to 18 months. Our projections assume that the effects of the adverse climate conditions in the country on loan loss provisions and loan growth would be manageable; that there would be a moderate growth in the bank's loan portfolio, and an increase in capital through the capitalization of a significant portion of its earnings. Nevertheless, in our view, the bank's required capital ratios are adequate, with a Tier 1 capital ratio of 9.5% at March 2012, compared with a minimum regulatory requirement of 8%. Moreover, the bank's good profitability levels, with a return on assets of 2.9% on average for the past five years, were due to its high efficiency (noninterest expenses over revenues average for the same period totaled 38.4% and 35.4%, respectively, in 2011). We assess Banco Continental's risk position as adequate. During the past four years, the bank's loan portfolio grew at a compound annual growth rate of 38%, compared with 32% in the overall banking system. For the next 12-24 months we expect the bank to expand its portfolio at more moderate levels and in line with the average banking system (in the 10%-12% range). The bank' loans are concentrated in the agribusiness sector (about 17% in agriculture and 13% in cattle production), but this is in line with the system's exposure to this sector (33%). We believe that the bank's management has a conservative risk culture and that International Finance Corporation, as one of the bank's shareholder, provides additional oversight. These factors mitigate the bank's credit origination process, during which the risk department analyzes the credit applications and the commercial area makes the final decision. Moreover, Banco Continental's asset quality metrics compare strongly with the industry average. As of Dec. 31, 2011, the bank's nonperforming loans were 0.8% of total loans, compared with 1.7% of the average Paraguayan system. During 2012, we expect the bank's delinquency ratios to worsen as a result of adverse climate conditions on the country's agribusiness sector. We believe that this will deteriorate but to levels still better than system average. Our average assessment of its funding reflects its funding structure's dependence on deposits--the same as the banking system in Paraguay. As of Dec. 31, 2011, customer deposits represented 83% of the bank's total liabilities (compared with 82% in the banking system), of which 48% were term deposits (compared with 38%). About 74% of the bank's deposits were retail, 17% from the public sector, and 9% wholesale. We will monitor the impact recent regulatory changes on public sector deposits. The bank has gradually diversified its funding base with financial obligations representing 11% of liabilities and subordinated loans making up almost 4%. We expect additional increases in financial obligations over the short to medium term. We view Banco Continental's liquidity as adequate. Cash, money market instruments, and the central bank securities have historically represented a relatively high proportion of total assets and accounted for 31% as of Dec. 31, 2011. Liquid assets covered 41% of total deposits and 80% of sight deposits as of the same date. Outlook The stable outlook reflects our expectation that the bank will continue to expand its operations within the Paraguayan financial system while maintaining healthy financial metrics despite adverse climate effects in the country. We also expect that Banco Continental will maintain its strong competitive position, despite intense competition. We could raise the ratings on Banco Continental if we raise the sovereign ratings on the Republic of Paraguay (BB-/Stable/B) and if the economic and industry risks for Paraguayan banks improve. We could lower the ratings on the bank if the economic and industry risks for Paraguayan banks decrease, if the sovereign ratings deteriorate, or if the bank's credit standing weakens. Ratings Score Snapshot Issuer Credit Rating BB-/Stable/-- SACP bb- Anchor b+ Business Position Strong (+1) Capital and Earnings Weak (0) Risk Position Adequate (0) Funding And Liquidity Average and Adequate (0) Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 Additional Factors 0 (Caryn Trokie, New York Ratings Unit)