TEXT-S&P affirms Banco Continental S.A.E.C.A.

Tue May 29, 2012 3:34pm EDT

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(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)
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