Fitch Ratings has affirmed Banco Davivienda (Costa Rica), S.A.'s (Davivienda CR) Long-Term (LT) Foreign Currency (FC) Issuer Default Ratings (IDR) at 'BB' and LT Local Currency (LC) IDR at 'BB+'.

In addition, Fitch has affirmed the FC and LC Short-Term (ST) IDRs at 'B', Shareholder Support Rating (SSR) at 'bb' and Viability Rating (VR) at 'bb-'. Fitch has also affirmed the bank's National LT and ST Ratings at 'AAA(cri)' and 'F1+(cri)', respectively, as well as the ratings of the local debt issue programs. The Rating Outlook for the LT FC and LC IDRs and LT National Rating is Stable.

Key Rating Drivers

Shareholder Support-Driven Ratings: Davivienda CR's IDR and national ratings are based on Fitch's assessment of the capacity and propensity of its parent, Banco Davivienda S.A. (Davivienda; BB+/Stable), to provide support, if required. Davivienda's relative credit strength with respect to the Costa Rican sovereign (BB-/Stable) and other rated issuers in the country, enable Davivienda CR's national ratings to be placed at the top of the national scale with a Stable Outlook.

Ratings Constrained by Country Risk: With a high degree of influence, Fitch also considers the possible transfer and convertibility (T&C) risks, reflected in Costa Rica's country ceiling of 'BB', which could limit Davivienda CR's ability to receive support and Davivienda's ability to provide it, which results in Davivienda CR's SSR and LT FC IDR being rated one notch below its parent's IDR.

The LT LC IDR of 'BB+' is equalized to its parent's LT FC IDR and two notches above Costa Rica's sovereign rating, since it is not constrained by T&C risks, according to Fitch's criteria. The Stable Outlook for the bank's LT IDRs mirrors that on its shareholder, also considering that of the sovereign.

High Reputational Risk: In the evaluating of propensity to support, Fitch considers the huge reputational risk that the Davivienda group could face in the event of a possible default by its subsidiary in Costa Rica, with whom it shares the same brand, as highly important.

Strategic Role in Group: In Fitch's support analysis, the key role that Davivienda CR has in the group's geographic diversification strategy by operating in a market considered strategic and with which it also shows operating synergies, carries moderate weight.

Well Established Business Profile: Davivienda CR's VR of 'bb-', equal to its implied VR, incorporates the agency's assessment of its business profile, which reflects the consistent and well-diversified business model between corporate and personal banking, as well as the moderate size of its franchise, being the second-largest private bank in Costa Rica, with market shares of 7.3% and 6.4% in credit and deposits, respectively, as of May 2023.

Risk Profile: The Risk Profile assessment, at the same level of the Costa Rican Operating Environment (OE), is influenced by the bank's sensitivity to exchange risk, given that the bank is characterized by the high percentage of its balance in U.S. dollars (loans: 64.9% as of March 2023), which explains the drop in loans and profitability as of 1Q23, due to the effect of appreciation of the colon against U.S. dollars. However, the agency expects the financial performance would stabilize over the foreseeable future.

Good Asset Quality: Fitch upgraded Davivienda CR's asset quality score to 'bb' from 'bb-'. Fitch weighs within the VR, Davivienda CR's moderate risk appetite that has translated to a good and stable asset quality ratio, with a NPLs metric of 1.9% as of March 2023 (2019-2022: 1.9%) and net charge-off levels around 1% of gross loans, reserve coverage for NPL of 162.7%, and good levels of collaterals that offset the higher credit concentrations than peers.

Profitability Affected by Exchange Rate Volatility: Davivienda CR's profitability has been moderate in recent years, with an operating profit to risk-weighted assets (RWA) ratio of 1.5% on average from 2019 to 2022. However, as of March 2023 it was negative 1.6%, completely due to losses derived from the exchange rate variations; however, when excluded, result in profits at similar levels to 2022. In its base scenario, the agency considers that the indicators of profitability would stabilize during 2023-2024 at their historical values.

Adequate Capital Levels: Davivienda CR's capitalization ratios improved in recent years. As of March 2023, the Fitch Core Capital (FCC) to RWA metric registered 13.0% versus 12.4% in 2022. This despite of operating losses in colones, given the entity's conservative strategies to protect its capitalization against exchange rate volatility, which Fitch considers prudent. In addition, the bank's capital position benefits from its ordinary parent support.

Stable and Diversified Funding Profile: Davivienda CR's funding and liquidity profiles are favored by its customer deposit base, which represented around 67% of total funding as of March 2023, as well as the synergies generated between its parent. The loan-to-deposit ratio decreased to 109.3% (2019-2022: 126.2%), supplemented with issuances in the local market and credit lines with financial institutions.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Negative changes in Davivienda CR's IDRs and SSR would mirror any movement in Costa Rica's sovereign ratings and Country Ceiling;

Any perception by Fitch of the parent's significantly reduced propensity to support the subsidiary may trigger a downgrade of IDRs, SSR and national ratings;

A multi-notch downgrade of Davivienda's IDRs would also entail a downgrade in Davivienda CR's FC and LC IDRs, SSR and national ratings, while a one notch downgrade in Davivienda's IDRs would trigger a downgrade in Davivienda CR's LC IDR;

A downgrade of Davivienda CR's VR could result from a material deterioration of the banks' financial performance that drops its FCC/RWA ratio consistently below 9% alongside incurring in operating losses consistently.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Davivienda CR's FC IDR and SSR could be upgraded in the event of an upgrade of Costa Rica's Country Ceiling, while the LC IDR would be upgraded if Davivienda's IDRs and Costa Rica sovereign rating are upgraded;

Davivienda CR's VR could be upgraded in the event of an improvement in the local OE and if the bank continues with consistent financial performance metrics;

The bank's national scale ratings are at the top of the scale, and therefore there is no room for positive actions.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Senior Unsecured Debt: Unsecured senior debt is rated at the same level as Davivienda CR's national ratings, as Fitch considers that the probability of default of its debt is the same as that of the bank.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Senior unsecured debt national ratings would be downgraded in the case of negative rating actions on the bank's national ratings.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Debt issue programs national ratings are at the top of the scale. Therefore, there is no room to upgrade.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

Summary of Financial Adjustments

Fitch reclassified prepaid expenses as intangibles and deducted them from equity to reflect their lower absorption capacity.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

Davivienda CR's ratings are support-driven by Davivienda.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

(C) 2023 Electronic News Publishing, source ENP Newswire