BANCO DAVIVIENDA S.A.
Fitch Ratings has downgraded
Fitch has also affirmed its Long-Term Issuer Default Rating (IDR) at 'B-' with a Negative Rating Outlook. Davivienda Sal's Short-Term IDR has been affirmed at 'B' and the Shareholder Support Rating (SSR) was affirmed at 'b-'. Also,
The rating actions on Davivienda Sal and ICQB follow the downgrade of
Davivienda Sal's VR of 'cc' is below the implied score of 'ccc' and reflects the agency's opinion that Salvadoran banks' performance continue to be highly exposed to the risks from the OE, which is in turn constrained by
The national ratings of Davivienda Sal and its holding, as well as those of other financial institutions rated in
ICQB's Long-Term IDR downgrade is also consequence of
Key Rating Drivers
Davivienda Sal
Support-Driven Ratings: Davivienda Sal's IDR and SSR are based on the potential ability and propensity of its shareholder
Sound Support but Country Risks Restrictions: Fitch's assessment of the parent's ability to support remains strongly influenced by
According to Fitch's criteria, the Country Ceiling incorporates transfer and convertibility risks that, in this case, could limit the subsidiary's ability to use shareholder support. The Negative Outlook indicates that the bank's IDR could be affected by downgrades of the Salvadoran sovereign rating and the Country Ceiling.
Significant Reputational Risk: Fitch, in its propensity to support analysis, also weighs with high importance the huge reputational risk that a potential default by Davivienda Sal would mean for its shareholder and subsidiaries, severely damaging the franchise in the region.
OE Highly Influence the Credit Profile: Davivienda Sal's financial profile has exhibited relative stability in recent years, and its intrinsic credit profile is consistent with relatively higher rating levels. Fitch believes, despite this, Salvadoran banks will continue to be sensitive to the country's risks such as lower economic growth, weaker investor sentiment, tight government liquidity position and policy uncertainty, which is reflected on the negative trend in Fitch's assessment of the OE.
Strong Business Profile with Consistent Performance: Davivienda Sal's VR also considers its robust local franchise, with a market share of 14.4% by loans as of
Capitalization and Funding Profile: Davivienda Sal's capital levels, with an FCC to RWA metric of 13.5% at 1H22, as well as the bank's diversified funding structure, which is sustained on its solid deposit franchise, good access to several financing sources and is further reinforced by the support and synergies arisen with its parent, are aspects that weigh in Davivienda Sal's VR.
ICQB
Good Franchise Position: ICQB's ratings are driven by its consolidated intrinsic profile and are highly influenced by its business profile and the OE. ICQB has a strong and consistent franchise in the auto lending segment in the below investment grade countries. The intra-group benefits for being the financial division of Grupo Q, a leading car distributor in
Controlled Asset Quality and High Profitability: ICQB's asset quality is consistent, with impaired loans above 90 days representing 2.1% as of 2Q22 (average from 2019 to 2021: 2.5%). Its profitability levels increased in 2022 as a result of the good performance on loans in all its jurisdictions. As of 2Q22, pre-tax income to average assets reached 4.9% (2019-2021: 3.9%).
Stable Tangible Leverage and Diversified Funding: Fitch considers ICQB's tangible leverage metric of 4.6x, as of
However, the entity has limited financial flexibility, as unsecured debt represented 23.2% (2019 to 2021: 30.8%) of interest-bearing liabilities but has successfully obtained financing over the cycle and has 50% available in lines of total funding.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Davivienda Sal
Davivienda Sal's IDR and SSR remain sensitive to changes in
Davivienda Sal's VR downgrades could come for a consistently lower operating profit-to-RWA ratio or operating losses. An FCC-to-RWA ratio consistently below 10% also would pressure the VR;
Davivienda Sal's IDRs could be downgraded by a multi-notch downgrade of Davivienda's IDRs; however, this scenario is unlikely in the rating horizon given the parent's Stable Outlook;
Any perception by Fitch of a relevant reduction of the strategic importance of Davivienda Sal for its parent may trigger a negative rating action of its SSR and IDRs;
The VR is sensitive to changes in the sovereign rating, or further deterioration on the local OE that leads to a material deterioration in its financial profile. Given the current low levels of the VR, downside potential would only arise if the worsening OE and/or the country's policy framework materially increases the likelihood of this bank defaulting on its financial obligations over the short term.
ICQB
ICQB's IDR could be downgraded due to a sustained deterioration in its profitability, or a continued pre-tax income to average assets indicator below 1.0%;
A downgrade or material deterioration of the main OEs where ICQB holds its major exposures.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Davivienda Sal
The Negative Outlook on Davivienda Sal's IDR indicates positive actions in the ratings are highly unlikely in the foreseeable future. However, over the medium term, Davivienda Sal's IDR, SSR and VR could be upgraded in the event of an upgrade of
The upside potential of Davivienda Sal's VR is limited due to the Fitch assessment of the OE in negative trend; Davivienda Sal's VR could only be upgraded over the medium term given an improvement of the OE, while maintaining its good company and financial profile.
ICQB
Ratings can be upgraded if the entity is able to diversify its revenues sources while maintaining its profitability levels, along with meaningful improvement in the scale of its operations without significantly altering ICQB's risk profile;
By an improvement on Fitch's assessment of the OEs where ICQB holds its major exposures.
VR ADJUSTMENTS
Davivienda Sal
The bank's 'cc' VR has been assigned below the 'ccc' implied VR, due to the following adjustment reason: Operating Environment/Sovereign Rating Constraint (negative).
The Operating Environment score of 'cc' has been assigned below the implied score of 'b', due to the following adjustment reason: Sovereign Rating (negative).
The Business Profile score of 'ccc' has been assigned below the implied score of 'b', due to the following adjustment reason: Business Model (negative).
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 '
Summary of Financial Adjustments
Davivienda Sal: Prepaid expenses were reclassified as intangibles and deducted from total equity to reflect their low 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 Sal's ratings are based on the potential support it would receive from its parent,
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(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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