Fitch Ratings has affirmed Banco Guayaquil S.A. y Subsidiarias' (Guayaquil) Long-Term Issuer Default Rating (IDR) at 'B-' and Viability Rating (VR) at 'b-'.

The Rating Outlook on the IDR is Stable.

Key Rating Drivers

Operating Environment High Influence: Guayaquil's 'b-' VR is one notch below implied 'bb' VR. Fitch believes Ecuador's Sovereign Rating and broader operating environment considerations highly influence Guayaquil's VR, as it limits the financial profile score.

Strong Market Position and Diversified Business Model: Guayaquil is the third largest bank in Ecuador. Its market share was 12.2% by assets as of 3Q22. Guayaquil's loan portfolio is fairly diversified, with commercial loans accounting for 54.3% of total loans, 40.6% consumer and 5.1% mortgages. Business model has been stable through time; Guayaquil has a long track record of earnings stability, which has proven resilient amid the economic cycles.

Sound Asset Quality: Guayaquil has maintained sound and stable asset quality metrics. As of 3Q22, the 60-days NPL ratio remained stable at 1.3% as of 3Q22 (YE21: 1.1%), comparing favorably with the banking system average (3Q22: 2.3%). Reserve coverage of impaired loans remains sound at 327.1% and enhances the bank's loss absorption capacity. The bank's adequate asset quality ratios reflect a lower risk appetite and more resilience than its peers, as well as the selective relief programs amid the pandemic. Fitch expects some deterioration in the NPL ratio with the unwinding of the regulatory flexibility to delay the recognition of deteriorated loan ends; however, it will remain commensurate to its rating category.

Improved Profitability: Guayaquil's profitability has improved due to lower impairment charges and a higher net interest income. The operating profit to Risk Weighted Assets (RWA) ratio improved to 2.0% at 3Q22 from 1.6% at YE 2021. Fitch expects further profitability improvement as of YE 2022 as loan impairment charges remain stable while income generation increase due to higher business volumes.

Adequate Capitalization: Guayaquil's Fitch Core Capital (FCC) to RWA ratio declined to 11.7% as of 3Q22 (YE 2021: 13.5%), reflecting an increase in RWA of 9.6% due to a loan's growth of 11.9% at the same date. The regulatory capital ratio of 14.2% as of 3Q22 is well above the regulatory minimum of 9.0% and mainly consists of Tier I capital (approximately 77% of regulatory capital). Fitch expects the FCC ratio to remain adequate in 2023, driven by moderate asset growth and higher income generation, while sound reserve coverage will continue to enhance loss absorption capacity.

Conservative Liquidity: Guayaquil's liquidity position is conservative. The loans-to-deposits ratio remains sound at 93.4% as of 3Q22. Historically, customer deposits have covered most of the bank's funding needs (87.4% as of3Q22). The bank's liquidity position has strengthened thanks to a customer deposits growth above the system's average. The bank maintains good access to capital debt markets and wholesale funding. The bank benefits from high quality available funds that represented 20.7% of short-term deposits as of 3Q22, which is considered adequate by Fitch.

GOVERNMENT SUPPORT RATING

The GSR of 'ns' reflects that despite Guayaquil's important market share and local franchise, Fitch believes that there is no reasonable assumption of support forthcoming from the sovereign due to Ecuador's limited financial flexibility and the lack of a lender of last resort.

Rating Sensitivities

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

IDRs and VR

The IDRs are sensitive to changes in the sovereign rating or further deterioration within the local operating environment;

The IDRs and VR could be downgraded if the pandemic-induced economic disruption results in a relevant deterioration of asset quality or profitability lead into a sustained decline in the bank's FCC-to-RWA ratio below 9%.

GSR

The GSR has no downgrade potential, as it is at the lowest possible level.

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

IDRs and VR

Upside potential is limited. In the long term, a rating upgrade would require improved prospects for the operating environment and a meaningful and sustained improvement of core profitability, combined with improvements in the bank's credit quality and capitalization.

GSR

Ecuador's propensity or ability to provide timely support to Guayaquil is not likely to change given the sovereign's low sub-investment-grade IDR. As such, the GSR has no upgrade potential.

VR ADJUSTMENTS

The VR of 'b-' has been assigned below the 'b' implied VR due to the following adjustment reason: Operating Environment (negative). Fitch has assigned an Operating Environment score of 'ccc+' that is below the 'b' category implied score due to the following adjustment reason: Macroeconomic Stability (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 '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

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.

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.

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