Fitch Ratings has affirmed Banco Hipotecario S.A.'s (Hipotecario) Foreign and Local Currency Long-Term Issuer Default Rating (IDR) at 'CC'.
Key Rating Drivers
Hipotecario's IDRs are based on its VR. The rating of Hipotecario's senior debt is equalized with its IDR.
Hipotecario's VR and IDRs are highly influenced by Argentina's volatile operating environment, as well as the bank's funding and liquidity profile and its deteriorating asset quality. The ratings also consider the bank's moderate franchise and adequate capitalization.
While the ultimate economic and financial market implications of the coronavirus pandemic remain uncertain, risks to Argentina's operating environment are clearly skewed to the downside. This underpins the agency's negative outlook on the operating environment and asset quality scores. Market volatility, low loan growth, higher credit costs and rising expenses due to high inflation will continue to weigh on Hipotecario's financial profile.
The bank has undergone a successful diversification of its funding structure, and now relies on its deposits as the main funding source, similar to other Argentine banks. As with most of its local peers, Banco Hipotecario's loan to deposits ratio has significantly decreased as deposit growth has outpaced loan growth and at June 2021 it reached a low 46.47%. While the outstanding amount of international debt issuances is small (around 5.4% of total liabilities), an extension or tightening of the capital controls in Argentina cannot be ruled out, adding uncertainty to Hipotecario's capacity to obtain U.S. dollars to service its debt.
The bank's asset quality metrics continue to be pressured by the challenging economic scenario, with the bank's NPL ratio reaching 14.8% in June 2021 driven mostly by the reduction of its credit portfolio and its corporate credit portfolio. In terms of the consumer portfolio, asset quality remained stable at 2.9% (versus 2.9% in FY20 from 7.7% in Dec. 2019). Commercial loans continued to represent a major part of the deteriorated portfolio, with the NPL ratio reaching 33.1% in June 2021, from 28.6% in Dec. 2020, mainly due to the contraction of its commercial portfolio (-10% quarter over quarter). Fitch expects NPL figures to deteriorate once the forbearance measures are lifted, with the impact on NPL reflected in the third-quarter figures.
Profitability has been pressured by very low loan growth since 2018, as well as higher loan loss provisions and the effect of high inflation. In addition, the net interest margin has been affected by some distorting regulations passed by the Central Bank in 2020, such as capping interest rates offered on loans, placing floors for deposit rates and imposing restrictions on fee increases, among others. The result was a net loss reported in 1H21, with the bank reporting operating profit/risk weighted assets of -6.93% compared with 2.07% in FY20.
The bank's current capitalization levels are commensurate with its rating level with CET 1 ratio of 16.14% as of June 2021, which is in line with its peers and well above the minimum capital requirement. Currently, the bank's strategy places a higher priority on profitability through improvement of operational efficiency and maintaining comfortable liquidity position over growth, which Fitch views as positive for capitalization over the medium term.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The IDRs and VRs would be pressured by a downgrade of Argentina's sovereign rating or a deterioration in the local operating environment beyond current expectations that leads to a significant deterioration in its financial profile;
Any policy announcements or a deterioration in the local operating environment that would be detrimental to the bank's ability to service its obligations, including a tightening of capital controls to the extent that they restrict debt payments, would be negative for creditworthiness.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The IDRs and VR of Banco Hipotecario could benefit from a sustained improvement in the bank's funding profile and asset quality.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SENIOR DEBT
The 'CC'/'RR4' rating on Hipotecario's medium-term notes reflects that these are senior unsecured obligations ranking pari passu with other senior unsecured indebtedness, and therefore, aligned with the bank's Foreign Currency FC IDR of 'CC'.
The notes are denominated in U.S. dollars. Fitch considers the bank's Foreign Currency IDR as the appropriate anchor for this issue rating, given the transfer and convertibility risk associated with settlement in foreign currency notwithstanding that the issuer will not incur material currency risk. The notes' Recovery Rating of 'RR4' reflects the average expected recovery in case of bank liquidation.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating of '5' and the Support Rating Floor of 'NF' reflect that, although possible, external support for Banco Hipotecario cannot be relied upon given the sovereign's track record for providing support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
SUPPORT RATING AND SUPPORT RATING FLOOR
Changes in the SRs and SRFs of Banco Hipotecario are unlikely in the foreseeable future.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Changes in the SRs and SRFs of Banco Hipotecario are unlikely in the foreseeable future.
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
Banco Hipotecario's ESG score for Management Strategy has been changed to '4' from '3' (the baseline score for this Governance issue assigned to all issuers globally). This reflects the high level of government intervention in the Argentine banking sector. The imposition of interest rate caps can lead to inadequate loan pricing, and, together with the imposition of interest rates floors on time deposits, puts significant pressure on banks' net interest margins. In addition, restrictions on fee levels can negatively affect performance ratios. This challenges Banco Hipotecario's ability to define and execute its own strategy. This has a moderately negative impact on the rating in conjunction with other factors.
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.
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
Banco Hipotecario S.A. LT IDR CC Affirmed CC
ST IDR C Affirmed C
LC LT IDR CC Affirmed CC
LC ST IDR C Affirmed C
Viability cc Affirmed cc
Support 5 Affirmed 5
Support Floor NF Affirmed NF
senior unsecured
LT CC Affirmed RR4 CC
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
BANCO HIPOTECARIO S.A. 
