Fitch Ratings has upgraded Banco Hipotecario S.A.'s Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) to 'CCC-' from 'CC' and Viability Rating (VR) to 'ccc-' from 'cc'.

The upgrade reflects Hipotecario's improvements in the bank's asset quality, funding mix and profitability during the past six quarters and the lower refinancing risk given the significant reduction of its capital markets debt.

Fitch has withdrawn the banks Support Rating of '5' and the Support Floor of 'No Floor' (NF) and assigned a new Government Support Rating of 'No Support' ('ns') as these ratings are no longer relevant to the agency's coverage.

Key Rating Drivers

Intrinsic Creditworthiness: Hipotecario's IDRs are based on the bank's intrinsic creditworthiness as determined by its VR. The bank's VR is one notch below its implied VR due to its comparatively weaker funding and liquidity profile. Despite improving trends in terms of the diversification of the bank's funding sources, concentration remains high when compared to international peers.

Challenging Operating Environment: Hipotecario's implied Viability Rating (VR) and IDRs are constrained by Argentina's volatile operating environment, and the bank's funding and liquidity profile. The risks to Argentina's operating environment are clearly skewed to the downside, underpinning Fitch Ratings' Negative Outlook on this score. Market volatility, low loan growth, higher credit costs and rising expenses, due to high inflation, will continue to weigh on Hipotecario's financial profile.

Satisfactory Asset Quality: During the first half of 2022 the bank's loan impairment ratio saw a significant improvement, decreasing to a low of 4.5% as of June 30, 2022 from the nearly 14% reported at December 2021. Securities (mostly liquid, Central Bank securities) accounted for nearly 50% of total assets while gross loans represented nearly 20% at June 30, 2022. Coverage ratios remain satisfactory.

Recovering Profitability: Profitability metrics strongly improved as a result of earnings from its securities portfolio and benefits from cost control initiatives and lower credit costs. The contained operating expenses have offset lower revenues from the smaller credit portfolio and lower fee income resulting from government regulation intended to support the economy. The benchmark operating profit to risk-weighted asset ratio sharply improved from YE 2021 when it was negative to a positive 8.5% at 1H2022.

Stronger Capitalization Metrics: The bank posts satisfactory capitalization levels with a CET 1 ratio of 18.7% and total capital ratio of 18.9%, in line with its peers and well-exceeds the regulatory minimums as of June 30, 2022. The June 2022 level was an improvement on the nearly 16% ratio posted at YE 2021. Fitch expects this ratio to decrease when the economy recovers.

Greater Funding Diversification: Hipotecario has made significant progress towards diversifying its funding base from predominantly funding by bonds to customer deposits as the main source of funding. Deposits now represent 84% of its non-equity funding. The bank's loan to deposit ratio is very low compared to peers at only 29.5% at 1H22. Deposit concentration has improved, but still high, as the top 10 depositors accounted for 39% of total deposits as of June 30, 2022. As of the same date, the bank reported adequate liquidity metrics of LCR 139% and NSFR of 219%.

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 deterioration in the local operating environment beyond current expectations, leading to a significant deterioration in its financial profile.

Any policy announcements or deterioration in the local operating environment detrimental to the bank's ability to service obligations would be negative for creditworthiness. This includes a tightening of capital controls, to the extent they restrict debt payments.

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

Maintaining the improvement in the bank's funding profile and asset quality in the context of a sovereign upgrade or a better operating environment would be positive for the bank's ratings.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

The rating of Hipotecario's senior medium-term notes is aligned with the bank's Long-Term Foreign Currency IDR. Fitch considers the Long-Term Foreign Currency IDR an appropriate anchor for this issue rating, given the transfer and convertibility risk associated with settlement in foreign currency, notwithstanding the issuer will not incur material currency risk. The notes' Recovery Rating of 'RR4' reflects the average expected recovery in case of bank liquidation. The bank has recently repaid a portion of its senior debt and has access to sufficient foreign currency to repay the upcoming November 2022 maturity.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Any change, either positive or negative, to Hipotecario's IDR could result in a similar change to the senior debt rating.

VR ADJUSTMENTS

The implied 'ccc' Viability Rating has been adjusted to 'ccc-' due to operating environment/sovereign rating constraint (negative);

The Operating Environment score of 'ccc' has been assigned below the implied score of 'b' due to the following adjustment reason: Sovereign Rating (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

Banco Hipotecario S.A. has an ESG Relevance Score of '4' for Management Strategy. 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. This has a negative impact on the credit profile, and is relevant to the ratings 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.

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