Fitch Ratings has affirmed Banco Supervielle S.A.'s (Supervielle) Foreign Currency and Local Currency Long-Term Issuer Default Ratings (IDRs) at 'CCC'.
KEY RATING DRIVERS
IDRS AND VIABILITY RATING (VR)
Supervielle's VR and IDRs are highly influenced and constrained by the volatile operating environment and low sovereign ratings of Argentina (Long Term IDR: 'CCC'). While the ultimate economic and financial market implications of the coronavirus pandemic are unclear, risks to Argentina's operating environment are clearly skewed to the downside. This underpins the agency's Negative Rating Outlook on its operating environment and asset quality scores for Supervielle.
The ratings also consider the bank's moderate franchise, adequate capitalization and liquidity and the deterioration of its asset quality indicators. Market volatility, low loan growth, higher credit costs and rising administrative expenses due to high inflation will continue to weigh on banks' financial profiles.
Profitability metrics have been under pressure in recent years as loan growth has been very low, and this, together with higher loan loss provisions and continued growth in administrative expenses, has affected profitability. Fitch notes that high inflation significantly distorted profitability ratios and affected international comparability up until December 2019.
Since January 2020, banks' financial statements are adjusted by inflation, following IFRS rules, so that their figures are not comparable with previous periods. In 1H20, profitability (in real terms) improved significantly, aided by wider net interest margins, increased Central Bank securities (Leliqs) and holdings, cost control and lower inflation. Supervielle's ratio of operating profit/risk-weighted assets rose to 1.87% as of June 30, 2020. However, Fitch believes that, as with the financial system as a whole, Supervielle's profitability will continue to be highly pressured by increased credit costs due to the coronavirus pandemic, high inflation and slow growth.
In addition, profitability has been affected by some distorting regulations passed by the Central Bank in 2020, such as capping interest rates offered on loans and placing floors for deposit rates amid very low credit growth; this has led to Argentine banks' increased exposure to the public sector, mainly to Central Bank securities. To compensate the banks for the economics of intermediation, the Central Bank has been reducing the legal reserve requirement and gradually expanding the limit for Leliq holdings.
In line with the deterioration of the operating environment, Supervielle's nonperforming loan (NPL) ratio rose to 7.4% of total loans as of Dec. 31, 2019 (up from 3.9% as of December 2018). As of June 2020, NPLs were lower (6.1%), mainly due to the regulatory forbearance measures dictated by the Central Bank. As of June 30, 2020, restructured loans under the relief measures accounted for 4.4% of the total.
In Fitch's view, Supervielle's loan loss reserves are adequate and have increased as the bank has set provisions according to its expected loss models. On a consolidated basis, the reserve coverage ratio was 125.5% as of June 30, 2020. In addition, 44% of Supervielle's commercial loan portfolio is covered with tangible guarantees (or 66% of impaired commercial loans), and 72% of retail lending is in the form of payroll loans or financing to retirees.
The securities portfolio has increased significantly (27.8% of total assets as of June 30, 2019), as the bank has followed the strategy to invest in highly profitable Leliqs to allocate its liquidity given the slump in loan growth. Supervielle's total exposure to the public sector was relatively high as of June 30, 2020 and mostly corresponds to Leliqs. The total sovereign exposure accounted for 30.7% of total assets, or 3.5x of Fitch Core Capital (FCC). While this exposure is high, 85.3% of the total exposure corresponds to Central Bank securities that are highly liquid and have a lower risk.
Supervielle's capitalization significantly improved following the Supervielle Group's issuance of fresh capital through an IPO in the New York and Buenos Aires stock exchanges for a total of USD623 million in 2016 and 2017. As of June 30, 2020, the bank's common equity Tier 1 (CET1) capital ratio was 13.1%. Although growth in the medium term will likely be low, the bank is committed to taking the necessary measures to maintain its capitalization at adequate levels when needed.
The primary source of funding is the bank's deposit base, which made up 86.8% of its funding as of June 30, 2020. The bank's loan-to-deposits ratio has decreased rapidly to 64.9%, well below the 100%-110% range shown in recent years, as deposit growth has been significantly stronger than loan growth. Liquidity levels are adequate, with a liquidity coverage ratio (LCR) of 125.5% and a net stable funding ratio (NSFR) of 181.2% as of June 30, 2020. The immediate liquidity ratio (cash and equivalents plus short-term central banks securities divided by total deposits) stood at a comfortable 54.5% as of June 30, 2020, while cash and equivalents represented 19.7% of deposits.
SUPPORT RATING AND SUPPORT RATING FLOOR
Supervielle's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF' reflect Fitch's view that, although possible, external support for this bank, as with most Argentine banks, cannot be relied upon given the ample economic imbalance. In turn, the sovereign's ability to support banks is uncertain, as reflected by the low sovereign ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Supervielle's IDRs and VRs would benefit from an upgrade of Argentina's sovereign rating.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The IDRs and VRs of Supervielle would be pressured by a downgrade of Argentina's sovereign rating or deterioration in the local operating environment beyond current expectations that leads to significant deterioration in the bank's financial profile.
Any policy announcements that would be detrimental to the bank's ability to service its obligations, including a tightening of capital controls to the extent that they would restrict debt payments, would be negative for creditworthiness.
SUPPORT RATING AND SUPPORT RATING FLOOR
Changes in the SR and SRF of Supervielle are unlikely within 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.
ENTITY/DEBT RATING PRIOR
Banco Supervielle S.A. LT IDR CCC Affirmed CCC
ST IDR C Affirmed C
LC LT IDR CCC Affirmed CCC
LC ST IDR C Affirmed C
Viability ccc Affirmed ccc
Support 5 Affirmed 5
Support Floor NF Affirmed NF
VIEW ADDITIONAL RATING DETAILS
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