Fitch Ratings has affirmed Banco ProCredit S.A.'s (ProCredit Ecuador) Long-Term Issuer Default Rating (LT IDR) at 'B-' with a Stable Rating Outlook and its Short-Term IDR at 'B'.

Fitch has also affirmed the bank's Viability Rating (VR) at 'ccc+'.

Key Rating Drivers

Support Driven Ratings: ProCredit Ecuador's IDRs are driven by Fitch's assessment of the potential support it would receive from its parent, ProCredit Holding AG & Co. KGaA's (PCH; BBB/Stable), if required.

Shareholder Support Rating: The 'b-' Shareholder Support Rating reflects Fitch's view of parent support as robust but constrained by Ecuador's transfer and convertibility risks captured by the country ceiling rating of 'B-'. Fitch's assessment of support considers the strategic role ProCredit Ecuador plays for ProCredit Group through its operation, providing core products and services of the group. The ProCredit group is an international group of development-oriented commercial banks with a focus on Eastern Europe. Ecuador is the group's only remaining operation in Latin America.

PCH's ability to provide timely support contemplates ProCredit Ecuador's relative size of approximately 6% of consolidated assets; Fitch believes any required support would be immaterial relative to the ability of parent to provide it. The propensity and commitment of PCH to provide support is reflected in the high level of operational and managerial integration and the reputational implications of subsidiary default. In addition, Fitch considers the presence of related funding and guarantees during different economic cycles in the support assessment.

VR

Adequate Asset Quality: At 3Q22, the NPL ratio deteriorated to 2.2% compared to 4YA of 1.6% (2018-2021; YE21: 2.5%) mainly due to seasoning of restructured and refinanced loans and more recently as a result of the Ecuadorian national strike that took place in June. Fitch expects asset quality to deteriorate when regulatory flexibility to delay NPLs recognition up to 60 days to cushion the coronavirus pandemic impact ends at YE22. However, it will remain adequate and commensurate with the bank's rating category.

Slight Profitability Increase: ProCredit's profitability performance, which has historically been constrained, improved slightly since 2Q22 as a result of increased business volumes to absorb high loan impairment charges. This was reflected in an operating profit to risk weighted assets (RWA) ratio of 0.05% compared to a 4YA of -1.05% (2018-2022). Further improvement is possible if the bank's business scale increases, the cost of credit decreases, and if funding and operating costs are reduced.

Parent Supported Capitalization: Capitalization ratios remain modest but supported, given PCH's propensity to provide support in line with ProCredit Ecuador's capitalization objectives. At 3Q22, the Fitch Core Capital to RWA ratio declined to 11.3% from 12.0% at 4Q21 due to 9.3% credit growth and consequent higher RWA. Fitch expects the entity's capitalization metrics to remain cushioned by PCH's propensity to provide support, along with ProCredit Ecuador's capitalization standards and in line with its projection of growth plans.

Improved Liquidity: Fitch believes that ProCredit Ecuador maintains a stable funding structure and adequate liquidity levels. The bank relies on external funding sources, primarily supported by the parent's benefits. At 3Q22, ProCredit Ecuador's loans to deposits ratio improved to 142.7% (compared to 151.7% at 4Q21), reflecting growth of 16.2% in customer deposits and the benefits of adequate liquidity in the Ecuadorian banking system, albeit less than in 2020 and 2021. Further funding diversification is possible in keeping with continuous growth of retail deposits and regulatory limits regarding parent funding.

Rating Sensitivities

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

ProCredit Ecuador's IDR and SSR are sensitive to changes in the sovereign rating and country ceiling;

IDRs and the SSR could also be downgraded if PCH's propensity or ability to support materially weakened;

The VR could be downgraded in the event of a sharp deterioration of the asset quality and consequently on its profitability metrics that would significantly reduce capital metrics.

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

ProCredit Ecuador's IDR and SSR could be upgraded in the event of an upgrade in the country ceiling and Ecuador's sovereign rating;

The VR has limited upside potential considering the still challenging operating environment. An upgrade of the bank's VR would also require sustainable improvements on profit ratios.

VR ADJUSTMENTS

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).

Fitch has assigned a Business Profile score of 'ccc+' that is below the 'b' category implied score 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 '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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