Fitch Affirms Banco de Occidente and Subsidiaries; Outlook Stable

About this update from Banco De Occidente Sa

Fitch Ratings has affirmed Banco de Occidente S.A.'s (Occidente) and its subsidiaries' international and national ratings. Fitch affirmed Occidente's Foreign and Local Currency Long- and Short-Term Issuer Default Ratings (IDRs) at 'BB+' and 'B', respectively, and its Viability Rating (VR) at 'bb+'. At the same time, Fitch affirmed Banco de Occidente (Panama), S.A.'s (BOP) LT IDR at 'BB+'. Fitch has also affirmed Occidente's, BOP's, and Ficudiaria de Occidente, S.A.'s (Fiduoccidente) National Scale Long- and Short-Term Ratings at ' AAA (col)' and 'F1+(col)', respectively, and Occidental Bank (Barbados) Ltd. (OBB) at 'AA+(col)' and 'F1+(col)', respectively. The Rating Outlook on the Long-Term ratings is Stable. A list of all rating actions appears at the end of this commentary. Key Rating Drivers IDRs Driven by VR: Occidente's IDRs are driven by its intrinsic creditworthiness, which is reflected in its 'bb+' VR. The bank's VR is one notch above its implied 'bb' VR due to the high influence of Fitch Ratings' assessment of the bank's business profile. Fitch believes Occidente's consistent business model allows the bank to generate modest but consistent income over time. The VR also considers Occidente's modest profitability metrics and relatively tight capital ratios. Controlled Asset Quality: While Occidente's NPL ratio (90+ days past due loans) seems poised to gradually improve, we believe this recovery could be slow and that the metric will remain more in line with a 'bb'/stable trend assessment for this factor. Furthermore, while the recent slight improvements have been aided by stricter risk controls, increased charge-offs have played an important role. As of September 2024 , the bank's NPL ratio slightly improved to 3.3% from 3.5% in December 2023 and from a 2020-2023 average of 3.7%. Fitch projects that the ratio could further improve to around 3%, a level that compares with other 'bb' asset quality assessed international peers. This score is further supported by reasonable reserve coverage of around 140% and relatively moderate borrower concentrations. Profits Still Under Pressure: Occidente's profitability remains tight due to high credit and funding costs. However, as of September 2024 , there are early signs of improvement driven by increased efficiency and reduced interest expenses. The annualized operating profit to risk-weighted assets (RWA) ratio improved slightly to 1.2% from 1% in December 2023 , and we expect this trend to continue slowly. The bank's loan impairment charges to pre-impairment operating profit ratio decreased to 70% from 73% in 2023. Although still high, this ratio could further decline if asset quality continues to improve, supporting the positive trend in profitability. Modest Capitalization: Occidente's capitalization remains modest, constrained by consistently higher credit growth compared to the industry average and its recurrent dividend payment policy. As of September 2024 , the bank's CET1 to RWA ratio stood at 10.6%, similar to other local and international peers also assessed at 'bb-'/stable in capitalization. Fitch expects Occidente's capital metrics to remain relatively tight, considering its modest internal capital generation and ongoing dividend policy. However, potential ordinary support from its parent, if required, is also factored in. Adequate Funding Structure: The bank's funding structure reflects its wholesale business profile, with its main source of funding being customer deposits, primarily from institutional clients. While these deposits have been stable, their cost is higher compared to banks with a broad retail base. As of September 2024 , Occidente's loan/deposit ratio is 98.4% (four-year average: 102.9%), which is comparable to other peers rated at the same level. Occidente's liquidity metrics are adequate; as of September 2024 , the local liquidity coverage ratio was a sufficient 104.3%. Fitch does not foresee significant changes in the bank's funding and liquidity profile. Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade Occidente's VR and IDRs could be downgraded by a significant deterioration of asset quality and profitability ratios that no longer reflect the bank's good business profile; specifically, an operating profit to RWAs ratio consistently below 1% and NPL ratio above 5%. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade An upgrade is unlikely in the foreseeable future given the constraints of the operating environment. Occidente's SSR of 'bb+' reflects Fitch's view of a high probability of support from GA, if needed, given its role and contribution to the group. Occidente is GA's second largest bank. In Fitch's opinion, Occidente is core to GA's strategy and institutional support should be forthcoming if required. GA has a consistent track record of support for its subsidiaries, and its ability to support them is reflective of its 'BB+'/Stable rating. The SSRs would be affected if Fitch changes its assessment of GA's willingness and/or ability to provide support. SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS BANCO DE OCCIDENTE ( PANAMA ), S.A. (BOP) BOP's IDRs are aligned to Occidente's as they reflect the potential support it would receive from Occidente should it be required. The parent's ability to support its Panamanian subsidiary is supported by Occidente's IDR of 'BB+'/Stable. BOP's IDRs also reflect the importance of the subsidiary in expanding Occidente's international presence while maximizing synergies with the group. In addition, Occidente's expected support to BOP is bolstered by the operational synergies, alignment of risk controls and business practices. OCCIDENTAL BANK ( BARBADOS ), LTD. (OBB) OBB's national ratings reflect the potential support it would receive from Occidente should it be required. Fitch believes that Occidente's propensity to support is high given the role OBB plays in the group's strategy by offering international services to Colombian and other Latin American clients and the high operational and managerial integration. As this subsidiary is domiciled in Barbados , Fitch also weights the country risks associated with Occidente's ability to support in case of need, which explains the one notch difference in the national scale rating. FIDUCIARIA DE OCCIDENTE S.A. (Fiduoccidente) Fiduoccidente national ratings are support driven and therefore are aligned to Banco de Occidente's ratings. In Fitch's view, Fiduoccidente is a core subsidiary to Banco de Occidente's business model and strategy, which constitutes a high propensity of either direct or indirect support. A default from this entity would constitute a high reputational risk to its parent. SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade For BOP: IDRs would change if Fitch's assessment of its parent's ability and/or willingness to support BOP changes. For OBB: A negative rating action on Occidente's national ratings; If Fitch perceives a diminished propensity of support from Occidente. For Fiduoccidente: A downgrade could come from a variation in Occidente's ability or propensity of support or if its national ratings were downgraded. Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade For BOP: IDRs would mirror a positive rating action on Occidente's IDRs. For OBB: An improvement of Barbado's country risk reflected in a sovereign rating upgrade. For Fiduoccidente: The national ratings are already at the highest possible level. VR ADJUSTMENTS The VR of 'bb+' has been assigned above the 'bb' implied due to a positive adjustment driven by the bank's business profile which is assessed at 'bb+'. The Earnings and Profitability Score of 'bb-' has been assigned above the 'b' category implied score due to the following adjustment reason: Historical and Future Metrics (positive). 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. Public Ratings with Credit Linkage to other ratings BOP's, OBB's and Fiduoccidente's ratings are support driven by Occidente's rating. ESG Considerations The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores . (C) 2024 Electronic News Publishing, source ENP Newswire

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