Fitch Ratings has affirmed the ratings of the Dominican-based Banco Multiple Leon (BML) and its related entity, Valores Leon. A complete list of rating actions is provided at the end of this press release.
Banco Multiple Leon S.A.'s (BML) ratings reflect its adequate liquidity ratios as well as its strengthened capital base. The ratings also incorporate the operational support of its majority shareholder, the Leon family. Nevertheless, the bank's still volatile asset quality metrics and weak profitability ratios relative to similarly rated Latin American regional peers (Long-term Issuer Default Ratings of 'B-' 'B', or 'B+') continue to limit BML's ratings.
Sustained improvements in asset quality metrics and profitability could be positive for creditworthiness. An unexpected deterioration in asset quality or profitability that pressures the bank's capital ratios could negatively affect its ratings.
In the event that BML experiences difficulties, support, while possible, cannot be relied upon given the Dominican Republic's low credit ratings.
BML's subordinated debt does not contain any equity component according to Fitch's methodology, as there is no possibility of deferring the interest payments in case of stress. Today, Fitch upgraded BML's subordinated bond rating to 'BBB(dom)' from 'BBB-(dom)', in line with its methodology 'Rating Bank Regulatory Capital and Similar Securities' published on Dec. 15, 2011. This methodology establishes that the difference between the issuer and the hybrid instrument ratings is only one notch, when hybrids absorb losses only in case of dissolution or liquidation, after accomplishing all privileged obligations of the bank.
As a result of a decision to curb the loan portfolio's credit risk due to a less favorable economic backdrop, the bank increased its investment portfolio with higher-yielding public securities. Moreover, the bank has been able to retain and increase a diversified funding base, as well as reduce its reliance on institutional funding, with a successful expansion in the retail market. At end-March 2012, cash and marketable securities represented an adequate 51% of total deposits, money market, and short-term funding.
Even though the bank has improved credit risk controls and cleaned up most of the legacy problem loans, asset quality metrics remain volatile and lag those of its domestic and similarly rated regional peers.
Impaired loans declined to 3.54% of total loans at YE 2011, reflecting significant charge-offs and foreclosed assets, though this improving trend reversed slightly during the first quarter of 2012 as this ratio reached 3.82% by end March 2012, in part due to a reduced loan portfolio. However, at 91% loan loss reserve, coverage of these loans (92.1% at end-March 2012) is low in light of still important loan concentrations, increased participation in the riskier retail segment, and regulatory risk ratings. As a result, Fitch expects BML's asset quality indicators to remain volatile in the near term.
BML's net interest margin has strengthened since 2010, due to the bank's proactive policy to adequately manage asset and liability interest rates and maintain lower financial expenses in this rising interest rate environment. However, provisioning expenses and high overhead costs continue to weigh on the bank's net income-to-average assets ratio of 1.1% at the end of March 2012, which remained weak relative to the Dominican market and regional peers.
In Fitch's view, it is likely that profitability ratios will decline slightly in 2012, given results of the first quarter, lower asset growth and the bank's target of increasing loan loss reserve coverage.
BML's capitalization ratios strengthened in 2011, as the share of Dominican central bank instruments increased as a proportion of the balance sheet. The bank's Fitch core capital-to-risk weighted assets ratio increased to 14.23% at March 31, 2012, from 13.93% at YE 2010, still lower than the market average but comparable with the median of adequately capitalized banks in the region. Nevertheless, Fitch believes capitalization could be stronger in light of still low profitability and volatile asset quality.
Valores Leon's ratings reflect the operational and financial support provided by BML. In Fitch's view, a clear commercial identification of this entity with BML, and the reputation risk to which it would be exposed in the case of eventual troubles at Valores Leon results in a high probability of direct or indirect support by BML, should it be required. As such, any changes in BML's creditworthiness would have a direct impact on the ratings of Valores Leon.
As of March 2012, BML ranked fifth out of 15 commercial banks in the Dominican Republic, with a 5.9% market share by total assets. At the same date, the Leon family controlled 89.1% of BML, while Darby Probanco Holding L.P. (a subsidiary of Darby Overseas Investment Inc.) controlled the remaining 10.9%.
Valores Leon initiated operations in 2002. The institution is a broker-dealer subsidiary of Grupo Financiero Leon (GFL), led by the Leon family, which in turn controls the largest industrial group in the Dominican Republic, with a particular focus on the beverage industry.
Considering the aforementioned factors, Fitch has taken the following rating actions:
Banco Multiple Leon:
--Long-term foreign and local currency IDRs affirmed at 'B-'; Stable Outlook;
--Short-term foreign and local currency rating affirmed at 'B';
--Viability Rating affirmed at 'b-';
--Support Rating affirmed at 5;
--Long-term National rating affirmed at 'BBB+(dom)'; Stable Outlook;
--Short-term National rating affirmed at 'F2(dom)';
--Long-term National subordinated debt upgraded to 'BBB(dom)' from 'BBB-(dom)';
--Support Floor affirmed at NF.
Valores Leon
--Long-term National rating affirmed at 'BBB+(dom)'; Stable Outlook;
--Short-term National rating affirmed at 'F2(dom)';
--Long-term National senior unsecured debt rating affirmed at 'BBB+(dom)'.
Additional information is available at www.fitchdominicana.com and www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria', Aug. 16, 2010;
--'2012 Outlook: Central America and the Dominican Republic', Dec. 19, 2011.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171
2012 Outlook: Central America and the Dominican Republic
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=661043
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