Fitch Affirms Banco Pichincha C.A. y Subsidiarias' IDR at 'B'; Outlook Stable

Fitch Ratings has affirmed Banco Pichincha C.A. y Subsidiarias' (Pichincha) Long-Term Issuer Default Rating (IDR) at 'B'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this press release.

KEY RATING DRIVERS - IDRs, VR

Pichincha's viability rating (VR), or standalone creditworthiness, drives its Long-term IDR. The bank's operating environment and funding highly influence its VR. The bank's VR reflects its strong franchise, market share, ample liquidity, and adequate capitalization. It also considers financial performance and asset quality pressures.

Ecuador's political and regulatory uncertainties continue to weigh on the bank's ratings. In Fitch's opinion, Ecuador's significant regulatory uncertainty and challenging operating environment limit the bank's profitability and internal capital generation capacity.

Pichincha's funding structure has benefited from its successful franchise and wide distribution network, which have allowed the bank to enjoy a well-diversified, stable, and relatively low-cost funding base, a trend Fitch expects to see continue over the medium-term. Due to dollarization and a lack of a lender of last resort, liquidity is conservative and in line with that of domestic peers but higher than international peers (emerging market commercial banks with 'b' category VR). Pichincha's liquid assets are of high quality relative to those of international peers, consisting primarily of cash, bank deposits and a large proportion of liquid and investment grade securities.

Pichincha's profitability is weak compared with both domestic and similarly rated international peers. Pichincha's return on assets (ROAA) reported a negative trend since 2012, reaching its lowest level at year-end 2013, due to regulations imposed in recent years. However, Fitch believes that Pichincha should be able to reverse the unfavorable trend in profitability in the near term, as the regulator has allowed banks to charge once again commissions and fees on certain services, and efficiency is improving.

Asset quality deterioration continued during 2013, mostly reflecting the maturation of Pichincha's rapidly growing microcredit and consumer portfolio in a challenging economic environment. Pichincha's Non-performing loans (NPL) to total loans ratio increased to 4.1% during the 1H14, in line with the Ecuadorian system's cyclical behavior at mid-year. However, loan loss reserve coverage of NPL loans exceeds that of peers. In Fitch's view, this trend is likely to stabilize given the enhanced credit risk tools.

Although Pichincha's capitalization is lower than that of large domestic and international peers, Fitch believes it is adequate considering strong reserve coverage of impaired loans and the bank's risk profile. Fitch core capital to risk weighted assets ratio increased to 9.6% at June 30, 2014 from 9.09% at year-end 2013. Fitch expects capital ratios to improve in the near term in line with the upward trend in profitability.

KEY RATING DRIVERS - SUPPORT RATINGS

Pichincha's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF' indicates that Fitch believes external support cannot be relied upon due to Ecuador's limited funding flexibility as well as the lack of a lender of last resort.

RATING SENSITIVITIES - IDRs, VR

Despite Fitch's Negative Outlook on the sector, the Outlook of Pichincha's IDR remains stable as downside risks at this rating level are manageable. Nevertheless, Pichincha's rating has limited upgrade potential in the short term, given its challenging operating environment and the impact on its performance. The Long-term IDR is at the same level of Ecuador's sovereign.

Pichincha's ratings could be pressured if government intervention continues to undermine the bank's performance, causing operating losses or a sustained weakening of the bank's Fitch core capital to weighted risks ratio below 9%, in conjunction with a material decline in excess loan loss reserves.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

Ecuador's propensity or ability to provide timely support to these banks is not likely to change given the sovereign's low speculative grade IDR. As such, the SR and SRF have no upgrade potential.

Fitch has affirmed the following ratings:

Banco Pichincha C.A. y Subsidiarias

--Foreign currency long-term IDR at 'B'; Stable Outlook;

--Foreign currency short term IDR at 'B';

--Viability Rating at 'b';

--Support at '5';

--Support Floor at 'NF';

Additional information is available at www.fitchratings.com

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Sector Outlooks: An Update (Argentina, Brazil, Costa Rica, Ecuador, Uruguay and Venezuela)' (Sept. 3, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Sector Outlooks: An Update (Argentina, Brazil, Costa Rica, Ecuador, Uruguay and Venezuela)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=762088

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=904714

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