Credit Opinion: Banco Internacional de Costa Rica, S.A.
Global Credit Research - 10 Apr 2013
Panama City, Panama
Ratings
Category
Moody's Rating
Outlook
Bank Deposits
Bank Financial Strength
Baseline Credit Assessment
Adjusted Baseline Credit Assessment
Stable
Ba1/NP
D+
(ba1)
(ba1)
Contacts
Analyst
Jeanne Del Casino/New York City
Felipe Carvallo/Mexico
M. Celina Vansetti/New York City
Georges Hatcherian/Buenos Aires
Phone
1.212.553.1653
52.55.1253.5700
1.212.553.1653
54.11.5129.2600
Key Indicators
Banco Internacional de Costa Rica, S.A. (Consolidated Financials)[1]
[2]12-12 [2]12-11 [2]12-10 [2]12-09 [2]12-08 Avg.
1,488.2 1,371.7 1,070.8 904.6 795.2 [3]17.0
Total Assets (USD million)
151.8 137.7 123.6 110.6 100.3 [3]10.9
Tangible Common Equity (USD million)
2.9
2.6
3.1
3.0
2.8 [4]2.9
Net Interest Margin (%)
2.3
2.2
2.7
2.1
1.4 [5]2.1
PPI / Average RWA (%)
1.5
1.7
2.0
1.5
0.9 [5]1.5
Net Income / Average RWA (%)
36.2
20.8
17.3
13.3
19.7 [4]21.5
(Market Funds - Liquid Assets) / Total Assets (%)
48.2
63.7
70.2
69.6
57.2 [4]61.8
Core Deposits / Average Gross Loans (%)
12.3
13.7
15.4
17.2
16.3 [5]15.0
Tier 1 Ratio (%)
12.1
13.5
15.3
17.0
12.7 [5]14.1
Tangible Common Equity / RWA (%)
50.7
54.4
52.0
55.6
62.5 [4]55.1
Cost / Income Ratio (%)
1.1
1.0
0.8
1.4
0.3 [4]0.9
Problem Loans / Gross Loans (%)
7.4
6.4
4.5
7.3
1.8 [4]5.5
Problem Loans / (Equity + Loan Loss Reserves) (%)
Source: Moody's
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel I; IFRS [3] Compound Annual
Growth Rate based on IFRS reporting periods [4] IFRS reporting periods have been used for average calculation
[5] Basel I & IFRS reporting periods have been used for average calculation
Opinion
RECENT CREDIT DEVELOPMENTS
On April 5, 2013, Moody's upgraded Banco Internacional de Costa Rica S.A. (BICSA)'s standalone bank financial
strength rating (BFSR) to D+, from D, and changed the outlook to stable from positive. The bank's baseline credit
assessment (BCA) was also lifted to ba1 from ba2, and the long and short term foreign currency deposit ratings of
Ba1 and Not Prime, respectively, were affirmed. The upgrade of the standalone ratings reflects the bank's growing
franchise and profitability as a lender and trade finance provider within the expanding economies and regional
trade of Central America, its main operating footprint. The bank's improving asset quality, risk management, and
corporate governance practices, and its diversifying funding profile also support the upgrade.
SUMMARY RATING RATIONALE
Moody's assigns Banco Internacional de Costa Rica (BICSA) a standalone bank financial strength (BFSR) of D+
and a baseline credit assessment (BCA) of ba1, reflecting the bank's established franchise, niche expertise, and
high quality corporate banking and international trade focus in the markets in which it operates, mainly Panama,
Costa Rica, and other Central American countries. The bank's earnings benefit from strong loan growth and
improving fee generation that has arisen as a result of an increased emphasis on value-added structured lending
and the origination and distribution of transactions.
The bank's stable asset quality reflects increased geographic and industry diversification of the loan portfolio as
well as proactive and conservative management of problem loans and reserve coverage. BICSA has
strengthened its risk management organization and corporate governance practices, including the centralization of
all credit and market risk functions at its head office in Panama, appointment of a Chief Risk Officer that reports
directly to the Board, and the addition of two independent members to the bank's Board of Directors. BICSA has
been diversifying its funding away from large shareholder deposits towards customer deposits, as well as by
broadening its access to market sources such as international bank borrowings and term debt issuances in
various Central American markets. These sources have supported balance sheet growth and allowed the bank to
reduce its funding costs in recent years.
BICSA's high reliance on wholesale and mainly short term market funding exposes it to pricing and refinancing
risks that are partly offset by its continuing diversification of sources. The bank's high growth strategy is also a
key challenge that may lead to rapid asset quality deterioration if not managed carefully, given large single
borrower concentrations and the developing nature of its target markets. Despite ample capitalization currently, it
could become a constraint going forward should earnings be insufficient to support management's growth targets.
BICSA's Ba1 foreign currency deposit rating is mapped directly from the bank's standalone baseline credit
assessment and does not benefit from support uplift. The bank's ratings do take into account the implicit support of
its controlling shareholders, Banco de Costa Rica, with a 51% stake, and Banco Nacional de Costa Rica, with a
49% stake, both wholly-owned by the Costa Rican government, in the form of support of full earnings retention by
the bank and endorsement of BICSA's strategy to develop international business on their behalf with Costa Rican
and other Central and South American companies.
Rating Drivers
Well managed growth strategy with improving core earnings and stable asset quality
Modest earnings capacity and market shares within highly competitive wholesale banking arena
Above average credit growth in developing markets adds potential volatility to earnings and asset quality
Reliance on short term wholesale US dollar funding sources, though diversifying, exposes the bank to pricing and
refinancing risks
High quality capitalization may become a constraint in future in light of modest earnings generation
Rating Outlook
The outlook for all ratings is stable.
What Could Change the Rating - Up
Upward movement of the BFSR would depend on sustained core earnings growth, maintenance of good asset
quality, liquidity and capital indicators, as well as reducing concentrations and funding diversification.
What Could Change the Rating - Down
Deterioration in profitability, asset quality, liquidity, or capitalization could lead to downward movement of the
BFSR.
Recent Results
In 2012, BICSA's net income grew by 3.8% to US$ 16.2 million, owing to strong growth in net interest income
(+21%) and recurring fees (+14%) on the back of 20% loan growth. Controlled funding (+6%) and operating
outlays (+8%) also contributed to the positive results. The net interest margin (NIM) improved to 2.9% from 2.6% in
the prior year, as funding costs were kept in check. Bottom line earnings also reflected higher gains from
securities sales ($ 2.2 million versus $300,000 in 2011).
Returns on average assets and equity declined to 1.1% and 10.8% from 1.3% and 11.9% in 2011, however,
largely driven by one-time charges. These included a realized loss of $ 6.7 million (and a $3.8 million unrealized
loss) due to changes in the valuation of interest rate swaps. These losses were partly offset by a $7.6 million gain
due to a deferred tax asset generated at the Miami agency related to loan loss allowances. Returns were also
dampened by a more than doubling of loan loss provisions ($6 million from $2.5 million). When extraordinary items
are excluded, pre-provision core earnings (excluding extraordinary gains and losses) showed improvement,
increasing to 1.8% of risk weighted-assets as of December 2012, from 1.6% in 2011.
DETAILED RATING CONSIDERATIONS
Detailed rating considerations for BICSA are as follows:
Profitability
BICSA's core earnings continue to grow healthily, though its earnings capacity remains modest. In 2012, net
income growth was nevertheless fueled by higher net interest income and fees, the latter related to lending and
structure finance transactions, as well as by lower funding costs. While the bank faces tight margins in its target
market of prime companies, it has managed to reduce its funding costs by taking advantage of low US dollar
interest rates and by diversifying its funding sources. We expect these trends to continue in 2013 given
management's loan growth target of around 15% and continued low interest rates expected for the better part of
the year.
Management has taken steps to centralize certain operations and to rationalize its cost base. While control of
costs has been improving, they remain a major drain on earnings. We consider the cost-income ratio to be high
given that the bank does not have a retail branch network, but maintains representative offices in various Central
American countries. We view as positive the declining trend in the cost-income ratio owing to strong core revenue
growth, to 51% in 2012 from 54% in 2011.
Asset Quality and Risk Management
BICSA's asset quality is stable, reflecting the bank's high quality customer base, increasing geographic and
industry diversification, and proactive management of problem loans and reserve coverage. We also note the risks
inherent in the bank's high growth lending strategy (three-year average growth of 24% annually) with companies in
Central America's developing economies that are also in a high growth mode. This risk to asset quality could
intensify if the bank increases its risk appetite or deviates from its areas of specialization.
Non-performing loan levels continued to rise in 2012 to 1.1% of total loans from 1% in 2011 and 0.8% in 2010.
Reserve coverage of NPLs increased to 139% from 133% as the bank increased provisions significantly and
charge-offs declined by 40%. Borrower concentrations remain under control, supported by a portfolio centered on
countries with strong credit profiles, such as Costa Rica (45% of total loans) and Panama (25%). The credit
portfolio is also diversified by industry, with a focus on manufacturing and food production (12.5% each),
construction (11.6%), finance and insurance (11.4%) and wholesale trade (10.4%).
BICSA continues to strengthen its risk management organization and practices, including the centralization of all
credit and market risk functions at its head office in Panama and the appointment of a Chief Risk Officer that
reports directly to the Board. The bank's risk management organization will however continue to be tested as
BICSA expands into new markets with new clients throughout the region.
Corporate Governance
Moody's has no major concerns regarding BICSA's corporate governance. Despite its public sector ownership,
BICSA's corporate policies do not allow interference in its governance, code of ethics, or credit policies and
practices. During 2012, BICSA added two independent members to its Board of Directors that will also be
members of the Risk and Audit committees, as required under new Panamanian regulations, a positive
development for the bank's corporate governance. The other seven members of the Board are appointed by the
Costa Rican government and are non-executive board members of the shareholder banks, though they are
personally liable to the bank.
Funding and Liquidity
Funding and liquidity remain stable, but may come under pressure as the loan portfolio continues to expand and
loan-to-deposit ratios increase. Management has diversified the bank's funding base away from large shareholder
deposits towards customer deposits and broader market sources. Term debt issuances have supported the
bank's medium term credit portfolio. As about 40% of BICSA's portfolio matures in three years or more, the bank
has issued three-to-five year debt in various Central American markets. In 2012, the bank issued US$ 12.5 million
of five-year senior debt in Panama, following issuances of $15 million in El Salvador in 2011 and $86 million in
Panama in 2010. The bank's funding is however still skewed largely to the short term, with 71% of liabilities due
within a year, exposing the bank to pricing and refinancing risks.
The bank's high and increasing loan leverage of 80% of total assets (up from 72% in 2011) and loan-to-deposit
ratio of 173% (up from 140%) are a function of its credit-oriented business model and lack of a retail deposit base,
but nevertheless add a level of liquidity risk to the bank's balance sheet. Liquid asset holdings were also reduced
in 2012 in order to realize gains, thus declining to 7% of total assets versus 25% in 2011. This risk is partly
mitigated by the bank's medium term debt issuances as well as by its largely short term, trade-oriented loan
portfolio and high quality securities portfolio, which may serve as alternate liquidity. About half of all loans are short
term and more than 40% are due within six months. The securities portfolio has also been shifted from Central
American names towards higher rated, investment grade countries and corporations. 70% of the securities
portfolio is comprised of corporate debt while 30% is devoted to sovereign names. The largest country
concentrations in the securities portfolio are from multilateral institutions (24%), Brazil (15%), the US (13%) and
Russia (10%).
Capital Adequacy
BICSA's capital is of high quality, comprised mainly of tangible common equity, but has declined in recent years in
line with strong asset growth. This is a concern given the bank's growth strategy and modest earnings capacity.
While capital has grown on average by 12% for the past three years, its BIS ratios have declined as the loan
portfolio has nearly doubled. BICSA reported a Tier 1 ratio of 12.5% as of December 2012, versus 13.7% and
15.4% for 2011 and 2010, remaining above the 8% and 10% minimum required by Panamanian and Costa Rican
regulators, respectively. The bank's capitalization is supported by a consistent 100% earnings retention policy.
Issuer Profile
BICSA began operations in Panama in 1976 as a general license bank by Banco Nacional de Costa Rica to serve
Central American corporations and to promote trade within the Central American common market. Later, the other
three state-owned commercial banks joined the project so that the Costa Rican banking system would be
represented by one entity with one agreed-upon strategy. In 2005, BNCR transferred its majority shareholding to
Banco de Costa Rica as part of a restructuring of the bank. BICSA was the tenth largest bank in Panama with total
assets of US$1.5 billion, loans of $1.2 billion, and equity of $159 million as of December 31, 2012. The Miami
agency was established in 1983.
Final Rating versus Scorecard Result
BICSA's assigned BFSR is one notch below the outcome of Moody's bank financial strength rating scorecard, as
it does not fully capture the competitive, growth-related and asset quality risks inherent in the bank's expansion
strategy.
Global Local Currency Deposit Rating (Joint Default Analysis)
We do not assign BICSA a local currency deposit rating as it is a dollar-denominated bank operating in Panama, a
fully and legally dollarized country. Panama has used the US dollar as legal tender since 1903 and bank deposits
in Panama are all US dollar-denominated. We therefore only assign a foreign currency deposit rating to BICSA.
Moreover, as Panama has no central bank and hence no true lender of last resort, Moody's does not incorporate
systemic support in its ratings for non-government-owned Panamanian banks.
Foreign Currency Deposit Rating
Moody's assigns a foreign currency deposit rating of Ba1 to BICSA that is unconstrained by the A3 Panamanian
country ceiling for deposits.
Notching Considerations
Senior debt would be rated similarly to deposits. Junior obligations would be subject to Moody's standard notching
practices.
Rating Factors
Banco Internacional de Costa Rica, S.A.
Rating Factors [1]
Qualitative Factors (70%)
Factor: Franchise Value
Market share and sustainability
Geographical diversification
Earnings stability
Earnings Diversification [2]
Factor: Risk Positioning
Corporate Governance [2]
A
B
C
D
Improving
C
Improving
C+
C+
Improving
D
Neutral
A
Neutral
B
Improving
B+
Neutral
x
x
x
x
- Risk Management
- Controls
x
x
Financial Reporting Transparency
x
x
x
x
Credit Risk Concentration
Liquidity Management
Market Risk Appetite
Factor: Operating Environment
Economic Stability
Integrity and Corruption
Legal System
Financial Factors (30%)
Factor: Profitability
PPI % Average RWA (Basel I)
Net Income % Average RWA (Basel I)
Factor: Liquidity
(Market Funds - Liquid Assets) % Total Assets
Liquidity Management
Factor: Capital Adequacy
Tier 1 Ratio (%) (Basel I)
Tangible Common Equity % RWA (Basel I)
Factor: Efficiency
Cost / Income Ratio
Factor: Asset Quality
Problem Loans % Gross Loans
Problem Loans % (Equity + LLR)
Total Score Trend
CE+
Improving
x
x
x
Controls and Risk Management
- Borrower Concentration
- Industry Concentration
E
x
- Ownership and Organizational Complexity
- Key Man Risk
- Insider and Related-Party Risks
- Global Comparability
- Frequency and Timeliness
- Quality of Financial Information
D
x
x
x
x
x
x
x
x
2.26%
1.81%
24.54%
x
13.87%
13.71%
54.16%
0.94%
6.06%
Lowest Combined Financial Factor Score (9%)
Economic Insolvency Override
Aggregate BFSR Score
Aggregate BCA Score
Assigned BFSR
Assigned BCA
D
Neutral
Cbaa1/baa2
D+
baa3
[1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.
[2] - A blank score under Earnings Diversification or Corporate Governance indicates the risk is neutral.
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