Rating Action: Moody's rates Caa2/B1.ar Banco de la Ciudad de Buenos Aires's classes XXII local currency notes; negative outlook
Global Credit Research - 02 Sep 2020
Buenos Aires City, September 02, 2020 -- Moody's Latin America Agente de Calificación de Riesgo (MLA) has today assigned a Caa2 global local currency senior unsecured debt rating and a B1.ar senior debt rating in the Argentinean national scale to Banco de la Ciudad de Buenos Aires' (Ciudad) XXII inflation linked (UVA) senior unsecured notes. The notes will be due July 2023 and will be issued under Ciudad's existing multi-currency senior unsecured program of USD1,500 million. The notes will be issued for ARS2,000 million, with possible upsize to ARS4,000 million, and the proceeds will be used for lending to small and medium sized companies in Argentina. The outlook on the global and national scale debt ratings is negative.
The following ratings were assigned to Banco de la Ciudad de Buenos Aires' Class XXII notes:
...Global local currency senior unsecured debt rating of Caa2; negative outlook
...Argentinean national scale local currency senior debt rating of B1.ar; negative outlook
Ciudad's ratings, which are equal to one of the highest ratings assigned to any domestically-owned Argentine bank, reflect its good capitalization levels and adequate asset risk and liquidity metrics. However, these credit strengths are offset by risks associated with Argentina's ongoing economic weakness and which may continue to pressure Ciudad's financial performance in the coming quarters.
Ciudad's role as financial agent of the City of Buenos Aires (Caa3 negative) provides it access to stable, low-cost funding, supporting its well-established deposit franchise, and allows the bank to offer financial services to a large base of civil servants, ensuring recurring earnings generation and lower credit risk, which help mitigate the effects of the economic recession worsened by the coronavirus outbreak that imposed social distancing measures since the 1Q 2020.
In March 2020, the bank's problem loans ratio improved slightly reaching 4.1% from 4.5% at the end of 2019, but continues to reflect the weak economic scenario in Argentina, with high inflation, deteriorating job markets and low industrial production, which have contributed to a severe slowdown in credit demand and origination. Ciudad has a diversified loan book, with about 28% of loans in the form of low-risk mortgage loans, which have historically demanded lower loan loss reserves .than unsecured loans. In March 2020, reserves were 79% of problem loans or 3.3% of total loans. However, the bank will continue to reinforce provisions in the second and third quarters, particularly to cover for rising risks in the corporate segment.
While asset risk will continue to challenge Ciudad's credit risk profile, as for similarly rated banks, its capitalization, measured as tangible common equity as a percentage of risk weighted assets, has remained stable at 10.2% on average in the past five years, which would help absorb potential increases in loan losses resulting from the negative economic scenario in Argentina.
Ciudad's actions to support clients at the outbreak of the coronavirus pandemic included loan deferrals and grace periods for about 2% of loans. As grace periods mature, roughly 90% of deferred loans are again paying the full balance, reducing potential credit losses. Since the onset of the crisis, the bank has been active in lending to small and medium sized companies and affected households, as well as companies that are suppliers of the City of Buenos Aires, a portfolio that accounted for 7.4% of total loans in June 2020.
Ciudad's profitability will continue to be impacted by a reduction in business volumes, lower interest rates, and higher provisions for loan losses, which increased 20.4% in the first three months of 2020 compared to the Q1 2019. Net income to tangible assets was 1.2% in March 2020, but preprovision income dropped almost 9%, compared to same period in 2019, largely resulting from a 10% decline in interest income in the period and lower fee income. The bank's lower cost of funding as a result of low policy rates in Argentina and entrenched core deposit base will continue to benefit its margins. Ciudad's B1.ar NSR is at the high end of the three NSR categories in Argentina that correspond to Moody's Caa2 global debt ratings. The NSR is supported by Ciudad's entrenched market presence in retail banking that ensures a steady core funding position and recurring earnings generation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ciudad's ratings are currently one notch above the rating assigned to its shareholder, the City of Buenos Aires, and two notches above the Government of Argentina's bond rating of Ca. Upward pressure on Ciudad's ratings is limited at this point as the rating outlook is negative. A downgrade of Argentina's sovereign rating could put downward pressure on the bank's global scale rating (GSR).
Both the global and national scale ratings could be downgraded if Ciudad experiences a significant deterioration in its financial fundamentals without a corresponding deterioration in the government of Argentina's creditworthiness.
The principal Rating Procedure Manual used in assigning these ratings was the Procedures Manual for Rating of Deposits, Debt Instruments, Counterparty Obligations and Shares of Financial Institutions published in September 2018 registered with the CNV -- Comisión Nacional de Valores in Argentina. Please see the Manuales de Procedimientos page on www.moodys.com.ar for a copy of this document. These ratings have been assigned through processes that are consistent with those employed for the assignment of ratings of similar securities or entities by other affiliates of Moody's Latin America Agente de Calificación de Riesgo in other jurisdictions under the methodology Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.ar.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
For issuers domiciled in Argentina, the regulatory report related to this rating action is available on www.moodys.com.ar.
Moody's Latin America Agente de Calificación de Riesgo's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found in the principal Rating Procedure Manual(s) used in the credit rating action(s) announced and described above. These general principles are consistent with those employed for assessing ESG risks in the assignment of ratings of similar securities or entities by other affiliates of Moody's in other jurisdictions, as described at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.moodys.com.ar for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com.ar for additional regulatory disclosures for each credit rating.
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