Fitch Ratings has affirmed Banco Guayaquil S.A. (BG) Long-Term Issuer Default Rating (IDR) at 'CCC+' and Viability Rating (VR) at 'ccc+'.

Fitch also affirmed the Government Support Rating (GSR) at 'ns'.

Key Rating Drivers

IDRs AND VR

Operating Environment with High Influence: BG's VR underpins its IDR. However, the ratings are capped by Fitch's assessment of the operating environment (OE) score of 'ccc+'. Ecuador's sovereign rating and broader OE considerations highly influence the bank's VR. The heightened sovereign political, fiscal, and financing risks, as well as the potential for renewed social unrest could negatively result in rising non-performing loans (NPL), and limit the bank's profitability and internal capital-generation capacity.

Good Business Model: BG is the second largest bank in Ecuador, with a market share of 12.2% by loans and deposits, respectively, as of 3Q23. BG's loan portfolio is fairly diversified, with commercial loans accounting for 52.6% of total loans, 42.4% consumer and 5.0% mortgages. The bank's business model has been stable through time; it has a long track record of earnings stability, which have proven to be resilient amid the economic cycles. However, BG's total operating income level is almost three times lower than the market leader.

Asset Quality Metrics Include Room for Deterioration: As of 3Q23, BG's regulatory impaired loan ratio, which is more conservative than 90 days delinquency, deteriorated to 2.8% from 1.4% at YE22, driven by the expiration of the regulatory flexibility to delay recognition of deteriorated loans and risk of the OE. Reserve coverage of impaired loans remains sound at 155.4% and enhances the bank's loss absorption capacity. Historically, the bank has evidenced adequate asset quality ratios, reflecting a conservative risk appetite; however, Fitch does not rule out additional pressures on asset quality metrics, driven by a challenging operating environment, the economic slowdown, the potential for renewed social unrest, and lower credit growth. Additionally, Fitch believes that the negative impacts of the El Nino weather pattern could pressure the debtor's payment ability.

Higher Profitability Levels: BG's profitability has improved due to controlled operating expenses and lower impairment charges due to the excess of loan loss allowances. In addition to a steady NIM due to a higher growth in profitable segments, the bank focused its growth strategy on consumer loans in order to mitigate rising funding costs caused by high competition in the system. As of 3Q23, operating Profit to Risk Weighted Assets (RWA) ratio improved to 2.6% from 2.3%. Fitch expects BG's profitability to remain stable, driven by controlled impairment charges due to lower growth. However, it does not rule out additional pressures driven by higher funding costs, due to less liquidity and high competition at a systemic level.

Stable Capitalization Ratios: BG's Fitch Core Capital (FCC) to RWA ratio stood at 12.5% (YE22: 12.41%), remaining at adequate levels. The regulatory capital ratio of 15.2% as of 3Q23 is well above the regulatory minimum of 9.0% and is mainly composed of Tier I capital (approximately 77% of regulatory capital). Capitalization ratios have benefited from the new regulation that reduced the weightings for some types of assets. Fitch does not expect material deterioration in capitalization levels of Ecuadorian banks, since growth is expected to be moderate.

Ample Funding and Liquidity Levels: BG's liquidity position is conservative but is decreasing due to OE risks. Loans-to-deposits ratio remained sound at 94.1% as of 3Q23 but increased from 89.0% at YE22. Historically, customer deposits have covered most of the bank's funding needs (87.9% as of 3Q23). The bank maintains good access to capital debt markets and wholesale funding. It benefits from high quality available funds that represented 34.5% of short-term deposits as of 3Q23, which is considered adequate by Fitch. In order to complement its liquidity levels, the bank maintains credit lines with local and foreign financial institutions.

GOVERNMENT SUPPORT RATING

The GSR of 'ns' reflects that despite BG's important market share and local franchise, Fitch believes that there is no reasonable assumption of support being forthcoming from the sovereign due to Ecuador's limited financial flexibility and the lack of a lender of last resort.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

IDRs and VR:

The IDRs are sensitive to changes in the sovereign rating or to further deterioration within the local operating environment;

The IDRs and VR could be downgraded if there is significant deterioration in the banks' intrinsic credit profile, although downside potential due to intrinsic financial deterioration is somewhat limited, given the low VR level imposed by the sovereign constraint.

GSR:

The GSR has no downgrade potential, as it is at the lowest possible level.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

IDRs and VR:

BG's upside potential is limited. In the long term, a rating upgrade would require improved prospects for the operating environment and a meaningful and sustained improvement in the bank's core profitability, along with improvement in the bank's credit quality and capitalization.

GSR:

Ecuador's propensity or ability to provide timely support to BG is not likely to change given the sovereign's low sub-investment-grade IDR. As such, the GSR has no upgrade potential.

VR ADJUSTMENTS

The VR of 'ccc+' has been assigned below the 'b' implied VR due to the following adjustment reason: Operating Environment (negative).

Fitch has assigned an Operating Environment score of 'ccc+' that is below the 'b' category implied score due to the following adjustment reason: Sovereign Rating (negative).

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.

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.

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