Fitch Ratings has affirmed Banco Hipotecario's Issuer Default Rating (IDR) at 'CC'.

KEY RATING DRIVERS

The bank's ratings are still highly influenced by the operating environment, which remains very challenging. Asset quality continues to be pressured by the steep recession, which has been exacerbated by a long lockdown due to the coronavirus pandemic. Similarly, profitability has been pressured by very low loan growth, rising costs due to continued high inflation, and increasing credit costs.

The ratings also consider the bank's funding profile and the recently modified proposed debt exchange, moderate franchise, adequate capitalization and liquidity, and the deterioration of its asset quality indicators. Market volatility, low loan growth, higher credit costs and rising administrative expenses due to high inflation will continue to weigh on Hipotecario's financial profile.

Fitch believes that the recently announced exchange offer, including the latest modification which combines both offers to a cash up front payment of USD 420 and USD 600 per USD 1,000 principal amount will alleviate near-term refinancing risks and provide Hipotecario with some leeway to avoid default if successful. However, despite successfully improving its funding profile in recent years and its strong liquidity position at end-June 2020, the bank remains heavily reliant on wholesale funding, which will continue to be under pressure by Argentinean issuers' limited market access.

The bank's profitability has been under pressure since reaching its recent peak in 2018, reflecting the weak operating environment with low credit growth opportunities. In this scenario, the bank's revenues depend on its central bank securities holdings and non-interest revenues. In 2020, with inflation adjusted figures, the bank reported operating profit /risk weighted assets of 0.78%, a reduction compared to 1.2% in June 19. Despite the reduced interest income from loans, the bank managed to protect its profitability and post a profit through lower provision expenses, improved margins and reduced personnel and administrative expenses.

Asset quality metrics continues to be pressured by the challenging economic scenario, with the bank's NPL ratio reaching 12.3% in December 2019 driven by the deterioration of some corporate loans, which affected several banks in the industry and the incorporation of its former consumer finance subsidiary Tarshop. In June 2020, this ratio increased slightly to 12.7% due to the reduction in the credit portfolio. In terms of the consumer portfolio, asset quality improved, with the NPL ratio declining to 4.4% in June 2020 from 7.7% in December 2019. Commercial loans continued to represent a major part of the deteriorated portfolio, with the NPL ratio reaching 29.9% in June 20, from 23.6% in December, mainly due to the contraction of its commercial portfolio. The bank has increased its Loan loss coverage to 93.6% of NPLs in June 2020, an improvement from 60% in December 2019.

The bank's current capitalization levels are commensurate with its rating level with CET 1 ratio of 16.4% as of June 2020, which is in line with its peers and well above the minimum capital requirement. Currently, the bank's strategy places a higher priority on profitability through improvement of operational efficiency and maintaining comfortable liquidity position over growth, which Fitch views as positive for capitalization over the medium term.

SENIOR DEBT

The 'CC'/'RR4' rating on Hipotecario's medium-term notes reflects that these are senior unsecured obligations ranking pari passu with other senior unsecured indebtedness, and therefore, aligned with the bank's Foreign Currency (FC) IDR of 'CC'.

The notes are denominated in USD. Fitch considers the bank's FC IDR as the appropriate anchor for this issue rating, given the transfer and convertibility risk associated with settlement in foreign currency notwithstanding that the issuer will not incur material currency risk. The notes' Recovery Rating of 'RR4' reflects the average expected recovery in case of bank liquidation.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating of '5' and the Support Rating Floor of 'NF' reflect that, although possible, external support for Banco Hipotecario cannot be relied upon given the sovereign's track record for providing support.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The IDRs and VR of Banco Hipotecario could benefit from the success of the debt exchange in relieving liquidity pressures.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

An unsuccessful debt exchange, which would result in increased refinancing risks, would put pressure on the bank's IDRs and VR.

Any policy announcements or a deterioration in the local operating environment that would be detrimental to the bank's ability to service its obligations, including a tightening of capital controls to the extent that they restrict debt payments, would be negative for creditworthiness.

SUPPORT RATING AND SUPPORT RATING FLOOR

Changes in the SRs and SRFs of Banco Hipotecario are unlikely in the foreseeable future

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]

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, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

RATING ACTIONS

ENTITY/DEBT	RATING	RECOVERY	PRIOR
Banco Hipotecario S.A.	LT IDR	CC 	Affirmed		CC
ST IDR	C 	Affirmed		C
LC LT IDR	CC 	Affirmed		CC
LC ST IDR	C 	Affirmed		C
Viability	cc 	Affirmed		cc
Support	5 	Affirmed		5
Support Floor	NF 	Affirmed		NF

senior unsecured

LT	CC 	Affirmed	RR4	CC

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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