Fitch Ratings has downgraded Banco de Credito de Bolivia S.A.'s (BCP Bolivia) Viability Rating (VR) to 'ccc' from 'b-'.

At the same time, Fitch affirmed BCP Bolivia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B-'. The Rating Outlook remains Negative. Fitch has also affirmed BCP Bolivia's Short-Term Foreign and Local Currency IDRs and Shareholder Support Rating (SSR) at 'B' and 'b-', respectively.

The downgrade of BCP Bolivia's VR follows the recent downgrade of Bolivia's Long-Term Foreign Currency IDR to 'CCC' from 'B-', given as per Fitch's criteria there is a high correlation between sovereign and bank credit profiles.

For additional details see 'Fitch Downgrades Bolivia to 'CCC',' dated Feb. 6, 2024, available at www.fitchratings.com. BCP Bolivia's Local and Foreign Currency IDRs were affirmed above the sovereign rating as it benefits from the support it would receive from its higher-rated parent; however, IDRs are currently capped by the country ceiling and sovereign rating with an uplift up to two notches according to Fitch's bank criteria.

Key Rating Drivers

Support from Parent: BCP Bolivia's IDRs and SSR reflect expected support the bank would receive from its parent, Credicorp Ltd. (BBB/Negative), if required. Fitch views BCP Bolivia as a strategically important subsidiary for Credicorp as it is an integral part of the group since it contributes to the parent's geographical diversification. Nevertheless, BCP Bolivia's Foreign Currency IDR is capped by Bolivia's Country Ceiling of 'B-', which captures transfer and convertibility risks and constrains Fitch's assessment of the ability of the shareholder to support its subsidiary. Fitch believes that the owner's commitment to its subsidiary is likely to survive a sovereign default and government restrictions are unlikely to be imposed, which would prevent the bank from servicing its obligations.

The Negative Outlook on BCP Bolivia's support driven IDRs reflects the Negative Outlook of the operating environment.

Challenging Operating Environment: The downgrade of BCP Bolivia's VR reflects the increased downside risks from the operating environment and liquidity risks associated with the significant decline in usable international reserves to very low levels, heightening risks to macroeconomic stability and debt service capacity. This has resulted in foreign exchange (FX) rationing and the emergence of parallel-market exchange rates in the context of a stabilized currency regime. BCP Bolivia's VR is one notch below its implied VR and constrained by Bolivia's sovereign rating as well as the challenging and deteriorated operating environment within a highly regulated and interventionist framework.

Good Franchise: Fitch's assessment of BCP Bolivia's business profile balances its moderate franchise, the benefits of being 100% owned by Credicorp Ltd., the largest financial group in Peru and its business model concentrated in a higher-risk market. As of 3Q23, BCP Bolivia was the fifth largest bank in its market as measured by total loans and deposits, with a market share of 9.1% and 8.3% respectively. BCP Bolivia benefits significantly from the reputation, synergies, technological developments and strategies of its shareholder; however, this has yet to materialize in a stronger franchise in Bolivia. Historically, the bank's branch expansion in the country has not been aggressive.

Pressured Asset Quality: BCP Bolivia's impaired loan ratio worsened to 2.7% in 3Q23 from a 1.6% average in 2019-2022, driven by the end of regulatory and compulsory relief measures for all the banking system and modest loan portfolio growth of 5.9%, which include a portion of loans transferred from former Fassil. The loan loss allowance/impaired loan ratio declined to 99%. Fitch expects asset quality metrics will remain pressured but still on a good level.

Pressured Profitability: The bank's profitability remained low in the midst of a pressured operating environment. Net interest margins slightly increased in 2023 due to higher loan growth and yields, benefited by the transferred loans of former Fassil. However, margin pressures remain due to interest rate ceilings of loans placed on productive sectors and deferred loan instalments. BCP Bolivia's operating profit to RWA ratio declined to 0.74% at 3Q23 from an average of 1.26% during 2019-2022. Fitch expects additional profitability pressures from lower business volumes, an increase in credit costs, and higher financial expenses related to the lower liquidity in the system.

Improving but Still Limited Capitalization Levels: Capitalization ratios improved at 3Q23 mainly due to higher retained earnings but still remained weak. The Fitch Core Capital (FCC) ratio improved by 70 bps to 11.0%. BCP Bolivia's capitalization is higher than local peers and the Bolivian banking system. The regulatory capital ratio of 12.5% is above the FCC ratio due to subordinated bond issuances; however, these are not considered loss absorbing capital under Fitch's criteria. Fitch believes that current metrics and loss absorption capacity will be tested given the expected asset quality and profitability deterioration.

Funding Concentration and Access to FX Liquidity Uncertain: Fitch assessment of the bank's Funding and Liquidity profile weighs its good liquidity metrics but is constrained by the local market poor foreign currency availability and depositor concentrations. Although funding concentration is a systemic issue, Fitch believes the bank's high funding concentration is one of its main weaknesses, but this is partially offset by the bank's solid liquidity, reflected in its loan to deposit ratio of 93.3%, and LCR well above 100%. In addition, liquidity risks may arise from reduced cash flows resulting from the ongoing liquidity restriction in foreign and local currency.

Rating Sensitivities

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

The IDRs and SSR will be downgraded if Fitch perceives a material weakening of the parent's ability or willingness to support the bank;

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

BCP Bolivia's VR could be negatively affected if the bank's operating profit to risk weighted assets is consistently negative or its FCC ratio falls below 7%;

A significant deterioration of its access to funding or sustained pressure on the bank's liquidity profile would also be negative for creditworthiness.

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

Rating actions on the bank's IDRs and SSR are sensitive of those of the sovereign and country ceiling;

BCP Bolivia's VR upside potential is limited given the sovereign's current rating and negative operating environment. Over the medium term, ratings could be upgraded due to an improvement in the operating environment and if the bank sustains a stable business and financial profile.

VR ADJUSTMENTS

The Viability Rating has been assigned below the implied score due to the following adjustment reason: Operating Environment/Sovereign Rating Constraint (negative).

The Operating Environment score has been assigned below the implied score due to the following adjustment reasons: Macroeconomic Stability (negative) and Sovereign Rating (negative).

Summary of Financial Adjustments

Fitch revised its intangible asset calculation to factor in some accounts that were classified as other assets and other accounts receivable under Bolivian GAAP. The bank cannot rely on these assets in case of a liquidation process to pay for financial obligations. Therefore, Fitch classified prepaid and deferred expenses as intangibles and deducted these from the Fitch Core Capital calculation.

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.

Public Ratings with Credit Linkage to other ratings

BCP Bolivia's IDRs are support-driven from its ultimate parent, Credicorp Ltd.

ESG Considerations

BCP Bolivia's Environmental, Social and Corporate Governance (ESG) Relevance Score for Management Strategy of '4' reflects a track record of high government intervention in the Bolivian banking sector. Government intervention in the country's banking regulatory framework challenges BCP Bolivia's ability to define and execute its own strategy. This has a negative impact on the rating.

BCP Bolivia's ESG Relevance Score for Governance Structure is '3', aligned with the standard scoring for all banks globally.

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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