banco regional s.a.e.c.a. · financial institutions credit opinion 29 january 2018 update ratings...

FINANCIAL INSTITUTIONS

CREDIT OPINION29 January 2018

Update

RATINGS

Banco Regional S.A.E.C.A.Domicile Paraguay

Long Term Debt Ba1

Type Senior Unsecured - FgnCurr

Outlook Stable

Long Term Deposit Ba2

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Farooq Khan [email protected]

Maria ValeriaAzconegui

+54.11.5129.2611

VP-Senior [email protected]

Rodrigo MarimonBernales

54-11-5129-2651

Associate [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Banco Regional S.A.E.C.A.Update to credit analysis

SummaryMoody's assigns a stand-alone credit assessment (BCA) of ba2 to Banco Regional S.A.E.C.A.(Regional), the second largest bank in Paraguay by market share of loans. The ba2 BCAreflects Regional's below system delinquency levels, the high concentration of its loanbook to the agriculture sector as well as its adequate capital and profitability. The BCA alsoincorporates the bank's strong reliance on deposit based funding, in large part due to itsbroad geographic footprint, and adequate levels of liquid assets. Regional's long-term globallocal currency deposit rating of Ba1 derives from the bank's BCA of ba2 and incorporatesa one notch uplift as a result of Moody's assessment of a high probability of governmentsupport to the bank in an event of stress.

Exhibit 1

Banco Regional - Key financial ratios

2.7% 14.4%1.2%

25.0% 18.7%

0%

5%

10%

15%

20%

25%

30%

35%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid Banking

Assets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

Banco Regional S.A.E.C.A. (BCA: ba2) Median ba2-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Financial Metrics

Credit strengths

» Profitability is supported by the bank's well-established position in the market, with thesecond largest participation in loans and third by deposits in the Paraguayan bankingsystem

» Stable core funding sources and high liquidity profile as a result of broad branch network

» Adequate capitalization as a result of good earnings generation

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1108212

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit challenges

» High concentration of lending operations with borrowers in the agriculture segment increases asset risk volatility

» Potential for increase in provisions for loan losses that would pressure profitability

OutlookThe outlook on all ratings is stable. The stable outlook reflects our expectation that Regional's standalone credit profile will remainresilient to a the deterioration in asset quality in the Paraguayan banking system over the next 12 to 18 months.

Factors that could lead to an upgradeRegional's standalone BCA could face positive pressure if the bank reports steady improvement of its financial metrics, particularlyprofitability and asset risk, while being able to achieve higher diversification and reducing sector concentration in its loan portfolio.

Factors that could lead to a downgradeNegative pressure could result from persistent deterioration in asset quality or a potential decline in profitability associated with higherprovisions. Additionally, a potential downgrade of Paraguay's deposit ceilings could move its deposit ratings down.

Key indicators

Exhibit 2

Banco Regional S.A.E.C.A. (Unconsolidated Financials) [1]9-172 12-162 12-152 12-142 12-132 CAGR/Avg.3

Total Assets (PYG billion) 14,887 15,033 15,307 13,712 11,985 6.04

Total Assets (USD million) 2,626 2,607 2,647 2,958 2,606 0.24

Tangible Common Equity (PYG billion) 1,227 1,169 976 809 650 18.54

Tangible Common Equity (USD million) 216 203 169 174 141 12.04

Problem Loans / Gross Loans (%) 2.7 2.0 2.2 2.0 2.2 2.25

Tangible Common Equity / Risk Weighted Assets (%) 14.4 13.3 10.2 9.5 8.4 11.26

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 18.8 15.6 20.1 19.9 21.7 19.25

Net Interest Margin (%) 4.2 4.5 4.3 3.6 4.1 4.25

PPI / Average RWA (%) 4.4 5.0 4.5 2.9 3.2 4.06

Net Income / Tangible Assets (%) 1.2 1.6 1.4 1.0 1.3 1.35

Cost / Income Ratio (%) 50.7 46.7 48.9 60.2 59.2 53.15

Market Funds / Tangible Banking Assets (%) 25.0 24.7 26.1 25.9 20.1 24.35

Liquid Banking Assets / Tangible Banking Assets (%) 18.7 19.4 17.2 18.3 20.8 18.95

Gross Loans / Due to Customers (%) 119.5 115.5 121.8 115.5 102.6 115.05[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel I; LOCAL GAAP [3] May include rounding differences due to scale of reported amounts [4] CompoundAnnual Growth Rate (%) based on time period presented for the latest accounting regime [5] Simple average of periods presented for the latest accounting regime. [6] Simple average ofBasel I periods presentedSource: Moody's Financial Metrics

ProfileThe first Banco Regional was created in the city of Encarnación, in 1991, focusing in agribusiness, and supporting the development andstrengthening of producers in the region.

In 2008, Rabobank from the Netherlands joins the bank as a shareholder with 40% of the shares, and Banco Regional S.A. becomesBanco Regional S.A.E.C.A. and the largest issue of shares in the local stock exchange is made. The Bank gets access to the Global Trade

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 29 January 2018 Banco Regional S.A.E.C.A.: Update to credit analysis


Finance Program from the International Finance Corporation (IFC) and the Inter-American Development Bank (IADB). The next year,Banco Regional acquires 100% of ABN AMRO Paraguay.

Currently, Regional is one of the leading financial entities in Paraguay, focussing on lending to the agricultural sector.

Detailed rating considerationsAsset risk pressures although problem loans are below the system'sThe ba3 score for asset risk reflects bank's better than system problem loan ratios in spite of the high exposure of Regional's loan bookto borrowers in the agriculture sector, which accounted for approximately 45% of total loans in 2016.

In 3Q2017, Regional reported a problem loans of 2.7%, showing an expected increase from the 2.05% reported in 2016 and below thesystem's average of 3.3%. The bank's asset quality has benefited from the adequate performance of its loan book with corporate clientsand SMEs. In addition, Regional also benefits from the risk-management practices, risk discipline and expertise in the agribusinesssector of Rabobank (Aa2 stable, a2), which holds a 38.7% ownership stake in the bank. The bank also reported an adequate level ofreserves to withstand potential losses derived from loan operations and as of September 2017 they represented 3.15% of gross loans,higher than the 2.5% registered in 2016, covering problem loans by 119%. However, restructured loans have grown significantly at thebank, yet decreased to 6% of total loans from the 7% in 2016, a sign of the effects of 2015-2016's twin shocks of commodity pricedeclines and guarani depreciation.

Regional has the second largest market share in terms of loans and third by deposits in Paraguay. The bank has roughly 80% of its loanbook, comprised mostly of working capital credit lines and foreign trade facilities, with corporate clients, while small and medium sizedcompanies (SME) answer for 16% of the total. The bank's exposure to consumer finance is small, representing about 4% of total loans,mostly in the form of personal loans and credit cards.

During the first 3 quarters of 2017, Regional's loan book just increased by 1%, still higher than the 7.6% fall in 2016. This show a partialrecovery from the system from previous loan book contraction which was a result of demand volatility from the agricultural sector inlight of commodity price swings. The Paraguayan banking system's problem loans were affected by the drop in commodity prices in2014 and 2015, which has also affected Regional's asset risk through corporate clients associated with the agriculture segment. Thecyclical nature of the agribusiness sector is also a challenge for management of asset risk, as it adds volatility to the performance of theloan book. The ba2 score for asset risk also incorporates our view of potential volatility in asset quality.

Capitalization to continue to remain highIn September 2017, Regional reported a regulatory total capital ratio of 17.3%, which provided an adequate cushion above the 12%minimum required by the central bank. The ratio improved from 12.8% in 2015, driven by the reinvestment of earnings into the bank'soperation. The bank's capital position was also high when measured with Moody's ratio of TCE to risk-weighted assets (RWA), at 14.4%and corresponds to a ba2 score for capital in its scorecard.

Despite a recent increase in loan delinquency, loan growth in Paraguiay will be supported by estimates of GDP growth of 4% in 2017and 4.5% in 2018 and in our view, Regional's capital position means the bank is well positioned to expand its loan book. Regional alsohas Tier 2 subordinated capital which accounted for 350 basis points of capital as of December 2016.

Earnings supported by ample network, but constrained by lack of diversificationOur ba2 score for profitability reflects Regional's good earnings power generation, which benefits from the bank's countrywidedistribution network, with 38 branches, and strong franchise in the agribusiness sector. However, the bank's profitability has a highreliance on lending activities as a main source of revenues, a feature that is in line with other Paraguayan banks, and is incorporatedinto our score for profitability.

As of September 2017, Regional reported net income of PYG136.8 billion, lower than the PYG168,9 billion in the previous year, despitea 21% decrease in provision expenses to PYG141 billion. The decrease in Regional's bottom-line result was driven by a 9.2% interestmargin, and a 7% decrease in non-interest margin, which resulted in a 10% decrease in the operative margin.



Stable core funding and high liquidity profileOur ba3 funding score for Regional reflects the bank's moderate exposure to foreign currency deposits and incorporates its ampleaccess to core deposits. In our view, the bank's steady funding sources stands as a positive rating driver.

Total deposits represented approximately 75% of total funding as of 3Q2017. Within total deposits, 50% are demand and 50% aretime deposits, which is relatively in line with the financial system. The bank's deposits base is well diversified among corporate andretail clients. Similar to other banks in Paraguay, Regional's largest depositor is the Instituto de Previsión Social, Paraguay's socialsecurity system.

In recent years, Regional has improved its funding mix by adding credit lines from international financial institutions to its deposits inthe domestic market. The bank also holds a sufficient level of liquid assets to counter its exposure to market funds and as of September2017 they represented 18.7% of liquid banking assets over tangible banking assets which maps to a b1 score for liquid assets.

Regional's rating is constrained by the Weak+ macro profile on ParaguayAs a primarily domestic bank, the bank's operating environment is heavily influenced by Paraguay and its Macro Profile is thusaligned with that of Paraguay at Weak+. Paraguay's weak if improving institutional framework, heavy dependence on agriculture,and vulnerability to climate-related shocks continue to weigh on the country's macro profile. Political event risk is low despite theimpeachment of the president in 2012 and energy exports keep the current account in surplus, limiting vulnerability to internationalmarket conditions, an important consideration given the high level of dollarization of the banking system. Banks performance hasremained stable despite the country's sometimes volatile economic growth.

About Moody's bank scorecardOur Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.

Rating methodology and scorecard factors

Exhibit 3

Banco Regional S.A.E.C.A.Macro FactorsWeighted Macro Profile Weak + 100%

Factor HistoricRatio

MacroAdjusted

Score

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 2.7% ba2 ← → ba3 Sector concentrationCapitalTCE / RWA 14.4% ba1 ← → ba2 Capital retentionProfitabilityNet Income / Tangible Assets 1.2% ba2 ← → ba2 Expected trendCombined Solvency Score ba2 ba2LiquidityFunding StructureMarket Funds / Tangible Banking Assets 24.7% ba3 ← → ba3 Extent of market

funding relianceLiquid Resources



Liquid Banking Assets / Tangible Banking Assets 19.4% b1 ← → b1Combined Liquidity Score ba3 ba3Financial Profile ba2

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint: Ba1Scorecard Calculated BCA range ba1-ba3Assigned BCA ba2Affiliate Support notching 0Adjusted BCA ba2

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Assessment 1 0 ba1 (cr) 0 Ba1 (cr) --Deposits 0 0 ba2 1 Ba1 Ba2Senior unsecured bank debt 0 0 ba2 1 -- Ba1Source: Moody's Financial Metrics

Support and structural considerationsNotching considerationsIn the absence of a bail-in resolution regime framework in Paraguay, the ratings of subordinated debts, bank hybrids, and contingentcapital securities follow the “Additional Notching Guidelines”, as per the Rating Methodology: Banks. In these cases, the approach takesinto account other features specific to debt classes, resulting in additional notching from the adjusted baseline credit assessment (BCA)of the issuer.

Government support considerationsRegional's long-term global local currency deposit rating of Ba1 derives from the bank's BCA of ba2 and incorporates a one-notch upliftas a result of Moody's assessment of a high probability of government support to the bank in an event of stress.

Counterparty risk assessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

Regional's CR Assessment is positioned at Ba1(cr) and Not Prime (cr), which is one-notch above the bank's Adjusted BCA of ba2.However, the CR Assessment is at the same level as Regional's deposit rating, which benefit from one-notch of government support.

Ratings

Exhibit 4Category Moody's RatingBANCO REGIONAL S.A.E.C.A.

Outlook StableBank Deposits -Fgn Curr Ba2/NPBank Deposits -Dom Curr Ba1/NPBaseline Credit Assessment ba2Adjusted Baseline Credit Assessment ba2Counterparty Risk Assessment Ba1(cr)/NP(cr)Senior Unsecured Ba1

Source: Moody's Investors Service



Moody’s related publicationsBanking system outlook

» Banking system outlook: Strong Capital and Profitability Offset Asset Risk, Support Stable Outlook (1081023)

Rating action

» Moody's affirms ratings of three Paraguayan Banks, stable outlook

Rating methodology

» Banks, September 2017 (1065675)

Credit opinion

» Credit Opinion - Government of Paraguay – Ba1 Stable (1100337)


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1081023https://www.moodys.com/research/Moodys-affirms-ratings-of-three-Paraguayan-Banks-stable-outlook--PR_369729https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1065675https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1100337


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REPORT NUMBER 1108212


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CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


banco regional s.a.e.c.a. · financial institutions credit opinion 29 january 2018 update ratings...

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