Fitch Downgrades Venezuela Banks: No Government Backbone
Fitch Ratings doesn't expect the failing Venezuela government to prop up banks, and it lowered its credit rating.
By
Dimitra DeFotis
Sept. 7, 2017 6:32 p.m. ET
Fitch Ratings lowered its long-term issuer rating on six of Venezuela's largest banks to CC from CCC late Thursday after downgrading Venezuela's sovereign credit rating and predicting a probable debt default.
The downgraded banks have a combined market share of roughly 42% of Venezuela bank assets, according to Fitch:
Banesco, Banco Universal, CA (BBU);
Mercantil, C.A. Banco Universal (Mercantil);
Banco Occidental de Descuento, Banco Universal C.A. (BOD);
Banco del Caribe, C.A. Banco Universal (Bancaribe);
Banco Exterior, C.A. Banco Universal (Exterior);
Banco Nacional de Credito C.A. (BNC).
Fitch based the downgrade on each bank's financial profile, and assumed no institutional or state support, "despite these banks' systemic importance." Venezuela's coffers are emaciated, and policy has been inconsistent on bank support. At this point, in Fitch's view, "government interference in the banking system and the economy as a whole negatively influences shareholder support." Fitch adds:
" ... High inflation, which Fitch expects to exceed 600% in 2017, distorts financial ratios and, in Fitch's view, they are not reliable for the purposes of comparison with other emerging market peers. While acknowledging that these banks have withstood the tough operating environment, we do not expect to rate any bank higher than the sovereign rating, particularly considering the very weak and uncertain operating environment.The banks' low impaired loans, which do not exceed 0.3% of gross loans at June 2017, are diluted by inflation-led loan growth (which averaged 139.5% across the banking system in 2016). Capital levels, which recovered moderately at June 2017 after authorities allowed for a revaluation of fixed assets at fair market value up to 100% of Tier 1 capital, remain pressured by high asset growth. In addition, the banks' continued nominal profitability and adequate liquidity is attributable to the continued growth of deposit funding (primarily demand deposits) which earn deeply negative returns in real terms due to capital controls and FX rationing."
Bonds issued by the Venezuelan government and government controlled energy producer Petroleos de Venezuela or Pdvsa are among the holdings in the
iShares JPMorgan USD Emerging Markets Bond exchange-traded fund (
EMB). The
VanEck Vectors Emerging Markets High Yield Bond ETF(
HYEM) also held Pdvsa bonds. The
iShares Latin America 40 ETF (
ILF) rose 0.5% Thursday.
Fitch Downgrades Venezuela Banks: No Government Backbone
