Fitch Affirms Banco Santander Chile's IDR at 'A+'; Outlook Remains Negative

BUENOS AIRES & SANTIAGO, Chile--()--Fitch Ratings has affirmed Banco Santander Chile's (BSC) Viability Ratings (VRs) and Long-term Issuer Default Ratings (IDRs) at 'a+' and 'A+', respectively. The Rating Outlook on the Long-term IDRs is Negative. A full list of ratings actions is at the end of this rating action commentary.

RATING DRIVERS

BSC's IDRs and National Scale Ratings remain driven by its 'a+' VR and they do not factor in any support from its parent, although it remains a strategically important subsidiary for Santander. BSC's IDRs, National Ratings and VR reflect its market-leadership position and its strong franchise within Chile, whose economy continues to perform well. The ratings also reflect the bank's healthy asset quality, strong profitability and funding, independent management, and adequate capital position. Liquidity has been strengthened and BSC benefits from a sizeable, historically stable, and well-diversified retail deposit base. In addition, BSC has significantly reduced refinancing risk and exposure to more price-sensitive deposits by growing core deposits and building a liquidity cushion while maintaining access to capital markets without any apparent rise in funding costs.

In Fitch's view, BSC is, to a large degree, ring-fenced from the rest of the Santander group thanks to strong regulatory oversight conducted by the Chilean Banking Regulator. In addition, BSC's Board and management teams enjoy a high degree of operating independence and the bank is not subject to interference from Santander in its day-to-day decision-making procedures. BSC's standalone capital is adequate for its rating category and its liquidity position is strong, while its exposure to the Santander group is insignificant and constrained by stringent local regulatory rules.

Fitch has affirmed BSC's Support Rating (SR) and Support Rating Floor (SRF) at '1' and 'A-', respectively. As the second largest bank in Chile, Fitch considers there to be an extremely high probability that the Chilean government (rated FC and LC IDR 'A+'/'AA-'; Outlook Stable by Fitch) will provide support should it be required. Fitch's SRF indicates a level below which the agency will not lower the bank's Long-term IDRs.

RATING SENSITIVITIES

The Outlook on BSC's long-term IDR and National long-term rating is Negative mirroring that on Santander's ratings. A downgrade in Santander's ratings will likely lead to a downgrade of BSC's VR and IDR. This reflects the inherent linkage of a subsidiary and its parent, as BSC's IDR is currently three notches above the rating of its parent, which is the maximum Fitch considers prudent according to its rating criteria. In spite of its intrinsic strength, BSC's VR could potentially be dragged down by a further deterioration of Santander, particularly in its access to or cost of funding, although this has not been the case so far.

Downward pressure on BSC's VR could also arise from a sustained pressure on profitability stemming from further rise in loan loss provisions (LLPs) or from markedly lower liquidity or capitalization. More specifically, BSC's VR could be downgraded if its return on average assets (ROAA) consistently remains below 1.3%, its Fitch Core Capital to Weighted Assets ratio falls and is maintained below 9% together with asset quality deterioration, and/or if the bank significantly reduces its liquidity cushion and maintains it below USD1 billion. In Fitch's view, there is limited upside potential in the near future for BSC's VR.

BSC's support rating or SRF could only be affected by a downgrade of Chile's sovereign IDRs, which is considered unlikely at the present time.

CREDIT PROFILE

At Sept. 30, 2012, BSC was the second largest bank in Chile by total loans and deposits, with market shares of 19.1% and 17.1% respectively, but the largest in retail loans, with a share of 22.5%. These factors support BSC's SR and SRF.

Profitability has historically been strong, backed by healthy operating revenues and strict cost control. At Sept. 30, 2012, however, its net income fell by 17.2% year over year due to higher LLPs as a result of exceptional charges, lower inflation and a rise in non-interest expenses due to significant IT investments intended to improve productivity and efficiency levels. As a result, BSC's return on assets and return on equity decreased to 1.49% and 18.09%, respectively at Sept. 30, 2012.

BSC's sound risk management approach and benign operating environment in Chile have supported its healthy asset quality ratios. However, at Sept. 30, 2012, LLPs rose to 2.05% of total loans (from 1.65% at Dec. 31, 2011) and impaired loans to 3.04% (from 2.95%), still low, however, given the retail profile of the loan book and solid reserve coverage (98.3%). BSC tightened its loan admission criteria and strengthened its recovery unit to avoid further deterioration.

BSC's funding is independent from its parent, in line with Santander's policies for its subsidiaries, and it benefits from a stable and well-diversified deposit base (core deposits accounted for 77.2% of the total). It is also active in bond issuance locally and internationally, and has significant lines from local and foreign banks. In the past three years it has diversified its foreign funding both by investor and geographically.

Since 2009, BSC has strengthened its liquidity. At Oct. 31, 2012, its liquidity cushion was USD2.7 billion (down from USD3.8 billion one year before) and liquid assets represented a sound 24.9% of total deposits. The bank intends to reduce this cushion further as it has diversified and improved its funding profile.

The bank's capital base is adequate for its rating category, with a Fitch core capital ratio of 9.29% at Sept. 30, 2012. Fitch expects these ratios to remain solid aided by BSC's sound internal capital generation.

Fitch has affirmed BSC's ratings as follows:

--FC and LC long-term IDRs at 'A+'; Outlook Negative;

--FC and LC short-term IDRs at 'F1';

--VR at 'a+';

--Support rating 'at 1';

--Support rating floor at 'A-';

--Long-term national rating at 'AAA(cl)'; Outlook Negative;

--National long-term rating at 'AAA(cl)';

--Short-term national rating at 'N1+(cl)';

--Senior unsecured bonds at 'A+'

--USD5 billion U.S. Commercial Paper Programme at 'F1'

--National long-term rating of Subordinated bonds at 'AA(cl)';

--National equity rating at 'Primera Clase nivel 1'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);

--'Fitch Takes Actions on Banco Santander's Latin American Subsidiaries' (June 13, 2012);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).

Applicable Criteria and Related Research:

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts

Fitch Ratings
Primary Analyst
Santiago Gallo
Director
+54-11-5235-8137
Fitch Argentina Calificadora de Riesgo S.A.
Sarmiento 663 - piso 7 - C1041AAM
Buenos Aires, Argentina
or
Secondary Analyst
Abraham Martinez
Director
+56-2-499-33-17
or
Committee Chairperson
Alejandro Garcia
Senior Director
+ 52 (81) 8399 9146
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Santiago Gallo
Director
+54-11-5235-8137
Fitch Argentina Calificadora de Riesgo S.A.
Sarmiento 663 - piso 7 - C1041AAM
Buenos Aires, Argentina
or
Secondary Analyst
Abraham Martinez
Director
+56-2-499-33-17
or
Committee Chairperson
Alejandro Garcia
Senior Director
+ 52 (81) 8399 9146
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
elizabeth.fogerty@fitchratings.com