NEW YORK--(BUSINESS WIRE)--Fitch Ratings has published the Chilean Banco BICE's (BICE) Viability Rating (VR) and foreign- and local-currency long-term Issuer Default Ratings (IDRs) at 'bbb+' and 'BBB+', respectively. Additionally, Fitch has affirmed BICE's National Ratings. A complete list of rating actions is provided at the end of this release.
KEY RATING DRIVERS - VR, IDRs, National Ratings and Senior Debt
Banco BICE's IDR's are derived from its VR and reflects solid financial performance, good asset quality ratios and overall sound risk profile, driven by a conservative long-term business strategy that have yielded resilient results in times of economic stress. Despite mainly focusing on commercial banking, asset management and its treasury business niche, its expansion into retail wealth management for high net worth individuals has been able to provide diversification to its revenue stream and also allow the bank to reduce the volatility of medium- to small-sized banks.
Sustained by stable earnings and a prudent cash dividend policy, Banco BICE's capital position is considered adequate given its earning generation capacity and history of limited loan losses, but its capitalization remains below the average of similarly rated banks and shows room for improvement. Also, liquidity is well managed and sufficient given the stability of its funding base, which has been concentrated in time deposits from institutional investors as the whole local medium-size peers.
BICE's local franchise and income diversification lags the trend of larger banks, while the significant portion of its treasury business may produce some volatility in its results, especially in times of market turmoil. Although its capital ratios have some improved Fitch core capital (FCC) at 9% as of Dec. 2013, is still below other similarly rated banks (median FCC at 10.7% for LATAM peers). Such contraction in FCC is explained by recent growth that has not been completely compensated for by earning retention. Worth mentioning is that given BICE's conservative approach toward banking and local regulations, its plain equity-to-assets ratio is in line with other banks with similar VRs, which is viewed positively by Fitch considers BICE's overall loss absorption capacity is adequate given its very low credit risk, sound and stable profitability and conservative banking management.
The steady growth of the commercial bank unit helps to balance the historical importance of the asset management and treasury business, although the latter is still significant and sometimes volatile. This trend in its revenue source should be maintained going forward, especially considering the bank's conservative business plan for the short- and medium-term. Appropriate asset and liability management in terms of currency, tenors and yield are crucial to enhance profits in times of less arbitrage opportunities, a framework very well controlled by the bank.
Adequate credit risk tools and the focus on a relatively lower-risk niche (corporate and high net worth segment) have allowed the bank to maintain strong and stable asset quality ratios, with adequate diversification figures in terms of obligors. BICE's historically low NPL ratio (the lowest in Chile and sound compared to international peers), together with limited loan impairment charges, results in strong asset quality ratios. Prudent loan loss reserve policies provide above-average reserve coverage and include a significant portion of counter-cyclical provisions.
Credit, market and operational risks, in Fitch's view, are well recognized on the balance sheet and reflect the conservative business approach. The historical track record of credit risk ratios and asset quality of the institution are better than average in the banking system, and are expected to remain strong. Loan loss provisions accounted for 20.6% of earnings before taxes and provisions as of June 30, 2014 and 0.6% of average gross loans. Reserves for gross loans, including additional past-due loans, is robust and one of the highest ratios of reserves for impairment loans (660% as of June 30, 2014) in the Chilean financial system and in Fitch's view this trend will remain sound.
Liquidity is ample and closely monitored. Liquid assets (16.3% of total assets as of June 30, 2014) represented in the last four years on average a stable 32.1% of total deposits and short-term funding where market volatility required more conservative liquidity positions worldwide. Fitch expects this trend will be maintained under forthcoming more strict local and international banking standards under Basel 3.
Capital levels are adequate for the rating level and stable after several years of adequate earnings, good provisioning and controlled growth. A recent subordinated bond issuance improved BICE's mismatch on the balance sheet but increased the use of hybrids in its capital structure (to 42% of total equity) - above the Chilean banking system average (32%). Healthy internal capital generation and moderate loan and assets growth in last 12 months have resulted in a slight improvement of its FCC-to-Risk Weighted Assets ratio to 8.8% as of June 30, 2014 (8.2% as of June 30, 2013). In Fitch's view, although the bank enjoys good earnings generation capacity and control the risks on its balance sheet, an improvement in the FCC ratio closer to the level of similarly rated commercial banks (VR 'bbb+' rated banks with a median FCC ratio of 12.0% as of Dec. 31, 2013) would help to fund its expansion in the medium term.
KEY RATING DRIVERS - Subordinated Debt
Fitch rates the national subordinated debt of Chilean banks two notches below its national long-term issuer rating. The two-notch difference considers the loss severity due to its subordinated nature (after default).
KEY RATING DRIVERS - Support Rating and Support Rating Floor
Fitch considers BICE a bank for which there is a moderate probability of sovereign support because the limited relative size of the Chilean banking system makes uncertain the propensity of the potential provider of support to do so.
RATING SENSITIVITIES - IDRs, VR, National Ratings and Local Debt
The Rating Outlook for the long-term IDRs and national rating is Stable and there are based on BICE's VR. A potential rating upgrade is unlikely as the current category is at the top of the natural VR range for universal commercial banks and is limited by its relatively modest local franchise. Fitch does not foresee any changes in the short term provided the bank's earnings remain stable and balanced by business segment and it maintains its high credit quality. A rating downgrade could take place if Banco BICE's capitalization ratios continue to fall and asset quality deteriorates significantly.
Specifically, downward pressure could result from a deterioration of its capital adequacy ratios, with an FCC ratio falling and remaining below 8.0%, either due to lower internal capital generation or from lower than expected profitability. BICE's VR could also be under pressure if operating return on assets falls and remains below 1% in the medium term, or if any unexpected risk deteriorates its profitability, capital base or sound asset quality in the medium term.
RATING SENSITIVITIES - Subordinated Debt
The subordinated debt would typically remain two notches below the bank's national long-term rating considering the loss severity due to its subordinated nature (after default).
RATING SENSITIVITIES - Support Rating and Support Rating Floor
Changes in the bank's Support Rating and Support Rating Floor are unlikely. BICE is not considered by Fitch as a domestically important financial institution (D-SIFI) of the Chilean financial system. Fitch considers BICE a bank for which there is a moderate probability of sovereign support because the limited relative size of the Chilean banking system makes it uncertain as to the propensity of the potential provider of support to do so.
Fitch has published BICE's ratings as follows:
--Foreign and local currency long-term IDRs at 'BBB+';
--Foreign and local currency short-term IDRs at 'F2';
--Viability rating at 'bbb+';
--Support rating at '3;
--Support rating floor at 'BB+'.
Fitch has affirmed BICE's national ratings as follows:
--Long-term national rating at 'AA(cl)';
--Short-term national rating at 'N1+(cl)';
--National long-term rating senior unsecured bonds at 'AA(cl)';
--National long-term rating subordinated bonds at 'A+(cl)'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=862835
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