Fitch Reviews Medium-Sized Chilean Banks

NEW YORK--()--Fitch Ratings has completed its review of Chile's five private medium-sized banks. As a result of the review, the National ratings of Banco BBVA Chile, Scotiabank Chile, Banco Itau Chile, Banco Bice and Banco Security (Security) have been affirmed. In addition, the Long-Term Issuer Default Rating (LT IDR) and Viability Rating (VR) of Banco Bice were affirmed. Finally, the Rating Outlook on Banco Itau's National Long-Term Rating has been revised to Negative from Stable, following a similar action on its parent bank in Brazil. The rating actions are summarized at the end of this press release.

For more details on each individual bank rating drivers and sensitivities, please refer to the respective press releases published along with this one and the special report Peer Review: Mid-Sized Chilean Banks (Small Franchises, Capital and Funding Challenges).

Together, the banks covered in this review represented 23.1% of total lending in Chile as of December 2014, excluding Chilean banks' investments abroad. Their assets - ranging from USD8.28 billion and USD19.9 billion - are for the most part accounted for on the domestic market and consist largely of loans to clients (73.5% of assets).

The five banks reviewed in this report hold a 3.0% to 6.8% share of total loans, excluding the Chilean banking system's lending abroad. Despite their disadvantage in terms of size in a market dominated by the four largest banks, the mid-sized entities' performance benefits from operating in a well-regulated market that has strong barriers to entry and access to a deep long-term funding market.

KEY RATING DRIVERS - VR, IDRs AND NATIONAL RATINGS

Of the five banks covered in this peer review, only BICE and Security have ratings that reflect intrinsic strength rather than the support of shareholders. The ratings of the other three entities, subsidiaries of international financial groups, factor in the support that would be provided by the parent institution, if it should be required. In Fitch's methodology, the issuer's rating is determined by its intrinsic, or viability rating, or by its support rating, whichever is higher.

The National equity rating - where applicable - is based on assessment of the long-term National rating, and the relative size into the local market in terms of capitalization, stock exchange transaction amount and free float.

BBVA, Scotiabank and Itau

In the case of these banks the National long-term ratings are based on expected support from their parent banks. Fitch considers these operations as part of the regional strategy of their parent banks; they share its commercial franchise, leverage on the experience of its banking groups, and mostly contribute with adequate earnings to the parent, although in a small way due to the overall size of the parent. The track record of the parent support of these subsidiaries is strong and is expected to remain so in the future.

BBVA Chile's (BBVA) National long-term rating reflects the likelihood of support from its parent, BBVA (Long Term rating of 'A-'/Stable Outlook by Fitch). The agency notes that BBVA Chile is a strategic subsidiary that has repeatedly contributed, albeit on a small scale, to the overall profitability of the parent. BBVA holds 67.6% of BBVA Chile's capital.

Scotiabank Chile's (SBC) National long-term rating reflect Fitch's assessment of the support provided by the Bank of Nova Scotia (BNS), if needed, as Fitch considers Scotiabank Chile to be a strategically important operation for BNS. Its capital investment in SBC represents 9.4% of BNS' overall investments in affiliates and subsidiaries, and is one of its three largest investments in Latin America. BNS holds 99.7% of BSC's capital.

Banco Itau Chile's (BIC) National long-term rating reflects Fitch's assessment of the support provided by Itau Unibanco Holding (IUH). Fitch considers BIC to be a key subsidiary for IUH due to its strategic integration and risk management, synergies with the parent, and the shared brand. The agency has noted IUH's proven commitment to BIC through its reinvesting of profits and ongoing capital contributions. IUH holds 99.9% of BIC's capital. The revision of the Outlook to Negative mirrors a similar action taken at the parent level and was driven by a change in the Sovereign rating outlook of Brazil. For more information please see 'Fitch Takes Various Actions on Brazilian Financial Institutions following Sovereign Outlook Revision'; published on April 13, 2014 and available on www.fitchratings.com.

Banco BICE and Banco Security

Banco Bice's (BICE) rating reflects its VR and factors in its solid financial performance and healthy overall credit profile, the result of a conservative strategy that has generated consistent earnings during periods of economic stress. Although the entity's core businesses are commercial banking, asset management, and treasury business, its growth in the investment management business for the high-end retail segment has provided revenue diversification and has helped mitigate the volatility to which mid-sized banks are susceptible.

Banco Security's (Security) rating reflects its stable performance throughout the business cycle. The bank operates with tight brokerage margins and relatively moderate returns on assets (ROAs), but it also has low credit risks. These factors, together with its tight FCC (Fitch Core Capital) relative to its peers and the system, are reflected in its National rating, the lowest among the banks covered in this peer review.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

BICE

Fitch considers Banco 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.

KEY RATING DRIVERS - SENIOR UNSECURED AND SUBORDINATED DEBT

The senior unsecured bonds of the five banks are rated at the same level as their National long-term rating, considering the absence of credit enhancement or subordination feature.

Fitch rates the subordinated debt of Chilean banks in the National scale two notches below their National long-term issuer rating. The two-notch difference considered the loss severity due to its subordinated nature; while zero notches for incremental non-performance risk were considered, given that the triggers of the securities applies after the bank have reached the point of non- viability.

RATING SENSITIVITIES - VR, IDRs AND NATIONAL RATINGS

BBVA, Scotiabank and Itau

Downward pressure on these Banks's National long term rating could come from a lower capacity or propensity of support. However, Fitch does not currently envision that happening in terms of propensity given the key strategic commitment of the group to its operations in Latin America. Itau's Negative Outlook is aligned with the Outlook of its parent.

BICE

The Rating Outlook for the long-term IDRs and National rating is Stable and are based on BICE's VR. A potential rating upgrade is unlikely considering BICE's company profile, which ranks below of larger banks with more established and diversified franchises. 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%, due either to lower internal capital generation or from lower than expected profitability. BICE's VR and national scale ratings could also be under pressure if operating ROA falls and remains below 1% in the medium term, or if any unexpected risk leads to a deterioration in profitability, capital base, or the currently sound assets quality in the medium term.

Security

The Rating Outlook for the long-term National rating is Stable. BS would be downgraded if the FCC consistently falls below 7.5% or if the non-performing loans (NPLs) rise over 2.5% and the overall operating ROA falls from 0.5% of average assets. Those actions, individually or separately, could even trigger a rating action on National scale long-term rating. Potential upgrade is not in the Fitch base scenario due to the limited capital base and profitability and the concentrations in the funding structure.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

BICE

Changes these ratings are unlikely given the business model of the bank, which wont result in structural changes on the overall systemic importance of the bank.

RATING SENSITIVITIES - SENIOR UNSECURED AND SUBORDINATED DEBT

The senior and subordinated debt of the five banks would generally move together with each bank's National long-term rating, with the subordinated debt typically remaining two notches below the bank's National long-term rating considering the loss severity due to its subordinated nature and zero notches for incremental non-performance risk.

Fitch has affirmed the following ratings:

Banco BBVA Chile

--Long-term National rating at 'AA(cl)'; Outlook Stable;

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

--Senior unsecured bonds National long-term at 'AA(cl)';

--Subordinated bonds National long-term rating at 'A+(cl)';

--National equity rating at 'Primera Clase nivel 3'.

Scotiabank Chile:

--Long-term National rating at 'AAA(cl)'; Outlook Stable;

--Short-term National rating 'N1+(cl)';

--Senior unsecured bonds National long-term at 'AAA(cl)';

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

--National equity rating at 'Primera Clase nivel 3'.

Banco Itau Chile:

--Long-term National rating at 'AA(cl)'; Outlook revised to Negative from Stable;

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

--Senior unsecured bonds National long-term at 'AA(cl)';

--Subordinated bonds National long-term rating at 'A+(cl)'.

Banco BICE

--Foreign and local currency long-term IDRs at 'BBB+'; Outlook Stable;

--Foreign and local currency short-term IDRs at 'F2';

--Viability rating at 'bbb+';

--Support rating at '3';

--Support rating floor at 'BB+';

--Long-term National rating at 'AA(cl)';

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

--Senior unsecured bonds National long-term at 'AA(cl)';

--Subordinated bonds National long-term rating at 'A+(cl)'.

Banco Security

--Long-term National rating at 'AA-'(cl);

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

--Senior unsecured bonds National long-term at 'AA-(cl)';

--Subordinated bonds National long-term rating at 'A(cl)'.

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

Applicable Criteria and Related Research:

--'Global Bank Rating Criteria' (Mar 2015).

Applicable Criteria and Related Research: Peer Review: Mid-Sized Chilean Banks (Small Franchises, Capital and Funding Challenges)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863685

Global Bank Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

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Contacts

Fitch Ratings
Primary Analysts
Diego Alcazar (BICE), +1-212-908-0396
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Abraham Martinez (Scotiabank Chile, Itau Chile, Security), +56-2-499-33-17
Director
Latin America Financial Institutions
Fitch Ratings
Santiago, Chile
or
Santiago Gallo (BBVA Chile), +56-2-499-33-20
Director
Latin America Financial Institutions
Fitch Ratings
Santiago, Chile
or
Secondary Analysts
Abraham Martinez (BICE, BBVA Chile), +56-2-499-33-17
Director
or
Santiago Gallo (Scotiabank Chile, Security), +56-2-499-33-20
Director
or
Committee Chairperson
Franklin Santarelli, +1-212-908-0739
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analysts
Diego Alcazar (BICE), +1-212-908-0396
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Abraham Martinez (Scotiabank Chile, Itau Chile, Security), +56-2-499-33-17
Director
Latin America Financial Institutions
Fitch Ratings
Santiago, Chile
or
Santiago Gallo (BBVA Chile), +56-2-499-33-20
Director
Latin America Financial Institutions
Fitch Ratings
Santiago, Chile
or
Secondary Analysts
Abraham Martinez (BICE, BBVA Chile), +56-2-499-33-17
Director
or
Santiago Gallo (Scotiabank Chile, Security), +56-2-499-33-20
Director
or
Committee Chairperson
Franklin Santarelli, +1-212-908-0739
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com