NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Scotiabank Peru S.A.A.'s (SBP) foreign and local currency Issuer Default Ratings (IDRs) at 'A-' and 'A+', respectively, and its Viability Rating (VR) at 'bbb+'. A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
IDRS and SUPPORT RATINGS
SBP is considered a strategic subsidiary of the Bank of Nova Scotia (BNS; 'AA-'/Outlook Stable). Hence, in Fitch's opinion, there is a high probability that SBP would receive support from its parent, should it be required. BNS' potential support underpins SBP's IDRs and support rating.
SBP has seen moderate deterioration in loan quality over the past year, coincident with a deceleration in the wider economy, higher delinquency in the commercial segment and changes in charge-off policy. Despite the bank's efforts in adjusting its risk appetite, Fitch expects that asset quality ratios would continue to be a bit worse than the industry average, reflecting SBP's orientation toward retail and microcredit lending.
The bank's profitability ratios were slightly weaker in 2015, due to various nonrecurring items registered during 2014. However, financial performance may remain adequate in 2016, based on ample margins, also benefited from low cost deposits, significant credit expansion into higher-margin segments and remarkable operating efficiency.
SBP's consistent performance and sound internal capital generation have resulted in solid capitalization ratios that compare adequately to those of its local and regional peers. Continued growth and more recently the appreciation of U.S. dollar assets, should slightly erode capital ratios but they are likely to remain strong and consistent with SBP's ratings.
While SBP's liquidity is adequate, structural dollarization - common to the entire banking system - creates a challenge, given the asymmetric liquidity (higher in dollars than in local currency). Fitch will continue to monitor the evolution of the de-dollarization efforts and the eventual introduction of structural, long-term solutions.
SBP's subordinated bonds are plain vanilla. In Fitch's opinion, their probability of non-performance is equivalent to that of SBP's senior bonds but, they would entail a higher loss in case of default due to their subordinated nature. They would normally be rated only one notch below the bank's local currency IDR (LC IDR), but the bonds' rating is constrained by the country ceiling and therefore the bonds are rated at that level, two notches below SBP's LC IDR.
IDRs AND SUPPORT RATINGS
Sovereign Upgrade: SBP's foreign currency IDR would be upgraded should Peru's sovereign rating and country ceiling be upgraded. Downward risk for the bank's IDRs is limited given its parent support but the IDRs could also change if Fitch's assessment of BNS' ability or willingness to support SBP changes.
SBP's viability rating (VR) could be upgraded if the bank maintains its robust balance sheet and performance amidst a stable operating environment. Some pressure on the VR could arise from a significant margin or asset-quality decline that impairs earnings and erodes SBP's reserve and capital cushion - specifically, operating ROAA below 2%, delinquency ratio consistently above 4% and FCC below 10%.
The subordinated debt ratings would move in line with SBP's LC IDR.
Fitch has affirmed SBP's ratings as follows:
--Long-term foreign currency IDR at 'A-'; Outlook Stable;
--Short-term foreign currency IDR at 'F1';
--Long-term local currency IDR at 'A+'; Outlook Stable;
--Short-term local currency IDR at 'F1';
--Support rating at '1';
--Subordinated debt at 'A-';
--Viability rating at 'bbb+'.
Additional information is available at 'www.fitchratings.com'.
Future Flow Securitization Rating Criteria (pub. 12 Aug 2015)
Global Bank Rating Criteria (pub. 20 Mar 2015)
Dodd-Frank Rating Information Disclosure Form