NEW YORK & SANTIAGO, Chile--(BUSINESS WIRE)--Fitch Ratings has conducted a portfolio review of selected Chilean banks after the Outlook revision of Chile's sovereign rating to Negative from Stable announced on Dec. 13, 2016 (see 'Fitch Affirms Chile at 'A+'; Revises Outlook to Negative' at www.fitchratings.com).
This portfolio review included Chilean banks with Issuer Default Ratings (IDRs) or Viability Ratings (VRs) equivalent to the sovereign. Fitch believes that these ratings are more sensitive to a potential sovereign downgrade or any significant deterioration of the operating environment over the near term.
No changes are expected in the national-scale ratings of these or other financial institutions in Chile derived from a potential downgrade of the sovereign. These ratings are local relative rankings of creditworthiness within a particular jurisdiction. Fitch does not expect these relativities to change in the event of a moderate downgrade in the sovereign rating.
Consequently, Fitch has revised the Outlook on Banco del Estado de Chile (Banco Estado) and Banco Santander Chile's (BSC) Long-Term Foreign and Local Currency IDRs to Negative from Stable, and has affirmed the ratings for both banks.
KEY RATING DRIVERS
BANCO ESTADO - IDRs, SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SR)
The Negative Outlook on Banco Estado's Long-Term IDRs mirrors the Long-Term IDR on Chile. Banco Estado's IDRs are aligned with Chile's sovereign Long-Term Foreign Currency IDR ('A+'/Outlook Negative) and Local Currency IDR ('AA-'/Outlook Negative) and are driven by the extremely high probability of support from its owner, the State of Chile. Banco Estado represents an important instrument of the state for developing credit and monetary policies, plays a strategic social role for the government and has systemic importance. These drivers also underpin its high Support Rating (SR) of '1' and Support Rating Floor (SRF) of 'A+'.
BANCO ESTADO - VR
Banco Estado's VR of 'bbb' is not affected by this rating action and reflects its strong market share, which places it as one of the strongest competitors in the Chilean banking system, being the third-largest bank measured by loans, and the first by deposits. Banco Estado's VR also reflects its sound funding structure based on a wide customer base, ample liquidity and lower, albeit moderately improving, credit quality, and is limited by its low capital base and its lower-than-peers' profitability.
BANCO ESTADO - SENIOR UNSECURED DEBT
Banco Estado's senior unsecured foreign currency bonds are rated at the same level as the bank's IDR, considering the absence of credit enhancement or subordination feature.
BSC - VR AND IDRs
BSC's IDRs are driven by its VR of 'a+' and these do not factor in any extraordinary support from its parent, Banco Santander, although it does remain a strategically important subsidiary.
The revision on the Outlook on BSC's Long-Term IDRs to Negative reflects the same rating action on the sovereign IDRs. BSC's IDRs and could be downgraded in the event of a downgrade of the sovereign's IDR, even if the bank's financials remain sound, as it is unlikely that the bank could be rated above the sovereign rating given its current financial profile.
BSC's ratings are highly influenced by its market-leading position and its strong franchise within Chile. At September 30, 2016, BSC was the largest bank in Chile by total loans and deposits, with market shares of 19.5% and 18.9%, respectively.
The ratings also consider the still favorable operating environment in Chile compared to its regional peers, which has supported its healthy asset-quality ratios, sound core profitability, diversified funding, and adequate capital position.
BSC - SR AND SRF
At Sept. 30, 2016, BSC was the largest bank in Chile by total loans and the second largest by deposits. This underpins BSC's SR of '1' and SRF of 'A-', as there is an extremely high probability of state support, should it be needed.
BSC - SENIOR UNSECURED
BSC's senior unsecured bonds are rated at the same level as the bank's IDR, considering the absence of credit enhancement or subordination feature.
RATING SENSITIVITIES
BANCO ESTADO - IDRs, SR AND SRF
The Outlook for the Long-Term IDRs is Negative, the same as the Outlook for Chile's sovereign ratings. Changes in the bank's IDRs and SRF are contingent upon sovereign rating actions for Chile.
BANCO ESTADO - VR
Banco Estado's VR could be downgraded if its overall company profile deteriorates, if the Fitch Core Capital (FCC) ratio remains consistently below 7% and if its LLR coverage, including voluntary LLRs, falls and consistently remains below 100% of non-performing loans. Upward ratings potential for Banco Estado's VR would arise mainly from a significant and sustained improvement of its capitalization levels, with its FCC ratio improving and remaining above 9%.
BANCO ESTADO - SENIOR UNSECURED AND SUBORDINATED DEBT
The ratings of Banco Estado's senior unsecured and subordinated debt are directly linked to the bank's IDR and National Rating and will move in line with rating actions on these ratings.
BSC - IDRs AND VR
BSC's IDRs and could be downgraded in the event of downgrade of the sovereign's IDR.
Downward pressure for BSC's VR and IDRs could also arise from a considerable deterioration of the bank's company profile, which is not Fitch's baseline scenario, or form sustained pressure on its profitability or consistently lower capitalization. More specifically, BSC's VR could be downgraded if its operating profit/RWAs ratio consistently remains below 1.5%, or its FCC/RWAs ratio is sustained below 9%. There is limited upside potential in the near future for BSC's VR given the Negative Outlook on the sovereign.
BSC - SENIOR UNSECURED DEBT
BSC's senior unsecured debt ratings are sensitive to changes in the bank's IDR.
BSC - SR AND SRF
BSC's SRF could be affected by a downgrade of the sovereign's IDR. The bank's SR would also be affected by a change in the systemic importance of BSC, which is considered unlikely at the present time.
For more information on Banco Estado and BSC's key rating drivers and sensitivities, please refer to their respective press releases published on Nov. 8, 2016 and available on www.fitchratings.com.
Fitch has affirmed the following ratings:
Banco Estado
--Long-Term Foreign Currency IDR at 'A+'; Outlook revised to Negative from Stable;
--Long-Term Local Currency IDR at 'AA-'; Outlook revised to Negative from Stable;
--Foreign and Local Currency Short-Term IDRs at 'F1+';
--VR at 'bbb'
--Support Rating at '1';
--Support Rating Floor at 'A+';
--Long-Term Foreign Currency senior unsecured bonds at 'A+'.
BSC:
--Long-Term Foreign and Local Currency IDRs at 'A+'; Outlook revised to Negative from Stable;
--Short-Term Foreign and Local currency IDRs at 'F1';
--Viability Rating at 'a+';
--Support Rating at '1';
--Support Rating Floor at 'A-';
--Senior unsecured bonds at 'A+';
--$5 billion Commercial Paper Rating at 'F1'.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Global Bank Rating Criteria (pub. 25 Nov 2016)
https://www.fitchratings.com/site/re/891051
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016592
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016592
Endorsement Policy
https://www.fitchratings.com/regulatory
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