MONTERREY, Mexico & SANTIAGO, Chile--(BUSINESS WIRE)--Fitch Ratings has affirmed Cooperativa del Personal de la Universidad de Chile Ltda's (Coopeuch) foreign- and local-currency long-term Issuer Default Rating (IDR) at 'BBB' and Viability Rating (VR) at 'bbb'. The Rating Outlook is Stable. A complete list of rating actions is provided at the end of this release.
KEY RATING DRIVERS - IDRs, VR, SENIOR UNSECURED DEBT AND NATIONAL RATINGS
Coopeuch's IDRs and national ratings are based on its VR, which reflects its good historical performance, solid capitalization and healthy portfolio quality. Coopeuch's ratings also reflect its strong franchise in consumer lending focused on public servants, the incipient expansion to the private sector and the diversification of its funding.
Coopeuch's profitability is strong and consistent with the risk profile of its portfolio (mainly consumer loans) and has consistently been higher than the average of the financial system, underpinned by its relatively wide interest margins and good cost efficiency. After the 2010-2013 pressure on profits, Coopeuch has been able to adequately adapt its business model restricting loans with direct payment resulting in a profitability recovery (2014-2015), due to lower provisioning expenses, a moderate increase in net interest revenue and commissions, and a smaller inflation adjustment. Fitch expects Coopeuch's results to remain relatively stable in the medium-term and to improve further once the Chilean economy resumes its growth at higher rates.
Although Coopeuch's past due loans (PDL) and charge offs have increased over the past five years due to the business mix change from 100% payroll-deductible loans, in Fitch's opinion they remain adequate to its business model. At Aug. 31, 2015 PDLs represented 5.04% of gross loans and net charge offs 4.20% of total loans, up from 5.13% and 2.96% at Dec. 31, 2013, although below the level shown at Dec. 31, 2014 (5.04% and 4.60% respectively); reserve coverage is adequate at 1.12 times (x) PDL.
Funding for Coopeuch has diversified over the past years, which favors stability of financing for the cooperative and reduces its dependence on wholesale financing. Retail founding through highly stable deposits and savings accounts, as well as equity, are the main sources of funding and represented 77.3% of total loans as of Aug. 31, 2015. Wholesale funding includes long-term bonds (32% of total funding), deposits from institutional investors (9.4%) and bank loans (3.8%).
Coopeuch has historically shown solid capitalization levels. As of Aug. 31, 2015, its Fitch Core Capital ratio improved to 39.8%, and its regulatory capital, which is entirely core capital, represented 37.2% of risk-weighted assets, vastly exceeding the 13.0% average reported by the banking system as of June 2015. Equity increases continuously due to the legal requirement to retain at least 20% of its profits and because its affiliates must acquire a certain number of shares (cuotas de participacion) each month.
In Fitch's opinion, Coopeuch's strategy to expand into the private sector improves its long-term viability by providing additional opportunities for growth and diversification, although it also increases the risk of its loan portfolio as it becomes more exposed to economic cycles. The entity's strategic plan seeks to improve its efficiency, competitiveness, management and risk controls, human resource development and progress in corporate governance.
Coopeuch's senior unsecured bonds are rated at the same level as its IDR and national rating, considering the absence of credit enhancement or a subordination feature.
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The Rating Outlook for the long-term IDRs and national rating is Stable. Downward ratings pressure could stem from deterioration in the entity's asset quality indicators leading to an increase in loan loss provisions that result in a sustained decline in operating profitability to below 2% of total assets.
The potential for a ratings upgrade is limited in the medium term given its niche orientation. However, significant diversification of its business model could result in rating upgrades in the long term.
The rating of Coopeuch's senior unsecured bonds will move in line with its national long-term rating.
RATING SENSITIVITIES - SUPPORT AND SUPPORT FLOOR RATINGS
Changes in the bank's support rating and support rating floor are unlikely. Fitch considers Coopeuch an entity for which there is a low probability of sovereign support because its limited relative size on Chilean banking system puts uncertainties about the propensity of the authorities to provide support to it in case of need.
Fitch has affirmed the following ratings for Coopeuch:
--Foreign and local currency long-term IDR at 'BBB'; Outlook Stable;
--Foreign and local currency short-term IDR at 'F2';
--Viability Rating at 'bbb';
--Support Rating at '5';
--Support Floor at 'No Floor';
--Long-Term National Rating at 'AA-(cl)'; Outlook Stable';
--Short-term National Rating at 'N1+(cl)';
--Long-term National Rating of bond program at 'AA-(cl)'.
Additional information is available on www.fitchratings.com
Global Bank Rating Criteria (pub. 20 Mar 2015)
National Scale Ratings Criteria (pub. 30 Oct 2013)
Dodd-Frank Rating Information Disclosure Form