Fitch Affirms Scotiabank Uruguay's VR at 'bb-' & IDR at 'BBB+'; Outlook Stable

MONTERREY, Mexico--()--Fitch Ratings has affirmed Scotiabank Uruguay S.A.'s (Scotiabank Uruguay) Viability Rating (VR) at 'bb-'. Fitch has also affirmed the bank's foreign currency (FC) and local currency (LC) long-term Issuer Default Ratings (IDRs) at 'BBB+' and 'A-', respectively. The Support Rating (SR) was affirmed at '2'. The long-term Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

IDRS & SUPPORT RATING

Scotiabank Uruguay's IDRs and SR are driven by the ability and propensity of its ultimate parent, Bank of Nova Scotia (BNS, 'AA-'/'aa-'/Stable Outlook) to provide support if needed. Scotiabank Uruguay's foreign currency IDR of 'BBB+' is at the country ceiling, while its 'A-' local currency IDR is two notches above that of the Uruguayan sovereign rating.

Fitch views Scotiabank Uruguay as a strategically important subsidiary for BNS. The bank is part of BNS' business plan for Latin America due to its potential long-term growth in Uruguay, a strategic market for the Canadian bank's expansion in the region. Last year, BNS completed its acquisition of Discount Bank, making Scotiabank Uruguay the fourth largest consolidated private bank in the country.

The Stable Rating Outlook on the IDRs is in line with that of the bank's parent, BNS.

VR

Weak profitability and capitalization ratios, while negatively affected by the recent acquisition of Discount Bank and its integration process, highly influence Scotiabank Uruguay's VR. The bank's VR also considers its growing franchise, sound and stable funding structure, ample liquidity and adequate assets quality metrics.

Scotiabank Uruguay's operating performance has been volatile since 2012, when BNS entered the Uruguayan market. In 2015, the bank's profits and capital ratios were affected negatively due to lower than expected structural earnings and the acquisition of Discount Bank, which incurred additional expenses related to the financial and operational integration (roughly 61% of pre-impairment profits). At the end of 2015, Scotiabank Uruguay registered net losses and operating ROA of 0.29% (2014: 0.79%).

Fitch expects the bank's profitability to increase in the coming years due continued growth, lack of additional non-recurrent non-interest expenses, and capture of all commercial and financial synergies from the clientele of Discount Bank.

The weakening of Scotiabank Uruguay's capital metrics in 2015 due to Discount Bank's integration was expected by management, and a capital infusion from BNS was made to absorb the transaction (USD90 million: USD70 million in form of direct funds and USD20 million in the form of subordinated debt). As of December 2015, tangible equity represented 5.05% of tangible assets, while the Fitch Core Capital (FCC) to risk weighted assets ratios (RWA) stood at 6.76% (2014: 6.73% and 8.99%, respectively), ratios that compare unfavorably to those of its closest peers.

Going forward, Scotiabank Uruguay's does not expect additional capital infusions to sustain and improve its capital metrics. The bank expects to strengthen its capital adequacy by internal capital generation. As Scotiabank Uruguay has an internal policy to maintain an excess of at least 10% of the regulatory capital requirement, Fitch expects capitalization to increase as more stringent requirements are eventually implemented by the local regulator.

Scotiabank Uruguay has a moderate franchise in a key business segment in the country, specifically in the retail and SMEs segments. With the acquisition last year of Discount Bank, Scotiabank Uruguay was consolidated as the fourth-largest private bank measured by loans and deposits.

Scotiabank Uruguay shows a growing, diversified, and stable funding structure. Scotiabank Uruguay's liabilities are largely made up of nonfinancial sector deposits, which represented 89% of assets as of December 2015. These deposits grew significantly during 2015 due to Discount Bank acquisition. While Scotiabank Uruguay operates on mostly short-term funding (95.7% with maturity less than one year), the mismatch in the bank's term structure is partially mitigated by its ample liquidity (liquid assets represented 63.8% of total short-term deposits), backing from its shareholder, and the relatively short-term nature of its loan portfolio (82.8% of the portfolio matures within 12 months) and most of its revolving contracts.

As of Dec. 31, 2015, the bank's NPLs represented 2.9% of the total loans and 4.2% without the effect of the sale of portfolio (2.6% and 4.4%, respectively, at end 2014; 2.3% and 3.6% in 2013). Fitch expects Scotiabank Uruguay's delinquency levels will continue to be relatively high considering its greater focus on retail loans compared to the Uruguayan financial system overall. The obligor concentrations are high and in line to Scotiabank Uruguay's current VR. Scotiabank Uruguay has an adequate level of loan loss reserves (LLR), and Fitch believes that its reserve coverage will remain at current levels.

RATING SENSITIVITIES

IDRS & SUPPORT RATING

Scotiabank Uruguay's FC IDR is capped by the country ceiling while its local currency IDR is two notches above the sovereign rating in local currency. Hence, positive rating actions are contingent upon upgrades in Uruguay's sovereign ratings and country ceiling.

In turn, a reduction in Scotiabank Uruguay's shareholder's ability or propensity to provide support could negatively affect its ratings.

VR

Scotiabank Uruguay's VR could eventually be downgraded if the bank does not improve its profitability and capital ratios in the short term. Specifically, if the bank does not show operating profits to risk weighted assets consistently above 1.25% and FCC to RWAs ratios above 9%. In addition, NPL ratios sustained above 3% would be also negative for the rating.

In turn, the VR could be positively affected if Scotiabank Uruguay shows sustained operating profits to risk weighted assets above 1.25% and FCC to RWAs ratios above 9%. Improvements in asset quality also could be positive for the ratings.

Fitch has affirmed the following ratings:

Scotiabank Uruguay

--Foreign Currency Long-Term IDR at 'BBB+'; Outlook Stable;

--Local Currency Long-Term IDR at 'A-'; Outlook Stable;

--Support Rating at '2';

--Viability rating to 'bb-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002998

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002998

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Alejandro Tapia
Director
+52 818 399 9156
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Santiago Gallo
Director
+562 24993320
or
Committee Chairperson
Theresa Paiz Fredel
Senior Director
+1-212-908-0534
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alejandro Tapia
Director
+52 818 399 9156
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Santiago Gallo
Director
+562 24993320
or
Committee Chairperson
Theresa Paiz Fredel
Senior Director
+1-212-908-0534
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com