November 7, 2017 / 5:28 PM / a year ago

Fitch Affirms Banco del Estado de Chile's FC IDR at 'A'; Outlook Stable

(The following statement was released by the rating agency) SAO PAULO, November 07 (Fitch) Fitch Ratings has affirmed Banco del Estado de Chile's Long-Term (LT) Foreign Currency Issuer Default Rating (IDR) at 'A' and its 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, SUPPORT RATING, SUPPORT RATING FLOOR AND NATIONAL RATINGS Banco Estado's IDRs are aligned with Chile's sovereign LT Foreign Currency IDR (A/Stable) and Local Currency IDR (A+/Stable), 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 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'. VR Banco Estado's VR reflects its strong market share, as one of the strongest competitors in the Chilean banking system, and the third-largest bank measured by loans in Chile, and the first by deposits. Banco Estado's VR also reflects its sound funding structure based on a wide customer base, ample liquidity and adequate credit quality, and is limited by its low capital base and its lower than private peers' profitability. Banco Estado's capital adequacy indicators have been low in recent years. Although these will likely improve with the higher regulatory requirements once the Basel III standards are implemented in Chile, Fitch believes that the bank's capital base will remain relatively lower than those of local and international private sector banks in the same rating category. In Fitch's view, capital levels are complemented by the bank's ample loan loss reserve (LLR) cushion and the extremely high propensity and ability of the state of Chile to strengthen the bank's position if needed. This will be especially important, since the bank will likely need a significant amount of capital when Basel III standards are adopted in Chile. Banco Estado's profitability has historically been lower than that of its private sector and internationally rated peers. However, its financial performance has been very stable, with an acceptable level of profitability considering it is state-owned, and adds an additional 40% to the usual corporate income tax rate. Similar to other state-owned institutions, Banco Estado's operating expenses are high compared with private sector peers. This is a consequence of its extensive commercial network and its social role in fostering banking penetration levels. Operating profit/risk-weighted assets reached 1.2% on an average basis over the past four years. Regional peer comparison of this ratio is partially affected by stricter risk-weighting rules in Chile. Banco Estado has consistently improved its non-performing loan (NPL)/gross loans ratio. Although these still compare unfavorably to local and international private sector peers, the difference has narrowed markedly. As of June 30, 2017, its NPL ratio was an adequate 3.05%, while the local average was 1.88%. Although Banco Estado's NPLs are somewhat higher than those of its peers, it should be noted that the effective loss of the loan portfolio is much lower, as shown by its net charge-offs/total loans ratio of only 0.52% as of June 30, 2017, which is below the financial system average (0.92%) and consistently lower than its loan impairment charge (1.10% of total loans at the same date). 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 a subordination feature. SUBORDINATED DEBT Fitch rates the national subordinated debt of Banco Estado two notches below its National long-term issuer rating. Fitch used this rating as an anchor rating to notch down the subordinated debt, based on the likelihood that sovereign support will remain sufficiently strong to continue factoring it into Banco Estado's subordinated bonds with a loss-absorption feature after the point of non-viability. The two-notch difference considers the loss severity due to its subordinated nature (after default). RATING SENSITIVITIES IDRs, SUPPORT RATING, SUPPORT RATING FLOOR AND NATIONAL RATINGS The Outlook for the LT IDRs is Stable, 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. VR Banco Estado's VR could be downgraded if its overall company profile deteriorates. A sustained reduction of the bank's LLR coverage of non-performing loans, including voluntary LLRs, below 100% that weakens its loss-absorption capacity would also be negative for Banco Estado's VR. A significant and sustained improvement of Banco Estado's Fitch core capital ratio above 10% would be positive for its VR. SENIOR UNSECURED AND SUBORDINATED DEBT Banco Estado's senior unsecured and subordinated debt ratings are directly linked to the bank's IDR and National Rating and will move in line with rating actions on these ratings. Fitch has affirmed Banco Estado's ratings as follows: --Long-Term Foreign Currency IDR at 'A'; Outlook Stable; --Long-Term Local Currency IDR at 'A+'; Outlook 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'; --Long-term National Rating at 'AAA(cl)'; Outlook Stable; --Short-term National Rating at 'N1+(cl)'; --National long-term rating on senior unsecured bonds at 'AAA(cl)'; Outlook Stable; --National long-term rating on its subordinated bonds at 'AA(cl)'; Outlook Stable. Contact: Primary Analyst Andre Ukon Associate Director +55-11-4504-2213 Fitch Ratings, Inc. Al. Santos, 700 - 7th floor Sao Paulo, Brazil 01418-100 Secondary Analyst Santiago Gallo Director +56-2-499-33-20 Committee Chairperson Alejandro Garcia Managing Director +1 212-908-9137 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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