TEXT-S&P affirms Scotiabank Peru 'BBB/A-2' issuer credit ratings
Overview -- Peru-based bank Scotiabank Peru has maintained its strong market position in the Peruvian financial system, healthy asset quality, and good profitability and capitalization. -- We are affirming our 'BBB/A-2' issuer credit ratings on the bank. -- The positive outlook reflects our view that we will raise the ratings on Scotiabank Peru following an upgrade of the sovereign. Rating Action On Dec. 19, 2012, Standard & Poor's Ratings Services affirmed its 'BBB/A-2' issuer credit ratings on Scotiabank Peru S.A.A. The outlook on the long-term rating remains positive. The stand-alone credit profile (SACP) of the bank is 'bbb+'. Rationale Standard & Poor's bases its ratings on Scotiabank Peru on its "strong" business position, "adequate" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity (as our criteria define the terms). Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in Peru is 'bbb'. Our economic risk score for Peru is '5', reflecting our opinion that economic improvements and the government's commitment to maintaining cautious fiscal policies and economic stability have strengthened its ability to withstand significant external shocks. In addition, the Peruvian economy is expanding, although this is not creating economic imbalances, in our opinion. However, the financial system's still-high, albeit decreasing, foreign currency exposure poses some risk. In this sense, if our view on macroeconomic stability deteriorates, our credit risk in the economy assessment could deteriorate. Our industry risk score for Peru is '4', reflecting sound regulations, regulators' strong track record, and the banking system's stable share of core deposits. We view the banking industry as stable and there is few market distortions. Although the private pension system has helped deepen the domestic capital market, we believe the market remains narrow. Scotiabank Peru has a diversified business profile, with active participation in both retail and wholesale banking. We view business position as the bank's major credit strength in our assessment of its SACP. With total assets of about $36.1 billion as of Sept. 30, 2012, the banks is Peru's third-largest financial institution with a market share of about 15% in terms of total loans and 13% in terms of deposits. In addition, the bank's loan portfolio is well diversified: commercial loans account for 59%, mortgages 16%, small business and microcredit 10%, personal loans 8%, and credit cards 5%. We believe Scotiabank Peru will continue taking advantage of its relatively high economies of scale, operating expertise through its parent, and good prospects for the Peruvian economy to maintain its sound profitability. We also expect that it will maintain its good operating efficiency, by expanding business volumes, and healthy asset quality, which should result in a good return on average assets (ROAA) ratio of about 2.6% despite a potential further decrease in spreads amid high competition in the Peruvian financial system. We view Scotiabank Peru's capital and earnings as "adequate," based on our projected risk-adjusted capital (RAC) ratio before diversification of about 8.8% for the next 12-18 months. Our forecast is based on our base-case scenario of loan growth of about 15% for 2012 and 2013, relatively stable net interest margins and return on assets, and a dividend payout of 30%. We consider Scotiabank Peru's quality of capital and earnings as strong, given its capital is 100% composed of Tier 1 capital and its profitability has remained sound over time. We assess the bank's earnings capacity as adequate because we expect its earnings buffer to be around 2.2%. Our risk position assessment for Scotiabank Peru is also "adequate." We consider that the bank's loan portfolio is well diversified by customer base and economic sectors and that it will likely remain healthy because of the solid Peruvian economy. In addition, the bank is not significantly exposed to single-name concentration: the bank's top 20 exposures represented about 14% of its total portfolio as of September 2012. Scotiabank Peru's good underwriting capabilities supported by the oversight of its parent result in low nonperforming loans (NPLs), which were only 1.6% of total loans as of Sept. 30, 2012. Also, net charge-offs represented only 1.1% of average customer loans, and loan loss reserves were a good 2.1x of NPLs as of Sept. 30, 2012. We view Scotiabank Peru's funding profile to be in line with the industry, with deposits representing about 74% of its funding base. We consider that the bank benefits from a relatively large retail deposit base and the growing Peruvian economy. In addition, the bank has fluid access to the domestic and global capital markets. Our assessment of its liquidity as "adequate" reflects its liquid assets (cash and money market instruments, securities available for sale and trading securities) that account for about 23% of total assets and 29% of total deposits as of Sept. 30, 2012. The issuer credit rating is one notch lower than the 'bbb+' SACP, because we consider that Scotiabank Peru doesn't meet the requirements to be rated above the sovereign foreign currency credit rating. However, we consider Scotiabank Peru to be a strategic subsidiary of The Bank of Nova Scotia (BNS; A+/Stable/A-1), which owns 97.7% of the bank. Outlook The positive outlook reflects our view that we would raise the ratings on Scotiabank Peru following an upgrade of the sovereign. Since we consider Scotiabank Peru a strategic subsidiary of BNS, a deterioration in the bank's SACP of up to two notches wouldn't harm its ICR, because we incorporate notches of uplift of parent support. We expect the bank will maintain its strong market position in the Peruvian financial system, healthy asset quality, and good profitability, capitalization, and liquidity during the next two years. Ratings Score Snapshot Issuer Credit Rating BBB/Positive/A-2 SACP bbb+ Anchor bbb Business Position Strong (+1) Capital and Earnings Adequate (0) Risk Position Adequate (0) Funding and Liquidity Average and adequate (0) Support +3 GRE Support 0 Group Support +3 Sovereign Support 0 Additional Factors -4 Related Criteria And Research -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Banks: Rating Methodology And Assumption, Nov. 9, 2011 -- Group Rating Methodology And Assumptions, Nov. 9, 2011 -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 Ratings List Ratings Affirmed Scotiabank Peru S.A.A. Counterparty Credit Rating BBB/Positive/A-2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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