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

Fri Mar 28, 2014 11:57am EDT

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(The following statement was released by the rating agency) NEW YORK, March 28 (Fitch) Fitch Ratings has affirmed Banco del Estado de Chile's (Banco Estado) foreign and local currency long-term Issuer Default Ratings (IDR) at 'A+' and 'AA-', respectively, and its Viability Rating (VR) at 'bbb'. A complete list of rating actions is provided at the end of this release. KEY RATING DRIVERS - IDRs, VR, SENIOR UNSECURED DEBT, SUPPORT RATING, SUPPORT RATING FLOOR AND NATIONAL RATINGS Banco Estado's IDRs are driven by the extremely high probability of support from its owner, the State of Chile. The bank is not a company by shares and relates with the Chilean Government through the Ministry of Finance. Banco Estado represents an important instrument of the State of Chile for developing credit and monetary policies, plays a strategic social role for the government and has a systemic importance. Based on these drivers, the bank's IDRs are aligned with Chile's Sovereign foreign currency IDR ('A+'; Outlook Stable) and local currency IDR ('AA-'; Outlook Stable), and they also underpin its high support rating of '1' and support rating floor of 'A+'. Banco Estado's VR reflects its strong liquidity given its high proportion of liquid assets (33.70% of its total assets as of Dec. 31, 2013), and sound structural funding based on a wide solid customer base. The bank's market position 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 at the end of 2013. During 2013, Banco Estado showed good overall financial performance in spite of high level of competition. The bank's VR is limited by its low capital base, and lower, albeit improving, credit quality in mortgage loans portfolio (although with a strong guarantee and additional provisions position) compared to local and international private peers (emerging market commercial banks with VR in the 'bbb' category). Banco Estado's profitability levels have historically been limited compared to its private sector peers. However, its financial performance has been very stable, showing an acceptable level of profitability in the past three years considering its state owned nature. 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 branch network, high personnel expenses and its role in fostering bancarization levels in Chile. The current administration has included efficiency among its key strategic objectives, although Fitch considers material advances in this regard only could be achieved over the medium to long term. Banco Estado has been able to consistently improve its past due loans to gross loans ratio in the past four years (3.65% as of Jan. 31, 2014 from 5.42% in 2009) and reserve coverage levels (129.94% as of Dec. 31, 2013 from 56.94%), reducing the gap with local and international peers. Fitch highlights Banco Estado's mortgage loans' credit quality drives its NPL ratio level and trend (7.98% as of Dec. 31, 2012 from 11.34% in 2009), although it is important to note that 33.7% of total mortgage loans carry a state guarantee. Fitch believes that Banco Estado's equity ratios will slightly improve during 2014, although still comparing unfavourably with local and international peers. Fitch also highlight that Banco Estado's current capital levels are considered acceptable due to its ample loan loss reserve cushion and the extremely high propensity and ability of the State of Chile to strengthen the bank's position if needed. In Fitch's opinion, Banco Estado's national ratings reflect the lowest expectation of default risk relative to all other local issuers or obligations, explained by the extremely high probability of government support. Banco Estado's senior unsecured foreign currency bonds are rated at the same level of the bank's IDR, considering the absence of credit enhancement or subordination feature. Fitch rates the national subordinated debt of Banco Estado two notches below its national long-term issuer rating. Fitch used the bank's long-term national 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 support into Banco Estado's subordinated bonds with gone-concern loss-absorption feature. The two notch difference considered the loss severity due to its subordinated nature (after default). RATING SENSITIVITIES - IDRs, VR, SUPPORT RATING, SUPPORT RATING FLOOR AND NATIONAL RATINGS The Rating Outlook for the long-term IDRs and national rating is Stable, the same as the outlook of the sovereign ratings. Changes in the bank's IDRs, support, support rating floor and national ratings are contingent to sovereign rating actions for Chile. Bancos Estado's VR could be downgraded if the bank maintains its current capital levels and fails to improve its Fitch Core Capital (FCC) ratio to a minimum of 7% by end-2014, or due to a material deterioration in asset quality (NPLs rising to 6%) that reduce its loss absorption capacity, although the latter is not Fitch's base case scenario. Fitch has affirmed Banco Estado's ratings as follows: --Foreign currency long-term IDR at 'A+'; Outlook Stable; --Local currency long-term IDR at 'AA-'; 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)'; --Short-term national rating at 'N1+(cl)'; --National long-term rating senior unsecured bonds at 'AAA(cl)'; --National long-term rating on its subordinated bonds at 'AA(cl)'. Contact: Primary Analyst Diego Alcazar Director +1-212-908-0396 Latin America Financial Institutions Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Santiago Gallo Director +56-2-499-33-20 Committee Chairperson Maria Rita Goncalves Senior Director +5521-4503-2621 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Jan. 31, 2014). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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