Fitch Affirms Scotiabank Peru S.A.A. at 'A-'; Stable Outlook

Tue May 27, 2014 4:24pm EDT

(The following statement was released by the rating agency) NEW YORK, May 27 (Fitch) Fitch Ratings has affirmed Scotiabank Peru S.A.A.'s (SBP) Viability Rating (VR) at 'bbb+' and its foreign and local currency Issuer Default Ratings (IDRs) at 'A-' and 'A+', respectively. A full list of rating actions follows at the end of this press release. KEY RATING DRIVERS IDR and Support Rating SBP is considered a strategic subsidiary of the Bank of Nova Scotia (BNS; rated 'AA-'/Outlook Stable by Fitch). Hence, in Fitch's opinion, there is a high probability that SBP would receive support from its parent, should it be required, provided that SBP does not suffer from a systemic risk event. BNS's potential support underpins SBP's IDRs and support rating. VR SBP's, VR is driven by its sound capital; ample margin and consistent performance; robust asset quality and reserves; strengthened franchise; improved funding structure and cost; positive operating and regulatory environment and heightened competition. Improved performance, sound internal capital generation, and, from the outset, significant fresh capital contributions from its parent, resulted in a solid capital base that compares well to that of its local and regional peers. Continued growth should slightly erode capital ratios, but they are likely to remain strong and consistent with SBP's ratings. SBP's loan mix has a higher proportion of retail and SME portfolio. Thus, it has a higher yield which combined with continued growth, as well as contained operating expenses and loan loss provisions result in a consistent and strong profitability. Efficiency remains sound and compares well against its regional peers. Solid portfolio growth and successful collection efforts helped SBP manage its legacy 'bad bank' and consistently improve asset quality. Past-due loans (PDLs) are in line with the average in Peru but remain sound relative to those of regional peers. PDLs are adequately covered by reserves, and sound risk management policies underpin their stability. BNS created a sound franchise from the merger of two local banks and the subsequent acquisition of a consumer/microfinance company. After a lengthy merger process, the bank consolidated its position as a universal bank with a stronghold on the corporate segment and growing retail operations. SBP's funding mix has improved in favor of lower cost demand deposits, thus underpinning funding costs and margins. In addition, the increasing importance of capital markets funding contributes toward improving asset/liability gaps. Peru's economy shows strong growth momentum based on sound macro fundamentals. In addition, a proactive regulator, eager to take the lead and apply pre-emptive remedies, has created a strong regulatory environment. Peru's economic growth and banks' profitability have spurred competition from existing players and newcomers. Strong regulation keeps aggressive players in check, while low banking penetration means the pie is growing for all. The Stable Outlook reflects Fitch's belief that the bank's environment and performance are resilient to eventual downturns. SUBORDINATED DEBT SBP's subordinated bonds are plain vanilla and lack the features that would earn them equity credit following Fitch's criteria. In Fitch's opinion, their probability of non-performance is equivalent to that of SBP's senior bonds but, they would entail a higher loss in case of default due to their subordinated nature. Hence, they would normally be rated only one notch below the bank's local currency IDR (LC IDR) but, the bonds' rating is constrained by the country ceiling and therefore the bonds are rated at that level, two notches below SBP's LC IDR. RATING SENSITIVITIES IDR and Support Rating Sovereign Upgrade: SBP's foreign currency IDR would be upgraded should Peru's sovereign rating and country ceiling be upgraded. Downward risk for the bank's IDRs is limited given its parent support but the IDRs could also change if Fitch's assessment of BNS's ability or willingness to support SBP changes. VR SBP's VR could be upgraded if the bank maintains good asset quality (90-days PDLs below 3.5%) and a solid performance (Operating ROA above 2%) amid a stable environment as evidenced by a higher sovereign rating. On the other hand, should asset quality deteriorate (90-day PDLs above 3.5%) or profitability sharply decline (operating ROAA below 2%), its VR would be pressured downwards. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt ratings would move in line with SBP's LC IDR. Fitch affirms SBP's ratings as follows: --Long-term foreign currency IDR at 'A-'; Outlook Stable; --Short-term foreign currency IDR at 'F1'; --Long-term local currency IDR at 'A+'; Outlook Stable; --Short-term local currency IDR at 'F1'; --Support rating at '1'; --Subordinated debt at 'A-'; --Viability rating at 'bbb+'. Contact: Primary Analyst Diego Alcazar Director +1-212-908-0396 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Larisa Arteaga Director +1-809-563-2481 Committee Chairperson Alejandro Garcia Senior Director +52-81-8399-9146 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); --'Assessing and Rating Bank Subordinated and Hybrid Securities' (Jan. 31, 2014). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities 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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