-- 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.
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
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.
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.
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
Ratings Score Snapshot
Issuer Credit Rating BBB/Positive/A-2
Business Position Strong (+1)
Capital and Earnings Adequate (0)
Risk Position Adequate (0)
Funding and Liquidity Average and adequate (0)
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
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. Use the Ratings search box located in the left