Banco del Estado de Chile

Transcription

1 Primary Credit Analyst: Cynthia Cohen Freue, Buenos Aires (54) ; Secondary Contact: Ivana L Recalde, Buenos Aires (54) ; ivana.recalde@standardandpoors.com Table Of Contents Major Rating Factors Outlook Rationale Related Criteria And Research APRIL 24,

2 SACP a- + Support +3 + Additional Factors 0 Anchor Business Position bbb+ Strong +1 GRE Support +3 Issuer Credit Rating Capital and Earnings Moderate -1 Risk Position Adequate 0 Group Support 0 AA-/Stable/A-1+ Funding Liquidity Above Average Strong +1 Sovereign Support 0 Major Rating Factors Strengths: Extremely high likelihood of support from its owner, the government of Chile; Strong business position as the third-largest bank in Chile; Above average and diversified funding, given its access to a large and stable deposit base; and Operations in the low risk Chilean environment. Weaknesses: Moderate capital position based on our risk-adjusted capital (RAC) framework; and Weaker-than-average profitability. Outlook: Stable The stable outlook on Chilean bank Banco del Estado de Chile reflects the outlook on the Republic of Chile (foreign currency: AA-/Stable/A-1+; local currency: AA+/Stable/A-1+) and our expectation that Banco Estado will maintain its strong market position and social policy role. Due to our expectation of the "extremely high" likelihood of government support, the ratings on Banco Estado will move in tandem with the sovereign. A downgrade is possible if our view of the "extremely high" likelihood of support from the sovereign diminishes. Rationale The ratings on Banco Estado reflect its "strong" business position, "moderate" capital and earnings, "adequate" risk position, "above average" funding, and "strong" liquidity (all as defined in our criteria), and our view that there is APRIL 24,

3 "extremely high" likelihood that Chile would provide extraordinary and timely support to the bank in the event of a financial distress. Anchor: For a bank operating only in Chile is 'bbb+' 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. The anchor for banks operating only in Chile is 'bbb+'. Chile's economic resilience reflects many years of sound and consistent economic policies, such as strong fiscal performance, low inflation, and the creation of a healthy financial system. While GDP per capita--approximately $15,700 as of the end of remains relatively low compared with those of more developed countries or of Chile's peers in the BICRA group '3', it's among the highest in the region and the population's leverage capacity is comparatively stronger. Chile has manageable economic imbalances as a result of sustained credit expansion for the past three years and the 'moderate vulnerability' of its current account and external debt position. However, the country's ability to absorb the impact of external financial shocks has strengthened over time thanks to monetary flexibility, a rules-based fiscal policy, significant external assets, and capital market development. With regards to industry risk, we believe that Chile has a sound regulatory framework and healthy competitive dynamics. We also consider that the country's financial system has a healthy and diversified funding mix through deposits, market debt, and external debt (banks and market). Table 1 Banco del Estado de Chile Key Figures (Mil. CLP) Adjusted assets 25,452, ,086, ,840, ,781, ,869,698.0 Customer loans (gross) 14,786, ,894, ,587, ,416, ,078,493.0 Adjusted common equity 974, ,075, , , ,112.0 Operating revenues 1,014, , , , ,228.0 Noninterest expenses 601, , , , ,807.0 Core earnings 115, , , , ,065.0 CLP--Chilean peso. Business position: The only state-owned bank; strong market position in residential mortgages, student loans, debit cards, insurance, and micro-business lending We view the bank's "strong" business position as a credit strength in our assessment of its stand-alone credit profile (SACP). Banco Estado is the only state-owned bank and the third-largest bank in the country, accounting for 13% of total loans and 19% of deposits, as of end December The bank has a strong market position in residential mortgages, debit cards, insurance, micro-business lending, and student loans. Banco Estado has an objective of facilitating access to banking products, including transactional accounts, to the low-income population segment. It has a large presence through 360 branches and 11,435 remote service centers (also called CajaVecina Point of Sale Units) as of December Additionally, about 6.4 million customers use its CuentaRut card, a debit card that card holders can use to operate a transactional account for money transfers or even for purchases in retailers, as of December APRIL 24,

4 As a result, the bank controls a 44% debit card market share, a significant achievement in offering bank services to the wider population. Retail banking represents about half of the bank's loan portfolio, consisting of consumer loans, credit cards, and mortgage loans. Commercial banking represents the other half and includes middle-market companies. We expect Banco Estado to continue facilitating credit access for the low-income population, slightly decrease its share of subsidized residential mortgages, and increase its focus on small and middle market lending. Table 2 Banco del Estado de Chile Business Position (%) Return on equity Capital and earnings: Projected RAC ratio of about 5.1% We currently view Banco Estado's capitalization as moderate. Our projected RAC ratio before diversification is about 5.1% for the next 18 months. This reflects a base-case scenario that incorporates lending growth of about 6% for 2014 and 2015, and stable net interest margins and new loan loss provisions. Capitalization of dividends and potential capital injections of the bank depend on the government's economic policy plans. Given this variability, we have used a conservative 70% dividend payout for 2013 and 2014 in our projections. However, we expect the government to inject capital into Banco Estado to support its growth, as it did during 2009 when the bank increased its lending during the global financial crisis to maintain credit flow. Banco Estado has adequate quality of capital, with 100% of its total adjusted capital consisting of adjusted common equity. Earnings--although modest partly due to the high tax burden--have been stable, with adequate diversification. New regulatory changes require banking client's consent to increase or charge new banking fees or commissions, which will reduce fee revenues of all banks in Chile. However, we expect Banco Estado's increasing levels of client transactions --thanks to CuentaRut's significant growth--to offset this drop. Table 3 Banco del Estado de Chile Capital And Earnings (%) Tier 1 capital ratio Adjusted common equity/total adjusted capital Net interest income/operating revenues Fee income/operating revenues Market-sensitive income/operating revenues Noninterest expenses/operating revenues Preprovision operating income/average assets Core earnings/average managed assets Risk position: Loan portfolio well diversified among economic sector, business segments, and single name exposures Our risk position assessment for Banco Estado is "adequate." We consider the bank's loan portfolio to be well diversified among economic sectors, business segments, and single name exposures. We expect Banco Estado to APRIL 24,

5 continue focusing on segments where it has expertise with no material changes in its lending composition. But we expect it to slightly lower its lending of government-subsidized residential mortgages in its retail portfolio and increase its lending to smaller companies in its corporate portfolio. Banco Estado's asset-quality metrics, although weaker than the industry average mainly because of its high exposure to the low-income residential mortgage segment, have improved. Loans 90 days overdue represented 3.6% of the bank's total loans, compared with the industry average of 2%, as of December Nevertheless, about 34% of Banco Estado's mortgage exposures have both the residential property as guarantee and government guarantee for the uncovered amount. Moreover, the government guarantees 44% of the bank's nonperforming loans (NPLs) in the mortgage portfolio. If we were to deduct the guaranteed mortgage loans from its total NPLs, we estimate this ratio would be about 2.4%, which is similar to the industry average. Table 4 Banco del Estado de Chile Risk Position (%) Growth in customer loans Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans Net charge-offs/average customer loans Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets Funding and liquidity: One of the largest deposit bases in Chile; stable and relatively low cost funding We view Banco Estado's funding as "above average." The bank enjoys one of the largest deposit bases in Chile's financial system thanks to its nationwide distribution network and strong market position--a competitive advantage, given the deposits' stability and relatively low cost compared with other funding sources. As of December 2013, the bank had 19% of the system's total deposits, and customer deposits represented about 81% of the bank's funding base sources. Banco Estado's stable funding ratio (available stable funding divided by the sum of the funding base and total equity net of intangibles) was a high 125% on average for the past three years. Additionally, a high percentage of total deposits are sourced from the government either as payment of government employee salaries or as payment to government service providers. The issuance of bonds (senior and subordinated) accounts for about 16% of the bank's funding base. Banco Estado enjoys "strong" liquidity, as seen in its large portfolio of liquid assets, which include mainly cash and securities from other banks and the central bank. The bank's broad liquid assets to short-term wholesale funding was 4.2x on average for the past three years. Our view of Banco Estado's liquidity has improved as the bank's liquidity levels have been consistently stronger than the Chilean system average. Table 5 Banco del Estado de Chile Funding And Liquidity (%) Core deposits/funding base APRIL 24,

6 Table 5 Banco del Estado de Chile Funding And Liquidity (cont.) Customer loans (net)/customer deposits Long term funding ratio Stable funding ratio N/A Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) N/A Net broad liquid assets/short-term customer deposits N/A Short-term wholesale funding/total wholesale funding N/A--Not applicable. Support: Extremely high likelihood of support from its owner, the government of Chile Our assessment of "extremely high" likelihood that Chile would provide extraordinary and timely support to the bank is based on our assessment of Banco Estado's "very important" role, in accordance with our criteria for government-related entities (GREs), as a vehicle in promoting the low-income population segment's use of banking products and access to home ownership and the bank's "integral" link with the Chilean state, which fully owns the bank. Banco Estado and the Chilean government are integrally linked in terms of management, strategic and financial monitoring, coordination of debt issuance, as well as in fulfilling a public policy role. Because of these factors, we consider that there is the "extremely high" likelihood of support from Chile. As a result, our foreign currency issuer credit rating on the bank is three notches higher than its SACP, and our local currency issuer rating on the bank is four notches higher than its SACP. The difference between the local currency and foreign currency ratings is linked to the ratings on Chile. The higher local currency rating reflects Chile's pursuit of an inflation-targeting monetary policy through its central bank, with ample exchange rate flexibility. The domestic fixed-income market is well developed thanks to earlier pension reform, which opened up individually funded pension accounts to the private sector. Also, Chile enjoys above average fiscal flexibility thanks to low debt and a track record of budget surplus or minor deficits. Related Criteria And Research Related Criteria Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Rating Government-Related Entities, Dec. 9, APRIL 24,

7 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- Ratings Detail (As Of April 24, 2014) Banco del Estado de Chile Counterparty Credit Rating Foreign Currency Local Currency Senior Unsecured Counterparty Credit Ratings History AA-/Stable/A-1+ AA/Stable/A Dec-2012 Foreign Currency AA-/Stable/A Dec Dec-2007 AA- A+/Positive/A-1 A+/Stable/A-1 26-Aug-2013 Local Currency AA/Stable/A Dec Dec-2010 Sovereign Rating Chile (Republic of) Foreign Currency Local Currency AA-/Stable/A-1+ A+/Positive/A-1 AA-/Stable/A-1+ AA+/Stable/A-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. APRIL 24,

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