Corpbanca S.A. Major Rating Factors

Transcription

1 Publication date: 12-Sep-2006 Reprinted from RatingsDirect Corpbanca S.A. Primary Credit Analyst: Carina Lopez, Buenos Aires (54) ; Secondary Credit Analyst: Federico Rey-Marino, Buenos Aires (54) ; Major Rating Factors Rationale Outlook Profile Ownership And Legal Status Strategy Accounting CREDIT RATING Outstanding Rating(s) Counterparty Credit Credit Rating History Sept. 14, 2004 BBB+/Stable/A-2 BBB+/Stable/A-2 BBB+/A-2 Asset Quality Profitability Asset-Liability Management Capital Sovereign Rating Local Currency Foreign Currency Chile (Republic of) AA/Stable/A-1+ A/Stable/A-1 Major Rating Factors Strengths: Increasing market participation in strategic business segments Good asset quality with well-developed credit policies and procedures Adequate profitability, though currently affected by higher operating expenses arising from the new business model Strong capitalization, well above the market average Operating in the Chilean low-risk environment Weaknesses: Funding profile somewhat dependent on institutional investors, with still-low participation of sight deposits from an atomized customer base Weaker liquidity position, though expected to improve in the short term Operating in an increasingly competitive environment Rationale The ratings on Corpbanca S.A. reflect its adequate market position as one of the leading midsize banks in the Chilean financial system, and its increasing penetration in strategic business segments. The ratings also reflect the bank's good financial profile, evidenced by healthy asset quality indicators; adequate profitability; and a strong capital base. These positive factors are counterbalanced by the relatively high concentration of deposits in the institutional segment (though still bellow the maximum limits that result in additional financial flexibility), a somewhat deteriorated liquidity position, and the increasingly competitive Chilean environment.

2 Corpbanca's recent performance has been influenced by the bank's decision to redefine its corporate strategy. With a traditional focus on wholesale banking, Corpbanca is currently concentrated on becoming a more retail oriented bank, targeting higher-yielding segments, such as the middle market and small and midsize enterprise (SME) segments and the individual sector. In this regard, the bank has been actively investing in its branch network, in the reorganization of business processes, in the development of new products, and in strengthening the bank's brand image. After growing above the market average in recent years, Corpbanca's lending portfolio has been growing at a slower pace since Although the bank has slightly reduced its market share due to the weaker growth in the corporate portfolio, higher penetration in strategic business lines-such as consumer financing, credit cards, and housing mortgages-has been obtained. Despite the strong increase in riskier business segments, asset quality indicators have remained strong. Looking forward, Standard & Poor's Ratings Services expects Corpbanca to increase penetration in the strategically important individual segment. Although further improvements in terms of asset quality are not expected, solid asset quality indicators should remain. Historically, Corpbanca has been able to post profitability above the system average. Nevertheless, first-half 2006 results were affected by higher operating expenses derived from the expansion of the bank's commercial network, and by lower trading gains due to the bank's decision to gradually liquidate its investment portfolio. On the other hand, fee income increased substantially as a result of the increasing penetration of fee-based products. In the short term, we expect the bank to continue to show profitability slightly below the market average, given higher operating expenses aimed at developing new products and restructuring operative and commercial areas. In the medium term, we expect the bank to gradually increase profitability, in line with the improved asset mix, higher fees, and increasing operating efficiencies. In terms of its funding base profile, Corpbanca will continue to face the challenge of increasing diversification given its dependence on institutional investors. Although this situation is perceived as a weakness, the high degree of development of the Chilean pension fund system has provided the bank with a stable and relatively low-cost deposit base. The bank will also face the challenge of increasing its liquidity position after the significant reduction of its investment portfolio aimed at reducing its exposure to market volatility. With total assets of Chilean pesos (ChP) 3,322 billion (or $6,070 million at ChP547.3 to $1) and a market participation of 6.2% in terms of loans as of June 30, 2006, Corpbanca is Chile's sixth-largest financial institution. Controlled by the Saieh Bendeck family, the bank focuses on commercial and consumer banking, delivering a wide range of universal bank products. Outlook The stable outlook reflects our expectation that Corpbanca will be able to maintain a consistent strategy in the highly competitive Chilean market, increasing penetration in strategically important business segments and maintaining healthy asset quality indicators. The outlook also incorporates the recovery of the bank's liquidity position and improvements in profitability. A consistent increase in the bank's market participation, a more diversified business profile, and the successful implementation of the bank's new strategy could result in a positive rating action. On the other hand, the deterioration of the bank's profitability, a strong decline in its asset quality indicators, and a weaker liquidity position could result in a negative rating

3 action. Profile With total assets of ChP3,322 billion ($6,070 million) as of June 30, 2006, Corpbanca is Chile's sixth-largest financial institution. The bank focuses on commercial and consumer banking, delivering a wide range of universal bank products. Corpbanca also complements its business through affiliates, participating in stockbrokerage, mutual funds, financial consulting, and insurance. While its overall market share of 6.2% of total loans is smaller than that of its direct competitors, the bank's large clientele base and its agile structure should help further its market position. Operating since 1871, Corpbanca has a long track record in the market. In 1995, the bank began to focus on growth in profitable segments and cost efficiency. The change in strategy was initiated by a new controlling group that was able to direct the bank for growth and reinforce its financial position. From December 1995 to June 2006, the institution's market share in terms of lending more than doubled, from a small 2.8% to the current 6.2%, due to commercial efforts and acquisitions related to retail banking. In the retail segment, the institution has expanded its market, encompassing from the high-income to the middle-low income segments. This expansion was also supported by the acquisition of Financiera Condell and the acquisition of Corfinsa's portfolio in Mortgage lending has also increased its participation in the bank's total portfolio, through which the bank expects to further increase cross selling between products and services by customers. Although bellow the market average, the bank has also expanded its operation in the wholesale segments. In the context of an increasing disintermediation process in the Chilean banking system, in 2005 the bank decided to redefine its corporate strategy, aiming at becoming a more retail oriented bank. Since then, the bank has been actively investing in its branch networks, and in developing new products. The bank's agile structure and technological support releasing sales officers to commercialization efforts should back future growth. With more than 68 branches (including Corpbanca and Bancondell brands), the bank benefits from an adequate countrywide distribution network. Ownership And Legal Status With a 49.59% stake in the bank as of March 31, 2006, Corpbanca is controlled by Corp Group Banking S.A., which in turn is controlled by Alvaro Saieh Bendeck and family. The ownership structure changed following the bank's intervention in the aftermath of the Chilean banking crisis in After the intervention of the Superintendecia de Bancos e Instituciones Financieras, the bank started to be managed by Sociedad Nacional de Minería in Given difficult market conditions, in 1995 the bank was sold to the former owners of Banco Osorno and Unión. Since then, Corpbanca has undergone a radical transformation process, becoming an important player within the Chilean financial system. Since Corp Group Banking S.A. took over, business growth has been supported by a continuous expansion of capital and a moderate pay out policy, pointing to the shareholders' commitment to develop a solid institution. In 1997, shareholders contributed nearly $157 million to pay down subordinated debt held by the institution with the Central Bank. In December 2002, through an IPO of its equivalent 25% shares, the bank raised additional

4 ChP109 billion in the stock exchange. As a result of the process, ownership was diversified to other shareholders, with the maintenance of Corp Group Banking S.A. as the major one. Corp Group Banking S.A. is indirectly controlled by the Saieh Bendeck family, the former owners of Banco Osorno, through their approximately 58% share of the group. This group of shareholders is represented on the board of directors and establishes the bank's chief strategy. Day-to-day business is run by a capable management team that has been successful in implementing a strategy of profitable growth, cost control, and risk management, managing to both strengthen the bank's franchise and preserve its strong fundamentals. Strategy Since the beginning of the decade, Corpbanca has been focused on strengthening its position as one of the leading midsize banks in the Chilean financial system. A consistent strategy based on an agile structure and clientele knowledge has allowed the bank to increase market share in strategic business lines, despite the increasing competition in the local banking system. Corpbanca has also been able to present above-average profitability, based on a strict cost control policy that has resulted in the bank becoming one of the most efficient banks, despite its lower scale of operations. In the context of an increasing disintermediation process in the local banking system-resulting from the expansion of the local capital markets and the companies' ability to tap international markets-coupled with increasing competition in a still-low interest rate context, Corpbanca decided to redefine its corporate strategy in With a traditional focus on wholesale banking, Corpbanca is currently concentrated on becoming a more retail oriented bank, targeting higheryielding segments, such as the middle market and SME segments and the individual sector. In accordance with the new corporate strategy and to develop a friendlier banking experience, Corpbanca has been investing in its branch network. During 2006, the bank opened three new Bancondell branches, the bank's consumer finance arm that competes with other local banks in lower income segments. In addition, to increase cross-selling opportunities, Corpbanca has strengthened its presence in mortgage lending, a line of business that it has been growing faster than the market average. The bank has also been very active in terms of credit cards, having signed an agreement with American Express. To support its strategy, the bank has been redesigning operating procedures and has increased its employee base. The bank has also been very active in terms of marketing campaigns and publicity. Although the bank has historically managed a consistent strategy, Corpbanca will face the challenge of developing its new business plan in the highly competitive Chilean market. Accounting Overall, Chilean accounting regulations for banks are consistent with the best practices set by international standards, in line with the country's leadership in Latin America in terms of transparency and quality of the regulatory

5 framework. Most recent changes include the new accounting rules for the valuation of securities and derivatives, in line with international standards. The first one includes the classification of securities in accordance with the banks' intent and ability to hold the securities as "held to maturity," "trading," and "available for sale." One of the few flaws in the accounting conventions is posed by the fact that banks account as past-due loans only the portion of the loan that is overdue, while the rest of the loans' balances remain part of the performing portfolio until their situation becomes litigious. Corpbanca is analyzed on a consolidated basis. Asset Quality After growing faster than the market average during recent years, Corpbanca's lending portfolio has been growing at a slower pace since 2005 as a result of the change in its corporate strategy. Although the bank has slightly reduced its market share, higher penetration in strategic business lines has been obtained, maintaining healthy asset quality indicators. As of June 30, 2006, the loan portfolio (excluding interbank loans and contingent loans) amounted to ChP2,769 billion ($5,059 million), recording a 13.1%, year over year increase, bellow the 19.1% posted by the financial system as a whole. The lower-than-average performance in terms of portfolio growth was mainly attributable to weaker performance of the commercial portfolio, which grew approximately 4% during the 12 months ended June This is mainly the result of the bank's decision to reduce exposure to large corporate clients and increase intermediation in the higher-yielding middle market and SME segments. On the other hand, Corpbanca has been able to reach noteworthy increases in terms of individual lending-an area of business that presents higher strategic importance-outperforming the market average. During the 12 months ended June 2006, the individual portfolio increased by 26%, above the 19% posted by the financial system. This remarkable increase was mainly fueled by the bank's commercial efforts to increase penetration in the housing mortgage business, which grew 34% year over year, well above the 22% recorded by the financial system. The bank also outperformed the system's growth in terms of consumer financing, reflecting a 20% year-over-year increase. The bank has a conservative credit culture, with a defined credit approval process, and maintains strict credit risk controls of the problematic portfolio. As in the underwriting credit process, the bank follows a conservative approach to provisioning. Loan-loss reserves have historically exceeded the balance of nonperforming loans. Though slightly deteriorating as a result of the increasing weight of the individual portfolio, Corpbanca's asset quality indicators continued to be strong. As of June 30, 2006, the nonperforming ratio (excluding interbank loans and contingent loans) slightly increased to 1.02%, from 0.96% at the end of The coverage with provisions also deteriorated slightly, decreasing to 164% from 177% at the end of 2005.

6 Given its traditionally wholesale banking profile, Corpbanca presents a somewhat concentrated loan portfolio. Nevertheless, the more retail-oriented strategy has allowed the bank to gradually reduce its portfolio concentration. As of March 31, 2006, the 20 largest exposures accounted for 12.8% of the bank's lending portfolio and represented 87% of its total equity. Looking forward, although we expect lower-than-average growth, we expect Corpbanca to further penetrate higher-yielding segments given the bank's new strategy. In line with this, we do not expect further improvements in terms of asset quality, although asset quality indicators are expected to remain solid. In addition, further improvements in portfolio concentration are expected, in line with the higher participation of SMEs and consumer financing. Profitability Historically, and despite competitive pressures in the Chilean financial system, Corpbanca has been able to post profitability above the system average (in terms of ROAA), thanks to adequate net interest margins, good fee income, and improving operating efficiencies. During 2005, ROAA reached 1.69%, above the 1.27% posted by the system as a whole. Nevertheless, lower trading results and higher noninterest expenses affected the bank's first-half 2006 results. The increase in short-term interest rates toward the end of 2005 negatively affected the bank's investment portfolio. To reduce its exposure to a relatively more volatile interest rate environment, the bank decided to gradually liquidate its investment portfolio and recognize the loss. In this regard, the bank's trading gains (net) decreased 64% year over year. By taking this decision, the bank also reduced interest income, as it no longer receive interest income in connection with the liquidated assets. Higher operating expenses in connection with the bank's new corporate strategy also affected Corpbanca's first-half 2006 results. Higher personnel and administrative expenses arising from increased commercial and backoffices activities resulted in noninterest expense increasing by 12%. During first-half 2006, the noninterest expense-to-revenues ratio deteriorated to 56%, from 46% during first-half On the other hand, fee income recorded a notable 34% year-over-year increase, representing 21% of the bank's operating revenues (versus 14% during first-half 2005). This increase is the result of Corpbanca's efforts to increase penetration of its recently developed fee-based products and improved collection processes. During first-half 2006, net earnings amounted to ChP17,845 million, representing a 29.9% year-over-year decrease. In line with this, ROAA decreased to 1.13% from 1.52%. In conclusion, although the bank's net results have decreased, we believe that the reduction in the total impact of trading gains over its operating revenues and the increase in fee income will provide Corpbanca with a more stable revenue base over the medium run. In the short term, we expect the bank to continue to show profitability slightly above the market average, given higher operating expenses aimed at developing new products and restructuring operative areas. In the medium term, we expect the bank to gradually improve profitability, in line with the improved asset mix due to higher penetration in more profitable business segments, higher fees, and increased operating efficiencies.

7 Asset-Liability Management Though concentrated as result of its dependence on institutional investors, Corp Banca's funding structure is adequate and stable. As of June 30, 2006, customer deposits represented 68% of its funding base. Although the dependence on institutional funding is perceived as a weakness, the high degree of development of the Chilean pension fund system has provided the bank with a stable and relatively low-cost deposit base. Given its traditionally wholesale-oriented profile, Corpbanca presents lowerthan-average sight deposits over its funding base. Nevertheless, we expect the more retail-oriented strategy designed by the controlling group to result in an increasing participation of individual deposits over total deposits in the medium term. The bank also benefits from adequate access to capital markets, which provide an additional source of funds. Other funding sources include borrowings from local and foreign financial institutions that have historically supported the bank's operations. Corpbanca presents a well-matched balance sheet in terms of currency. Nevertheless, it presents a long position in inflation adjusted assets based on the expectation of slight increases in inflation rates in the short term. In line with the new corporate goals, the bank has decided to reduce its investment portfolio's exposure. During first-half 2006, the bank decided to gradually liquidate its holdings in the context of rising interest rates. Although this situation led to a reduction in the bank's liquidity position (as the funds raised were applied to repay deposits), the bank still presented ratios above the regulatory requirement. In the short term, we expect the bank to gradually recover its liquidity position. In addition, in recent years, the bank has tried to improve its asset-liability management, which included the further formalization of policies and better measurement and control of risks and enhanced quality of information. The internal limits set on interest rate and foreign currency gaps are acceptable and more conservative than those established by Chilean regulations. Capital The bank's capital level is strong, giving room for loan portfolio expansion over the medium term. Corpbanca also benefits from an adequate revenue stream that provides the bank with an additional source to finance portfolio growth. The bank's moderate payout policy (50% of the bank's earnings during the past five years) also helps maintain strong capitalization levels. As of June 30, 2006, the adjusted equity-to-adjusted assets ratio was 13.2%, slightly improving from 11.0% at December 2005 and well above the system's average of 7.0%. At June 2006, the Basle ratio improved to a healthy 14.4%. Capital is supported by subordinated debt, but mainly by a strong core capital base. Table 1 Balance Sheet Statistics --Year ended Dec Breakdown as a % of assets (adj.)

8 (Bil. ChP) - Assets Cash and money market instruments Securities Trading securities (marked to market) Nontrading securities Loans to banks (net) Customer loans (gross) 2,769 2,598 2,251 1,909 1,561 1, Other consumer loans Total real estate loans Foreign loans Commercial/corporate loans 1,357 1,303 1, All other loans Loan loss reserves Customer loans (net) 2,723 2,554 2,210 1,865 1,523 1, Earning assets 2,917 3,046 2,780 2,378 1,865 1, Equity interests/participations (nonfinancial) Fixed assets All other assets Total reported assets 3,322 3,456 3,202 2,787 2,227 1, Less commitments and guarantees on B/S (238) (227) (197) (198) (142) (108) Adjusted assets 3,084 3,230 3,005 2,589 2,085 1, Breakdown as a % of liabilities + equity Liabilities Total deposits 2,010 2,203 2,087 1,885 1,483 1, Noncore deposits Core/customer deposits 1,943 2,158 2,069 1,816 1,468 1, Repurchase agreements Other borrowings Other liabilities Total liabilities 2,915 3,049 2,825 2,448 1,923 1, Total shareholders' equity Common shareholders' equity (reported) Share capital and surplus Reserves (incl. inflation revaluations) (0) (5) (0.01) (0.15) Retained profits Total liabilities and equity 3,322 3,456 3,202 2,787 2,227 1, Tangible total equity Tangible common equity Adjusted common equity Adjusted total equity *Data as of June 30, Ratios annualized where appropriate. Table 2 Profit and Loss Statement Statistics

9 --Year ended Dec Adj. avg. assets (%) (Bil. ChP) - Profitability Interest income Interest expense Net interest income Operating noninterest income Fees and commissions Equity in earnings of unconsolidated subsidiaries Trading gains Other noninterest income (2) (4) (3) (0.15) (0.12) (0.11) Operating revenues Noninterest expenses Personnel expenses Other general and administrative expense Depreciation and amortization-other Net operating income before loss provisions Credit loss provisions (net new) Net operating income after loss provisions Nonrecurring/special income Nonrecurring/special expense Pretax profit Tax expense/credit (1) (0.08) (0.03) Net income before minority interest Net income before extraordinaries Net income after extraordinaries Core earnings Asset Quality Nonperforming assets Nonaccrual loans Net charge-offs Average balance sheet Average customer loans 2,638 2,382 2,037 1,694 1,405 1,183 Average earning assets 2,981 2,913 2,579 2,121 1,743 1,508 Average assets 3,389 3,329 2,994 2,507 2,082 1,805 Average total deposits 2,107 2,145 1,986 1,684 1,418 1,268 Average interest-bearing liabilities 2,928 2,897 2,619 2,170 1,817 1,625 Average common equity Average adjusted assets 3,157 3,117 2,797 2,337 1,957 1,708 *Data as of June 30, Ratios annualized where appropriate. Table 3 Ratio Analysis --Year ended Dec. 31--

10 ANNUAL GROWTH (%) Customer loans (gross) Loss reserves (5.87) Adjusted assets (9.01) Customer deposits (19.92) Tangible common equity (0.06) Total equity (0.06) Operating revenues (10.13) Noninterest expense (2.21) (9.20) Net operating income before provisions (25.48) 1.42 (2.76) Loan loss provisions (23.67) (29.06) Net operating income after provisions (33.63) Pretax profit (32.43) Net income (32.19) PROFITABILITY (%) Interest Margin Analysis Net interest income (taxable equiv.)/avg. earning assets Net interest spread Interest income (taxable equiv.)/avg. earning assets Interest expense/avg. interest-bearing liabilities Revenue Analysis Net interest income/revenues Fee income/revenues Market-sensitive income/revenues Noninterest income/revenues Personnel expense/revenues Noninterest expense/revenues Noninterest expense/revenues less investment gains Expense less amortization of intangibles/revenues Expense less all amortizations/revenues Net operating income before provision/revenues Net operating income after provisions/revenues New loan loss provisions/revenues Net nonrecurring/abnormal income/revenues (0.07) (0.87) (1.43) (1.33) (14.04) (5.76) Pretax profit/revenues Net income/revenues Tax/pretax profit (4.38) (1.67)

11 OTHER RETURNS Pretax profit/avg. risk assets (%) N.A N.A. Net income/avg. risk assets (%) N.A N.A. Revenues/avg. risk assets (%) N.A N.A. Net operating income before loss provisions/avg. risk assets (%) N.A N.A. Net operating income after loss provisions/avg. risk assets (%) N.A N.A. Net income before minority interest/avg. adjusted assets Net income/avg. assets + securitized assets Cash earnings/avg. tang. common equity (ROE) (%) Core earnings/avg. tang. common equity (ROE) (%) FUNDING AND LIQUIDITY (%) Customer deposits/funding base Total loans/customer deposits Total loans/customer deposits + long-term funds Customer loans (net)/assets (adj.) CAPITALIZATION (%) Adjusted common equity/adjusted assets Adjusted common equity/adjusted assets + securitization Adjusted common equity/risk assets N.A Adjusted common equity/customer loans (net) Internal capital generation/prior year's equity Regulatory total capital ratio Adjusted total equity/adjusted assets Adjusted total equity/adjusted assets + securitizations Adjusted total equity/risk assets N.A Adjusted total equity plus LLR (specific)/customer loans (gross) Common dividend payout ratio ASSET QUALITY (%) New loan loss provisions/avg. customer loans (net) Net charge-offs/avg. customer loans (net) Loan loss reserves/customer loans (gross) Credit-loss reserves/risk assets N.A Nonperforming assets (NPA)/customer loans + ORE NPA (excl. delinquencies)/customer loans + ORE Net NPA/customer loans (net) + ORE (0.66) (0.76) (0.99) (0.98) (0.63) (0.79) NPA (net specifics)/customer loans (net specifics) (0.66) (0.76) (0.99) (0.98) (0.63) (0.79)

12 Loan loss reserves/npa (gross) *Data as of June 30, Ratios annualized where appropriate. N.A.--Not available. This report was reproduced from Standard & Poor's RatingsDirect, the premier source of real-time, Web-based credit ratings and research from an organization that has been a leader in objective credit analysis for more than 140 years. To preview this dynamic on-line product, visit our RatingsDirect Web site at Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY Editorial offices: 55 Water Street, New York, NY Subscriber services: (1) Copyright 2006 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities.