Banco Internacional del Peru-Interbank 'BBB-' Ratings Affirmed; Outlook Remains Stable

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1 Research Update: Banco Internacional del Peru-Interbank 'BBB-' Ratings Affirmed; Outlook Remains Stable Primary Credit Analyst: Cynthia Cohen Freue, Buenos Aires ; Secondary Contact: Ivana L Recalde, Buenos Aires (54) ; ivana.recalde@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List JUNE 16,

2 Research Update: Banco Internacional del Peru-Interbank 'BBB-' Ratings Affirmed; Outlook Remains Stable Overview Peru-based Interbank has maintained sound operating performance in 2015 despite stiff competition, and we expect its asset quality to stabilize as economy strengthens. We're affirming our 'BBB-' issuer credit rating on the bank. The stable outlook reflects our expectation that Interbank will maintain its market position and systemic importance in the Peruvian financial system, while its asset quality will remain in line with the industry. Rating Action On June 16, 2016, S&P Global Ratings Services affirmed its 'BBB-' long-term issuer credit rating on Banco Internacional del Peru-Interbank (Interbank). The outlook remains stable. At the same time, we affirmed our 'BB-' issue-level rating on the bank's subordinated bonds. Rationale The rating on Interbank reflects its adequate business position as the fourth-largest financial institution in Peru; moderate capital and earnings; adequate risk position with a focus on retail lending and asset quality metrics in line with the industry; average funding, in line with those of its peers; and adequate liquidity taking into consideration the characteristics of the Peruvian market. The rating on the bank also reflects one-notch uplift due to government support. We believe there is a moderately high likelihood that the government would provide extraordinary and timely support to Interbank in the case of credit stress. 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-'. We believe that economic risk for banks operating in Peru has increased. Economic growth has slowed significantly since 2014, and we have revised our assessment of Peru's trend growth prospects. We expect growth to average 3.7% per year in to 2018 and, 2.8% in per capita terms, which will somewhat limit Peru's ability to catch up to its more developed peers in the medium term. Nevertheless, we hold that a strong fiscal position, prudent monetary policies, and a credible and effective central bank provide the country with enough flexibility to withstand future and present external shocks. Credit growth rates have fallen JUNE 16,

3 since 2014, but credit growth continues to add above 2 percentage points (pps) to leverage (credit to GDP) per year, which increases the risk of economic imbalances. Although credit and real estate prices have been growing steadily, Peru does not have a real estate bubble, in our view. Real estate price growth has been framed by solid economic growth, an increase in household income, and a growing middle class. We have observed a rapid alignment of real estate prices growth with slower economic growth since Low income levels, poor debt capacity, and still high dollarization in the economy, especially in the banking system, increase credit risk in the economy. However, we believe that the authorities' strengthened commitment to stronger policies as a means of reducing dollarization in the system could reduce credit risk in the medium term. We consider industry risk for banks operating in Peru to be, in general, lower than its peers'. We believe that Peru has a sound regulatory framework, with ample supervisory coverage and periodic risk-based supervision under a highly professional regulator. Both the Peruvian Central Bank and Superintendencia de Banca y Seguros--which regulates banks and insurance companies--are very active. In the past two years, authorities have introduced several prudent measures to ensure financial stability at the macro level amid a weakened economy with growing external risk. Peru's financial system has registered generated strong profitability and adequate levels of capitalization in the past five years, and there are no significant market distortions that could alter the system's competitive dynamics in the near term. We also believe the country's financial system has a healthy and diversified funding mix through deposits, domestic market debt, and external debt (banks and market), as well as strong government support to provide liquidity if needed. We view Interbank's business position as adequate. With total assets of about PEN41.2 billion as of March 31, 2016, Interbank remains the fourth-largest financial institution in Peru, with a market share of 11.1% in terms of loans and of 11.8% in terms of deposits. The bank has a diversified credit portfolio, with the retail segment accounting for 52.8% (compared with the industry's 33.8%) of total exposure and corporate and small- to medium-size enterprises for 47.2% (compared with the industry's 66.2%). The bank's higher-than-average retail lending underscores its stronger competitive position and expertise in the consumer credit segment, in particular credit cards, which has traditionally been Interbank's key focus. The bank expanded its lending in this segment in the past 12 months, targeting the high-income population segment. Interbank has an ample nationwide network through its 290 branches and 2,297 ATMs, which provide stability to the bank's deposit base and business in general. We expect Interbank to maintain its current market share, and its lending growth pace in line with the industry average and we don't expect any shift in its business focus in the next months, keeping the bank's overall business position as adequate. We view Interbank's capitalization as moderate. This stems from our projected risk-adjusted capital (RAC) ratio before diversification of about 6.9% to -7.1% for the next months and our view of a negative trend in Peru's JUNE 16,

4 economic risk, which could add pressure to the RAC ratio. The weaker economic risk score on Peru, which calibrates the risk weights for our RAC framework, would raise risk charges, and therefore, lower RAC ratios of banks operating in Peru. Our RAC projections for Interbank incorporate its loan growth of about 15% in 2016 and 2017 and slightly lower net interest margins (NIMs) than in the past two years due to higher funding costs. We also expect core earnings over average assets to weaken due to the lower NIMs. We also expect the bank's dividend payouts to remain at 45% of net income. Interbank's regulatory capitalization ratio was 16.4% as of March. 31, 2016, well above the minimum requirement of 11.7% (10% plus 1.7% of additional capital requirement). The bank's earnings quality is sound, with net interest income accounting for almost 73% of operating revenue and banking fees (8%) in the first quarter of 2016, compared with 73% and 11%, respectively, in The bank's efficiency ratios are adequate, with non-interest expenses to revenues ratio of 40.9% in the first quarter of 2016 with the 46.2% three-year average. Our view on Interbank's adequate risk position continues to reflect diversified loan portfolio by business, economic sectors, and customers and moderate credit losses and sound asset quality metrics. Corporate and SMEs loans accounted for about 47.2% of the bank's gross loan portfolio and retail the remainder, including payroll loans, mortgages, and a higher-than-average exposure to credit cards. We don't expect Interbank's loan mix to change in the coming quarters. The bank has manageable concentration levels. Its 20 largest loans represent 13% of the bank's total loan portfolio, equivalent to about 113% of its adjusted total equity. Interbank has historically posted healthy asset quality metrics and credit losses. Over the past few quarters, the bank's nonperforming loans (NPLs) to customer loans did not grow as much as the industry average as a result of the adjustments in the retail segment, the relatively high lending growth, and writing off some corporate troubled loans. In this sense, Interbank's NPLs to total loans ticked up to 2.5% as of March 2016 from 2.4% at the end of 2015, compared to industry average of 2.7% and 2.5%, respectively. We expect the bank's NPL ratio to stop growing as the economy strengthens. Interbank's loan loss reserves over gross nonperforming assets totaled 186.4% as of March 2016, compared with 193.9% at the end of We expect the bank to maintain reserve levels near 200% for the next two years. We consider Interbank to have an average funding profile, in line with its domestic peers and the industry. In this sense, its stable funding ratio was 119.4% as of March 2016, with the 120.9% three-year average. Over the next quarters, we expect metrics to remain at similar to current levels. Interbank benefits from a large, stable, and relatively low-cost deposit base that represented 76.2% of total funding base as of March 2016 with the 73.4% three-year average. Customer loans accounted for 96.4% of deposits as of March 2016 and averaged 95.9% for the past three fiscal years. The bank's current focus is to increasing the share of retail deposits through its distribution network. The central bank's repurchase agreements represent about 8.2% of Interbank's funding base at the end of JUNE 16,

5 In our view, Interbank has an adequate liquidity position, with a broad liquid assets over short-term funding of 8.5x as of March 2016 and 2.4x at the end of 2015, compared with 5.6x at the end of Interbank has a fluid access to the domestic and global capital markets, given its solid position in the market and its credit quality. Intercorp Financial Services Corp. (IFS; not rated) controlled 99.3% of Interbank at the end of In turn, Intercorp Peru Ltd. (Intercorp; BB/Stable/--) controls 77.2% of IFS shares. The Rodriguez-Pastor family controls Intercorp, a non-operating holding company, which participates in several sectors of the Peruvian economy, including financial services, insurance, supermarkets, retail, real estate and education. We view Interbank as having high systemic importance for the Peruvian financial system. This opinion stems from the bank's sound and stable market shares. Interbank remains the fourth-largest financial institution in Peru, with a market share of 11.1% in terms of loans and of 11.8% in terms of deposits, in addition to its high exposure to the retail segment. As a result, we believe there is a moderately high likelihood of extraordinary government support--given that we consider the Peruvian government as being supportive towards its financial system. As a result, the rating on the bank reflects one-notch uplift from its SACP. Outlook The stable outlook on Interbank reflects our expectation that it will maintain its positon as the fourth-largest bank and systemically important bank in Peru. Despite the negative trend in the economic risk in Peru's BICRA, the bank's capital position will remain at moderate levels, even if the economic risk score on Peru weakens. Downside scenario A downgrade is possible if the bank's systemic importance diminishes, but we don't foresee such a scenario in the medium term. Upside scenario We could upgrade the bank if its capital position improves significantly, with a RAC ratio well above 7%, which could result from lower pressure on the economic risk score assessment of the BICRA and maintenance of high levels of retained earnings or a capital injection, or a lower dividend payout ratio. Ratings Score Snapshot Issuer Credit Rating BBB-/Stable/-- JUNE 16,

6 Support +1 GRE Support 0 Group Support 0 Sovereign Support +1 Additional Factors 0 Related Criteria And Research Related Criteria Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015 Group Rating Methodology, Nov. 19, 2013 Banks: Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013 Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Bank Capital Methodology and Assumptions, Dec. 6, 2010 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Commercial Paper I: Banks, March 23, 2004 Ratings List Ratings Affirmed Banco Internacional del Peru-Interbank Counterparty Credit Rating Subordinated SACP bb+ Anchor bbb- Business Position Adequate (0) Capital and Earnings Moderate (-1) Risk Position Adequate (0) Funding and Liquidity Average and adequate (0) BBB-/Stable/-- BB- Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at and at All ratings affected by this rating action can be found on the S&P Global Ratings public website at Use the Ratings search box located in the left column. JUNE 16,

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