Fitch Affirms Banco BICE's IDRs at 'BBB '; Outlook Stable
For more details, please refer to Fitch's special report 'Peer Review: Mid-Sized Chilean Banks (Small Franchises, Capital and Funding Challenges)', which is available at 'www.fitchratings.com'.
KEY RATING DRIVERS - VR, IDRs and National Ratings
Banco BICE's IDRs are derived from its VR and reflect solid financial performance, strong asset quality ratios and overall sound risk profile, driven by a conservative long-term business strategy that have yielded resilient results in times of economic stress. Despite mainly focusing on commercial banking, asset management and its treasury business niche, its expansion into retail wealth management for high net worth individuals has been able to provide diversification to its revenue stream and also allow the bank to show lower volatility in its results compared to other of small- to medium-size banks.
Sustained by stable earnings and a prudent cash dividend policy, Banco BICE's capital position is considered adequate given its earning generation capacity and history of limited loan losses, but its capitalization remains below the average of similarly rated banks and shows room for improvement. Also, liquidity is well managed and sufficient given the stability of its funding base, which has been concentrated in time deposits from institutional investors as the whole local medium-size peers.
BICE's local franchise and income diversification lags the trend of larger banks, while the significant portion of its treasury business may produce some volatility in its results, especially in times of market turmoil. Its capital ratios remain below similarly rated peers, but adequate for its risk profile and stable results (Fitch core capital (FCC) at 8.9% as of December 2014 vs median FCC at 10.7% for direct Latam peers). Given BICE's conservative approach toward banking and local regulations, its plain equity-to-assets ratio is in line with other banks with similar VRs, which is viewed positively by Fitch. Considering BICE's overall loss absorption capacity, its current capital level is adequate given its very low credit risk, sound and stable profitability and conservative banking management.
The steady growth of the commercial bank unit helps to balance the historical importance of the asset management and treasury business, although the latter is still significant and sometimes volatile. This trend in its revenue source should be maintained going forward, especially considering the bank's conservative business. Appropriate asset and liability management in terms of currency, tenors and yield are crucial to enhance profits in times of less arbitrage opportunities, a framework very well controlled by the bank.
Adequate credit risk tools and the focus on a relatively lower-risk niche (corporate and high net worth segment) have allowed the bank to maintain strong and stable asset quality ratios, with adequate diversification figures in terms of obligors. Credit, market and operational risks, in Fitch's view, are well recognized on the balance sheet and reflect the conservative business approach.
BICE's historically low NPL ratio (the lowest in Chile and also compared to international peers), together with limited loan impairment charges, results in strong asset quality ratios; a trend expected to remain in the medium term. Prudent loan loss reserve policies provide above-average reserve coverage and include a significant portion of counter-cyclical provisions. Reserves for gross loans, including additional past-due loans, is robust and one of the highest ratios of reserves for impairment loans (450% as of Dec. 2014) in the Chilean financial system and in Fitch's view this trend will remain sound. Loan loss provisions accounted for 21.6% of earnings before taxes and provisions as of Dec. 2014 and 0.46% of average gross loans.
Liquidity is ample and closely monitored. Liquid assets (22.8% of total assets as of Dec. 2014) represented in the last five years on average a stable 32.2% of total deposits and short-term funding where market volatility required more conservative liquidity positions worldwide. Fitch expects this trend will be maintained under forthcoming more strict local and international banking standards under Basel 3.
Capital levels are adequate for the rating level considering the relatively lower risk profile of the bank; its trend is stable after several years of adequate earnings, good provisioning and controlled growth. A recent subordinated bond issuance improved BICE's mismatch on the balance sheet but increased the use of hybrids in its capital structure (to 44% of total equity) - above the Chilean banking system average (31%). Healthy internal capital generation and above system loan and assets growth in last 12 months have resulted in a flat FCC-to-Risk Weighted Assets ratio near to 9% in 2013-2004. Although the bank enjoys a sound earnings generation capacity and controlled risks on its balance sheet, an improvement in the FCC ratio closer to the level of similarly rated commercial banks (VR 'bbb+' rated banks with a median FCC ratio of 12% as of Dec. 31, 2014) would help to fund its expansion in the medium term.
KEY RATING DRIVERS - Senior Unsecured and Subordinated Debt
BICE's senior unsecured bonds are rated at the same level as its National long-term rating, considering the absence of credit enhancement or subordination feature. Fitch rates the subordinated debt of Chilean banks in the National scale two notches below their National long-term issuer rating. The two-notch difference considered the loss severity due to its subordinated nature, no notch deduction for non-performance risk given its gone concern feature (triggered after the point of non-viability).
KEY RATING DRIVERS - Support Rating and Support Rating Floor
Fitch considers Banco BICE a bank for which there is a moderate probability of sovereign support because the limited relative size of the Chilean banking system makes uncertain the propensity of the potential provider of support to do so; commensurate with the current Support Rating of '3'.
RATING SENSITIVITIES - IDRs, VR and National Ratings
The Rating Outlook for the long-term IDRs and national rating is Stable. A potential rating upgrade is unlikely considering the company profile of the bank, which is less diverse than larger banks and with a modest franchise.
A rating downgrade could take place if Banco BICE's capitalization ratios and asset quality deteriorates beyond historic trends. Specifically, downward pressure could result from a deterioration of its capital adequacy ratios, with an FCC ratio falling and remaining below 8%, either due to lower internal capital generation or from lower than expected profitability. BICE's VR could also be under pressure if operating return on assets falls and remains below 1% in the medium term, or if any unexpected risk deteriorates its profitability, capital base or sound assets quality in the medium term.
RATING SENSITIVITIES - Senior Unsecured and Subordinated Debt
The senior and subordinated debt would generally move together with each bank's National long-term rating, with the subordinated debt typically remaining two notches below the bank's National long-term rating.
RATING SENSITIVITIES - Support Rating and Support Rating Floor
Changes these ratings are unlikely. Currently there are no visible plans to reduce sovereign support towards banks in Chile, while it is unlikely the bank will increase its size until the bank is considered systemically important.
Fitch has affirmed BICE's ratings as follows:
--Foreign and local currency long-term IDRs at 'BBB+'; Outlook Stable;
--Foreign and local currency short-term IDRs at 'F2';
--Viability rating at 'bbb+';
--Support rating at '3;
--Support rating floor at 'BB+'.
--Long-term National rating at 'AA(cl)';
--Short-term National rating at 'N1+(cl)';
--Senior unsecured bonds National long-term at 'AA(cl)';
--Subordinated bonds National long-term rating at 'A+(cl)'.
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