OREANDA-NEWS. Fitch Ratings has affirmed Scotiabank Uruguay S.A.'s (Scotiabank Uruguay) Viability Rating (VR) at 'bb-'. Fitch has also affirmed Scotiabank Uruguay's foreign currency (FC) and local currency (LC) long-term Issuer Default Ratings (IDRs) at 'BBB+' and 'A-', respectively. The Support Rating (SR) was affirmed at '2'. The long-term Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS - IDRS & SUPPORT RATING

Scotiabank Uruguay's IDRs and SR are driven by its ultimate parent, Bank of Nova Scotia (BNS, rated 'AA-' Stable Outlook), ability and propensity to provide support, if would be required.

Fitch considers Scotiabank Uruguay as an important subsidiary for its parent while it benefits from strong synergies with BNS. In Fitch's view, Uruguay will remain as a strategic market for BNS, enhanced by the recent announcement of the acquisition of Discount Bank. Following the planned merger with Discount Bank, Scotiabank Uruguay will stand as the third largest private bank in the country.

RATING SENSITIVITIES - IDRS & SUPPORT RATING

Scotiabank Uruguay's FC IDR is capped by the country ceiling while its local currency IDR is two notches above the sovereign rating in local currency. Hence, positive rating actions are contingent upon upgrades in Uruguay's sovereign rating.

In turn, changes in Scotiabank Uruguay's shareholder's ability or willingness to provide support could negatively affect its ratings.

KEY RATING DRIVERS - VR

The bank's VR considers its improved profitability and capitalisation ratios, though they remain lower than those of its closest peers. The VR is also underpinned by the bank's ample liquidity and growing franchise while it is tempered by the below-average asset quality metrics.

Fitch believes the expected acquisition of Discount Bank fits well into Scotiabank Uruguay's current business model and could allow potential cross-sales. The acquisition should contribute to customer and funding diversification. As of end-2014, Discount's loan portfolio accounted for 28.5% of Scotiabank Uruguay's total loan portfolio and 65.2% of total deposits. Discount will also add 17 branches, 260 employees and a strong network of payroll payments.

In Fitch's view, Scotiabank Uruguay's capital ratios could stabilize in 2015, following a relevant improvement in the past year (Fitch Core Capital [FCC] 2014: 9% vs. 2013: 7.6%). The positive trend in the bank's operating performance will also contribute in this regard. The acquisition of Discount Bank will not materially affect Scotiabank Uruguay's capital position as BNS is expected to finance the transaction and inject fresh capital to absorb future expenses related to the transaction.

Sixty-day non-performing loan (NPL) ratios remained above domestic private bank's averages; however, the bank has been able to contain further deterioration through recurrent loan sales and a consistent charge-off policy (1.33% of average loans). As of Dec. 31, 2014, NPLs represented 2.6% of the total loans and 4.4% without the effect of the sale of the loan portfolio (2.3% and 3.6%, respectively, at end 2013). Fitch expects Scotiabank Uruguay's delinquency levels will continue to be relatively high considering its greater focus on retail loans compared to other banks in the Uruguayan financial system.

Positively, Scotiabank Uruguay has a good level of loan loss reserves (LLR) that Fitch believes will remain stable. LLR covers 4.65% of total loans and 176% of nonperforming loans. Obligor concentrations are moderate, with the 10 largest borrowers representing 8.7% of total loans.

Scotiabank Uruguay shows a growing, diversified, and stable funding structure. The bank's liabilities are largely made up of deposits, which have grown close to 20% over the last two years. While Scotiabank Uruguay operates on mostly short-term funding, its ample liquidity, relatively short-term nature of its loan portfolio, and potential for support from BNS, facilitates ALM.

RATING SENSITIVITIES - VR

Scotiabank Uruguay's VR could eventually be upgraded if the bank is able to sustain its recent improvements in profitability (i.e. operating ROAA of around 1% and FCC ratio above 9%). NPL ratios below 3% would also be positive for the rating.

In turn, the VR could be negatively affected if Scotiabank Uruguay shows sustained operating ROAAs below 1% and FCC ratios below 8%. NPL ratios above 3% would also be negative for the rating.

PROFILE

Scotiabank Uruguay is a universal bank and has a mid-sized franchise in the retail and SMEs segments. Scotiabank Uruguay is the fourth largest private bank in terms of loans and deposits, with a market share of 12.1% and 11.0% for end-2014, respectively.

Fitch affirmed Scotiabank Uruguay's ratings as follows:

--Long-term FC IDR at 'BBB+', Outlook Stable;
--Long-term LC IDR at 'A-', Outlook Stable;
--SR at '2';
--VR at 'bb-'.