OREANDA-NEWS. Fitch Ratings has affirmed Banco Santander Chile's (BSC) Viability Rating (VR) and long-term Issuer Default Ratings (IDR) at 'a+' and 'A+', respectively. The Rating Outlook on the long-term IDRs is Stable. A complete list of rating actions is provided at the end of this release.

KEY RATING DRIVERS - VR, IDRs AND NATIONAL RATINGS

BSC's IDRs and National long-term rating are driven by its VR of 'a+' and these do not factor in any extraordinary support from its parent, Banco Santander, although it remains a strategically important subsidiary.

BSC's VR and IDRs reflect its market-leadership position and its strong franchise within Chile. The ratings also reflect the bank's healthy asset quality, sound core profitability, diversified funding and adequate capital position.

BSC has historically maintained a strong record of overall performance across the cycle with an average return on average assets (ROAA) of around 2%. At Aug. 31, 2015, BSC's net income declined by 10.1% year over year (yoy) due to lower inflation that affected the yield on its inflation-indexed assets (Unidad de Fomento, or CLF), which was partly offset by the bank's strong core earnings capacity. As a result, BSC's average return on assets (ROAA) and average return on equity (ROAE) declined to 1.53% and 18.61%, respectively (1.92% and 22.38% at Dec. 31, 2014), which still compare well with those of its local and international peers. Fitch considers BSC's core earnings capacity to be sound and expects its profitability to remain healthy, although in the long term it will probably remain below its historical levels given the costs of heavier regulation and probably narrower margins due to competition. In addition, inflation levels are expected to be lower in 2016, and interest rates will likely rise, and this, together with likely higher provisions and lower growth due to the slowdown in the economy will put some pressure on BSC's net interest revenues, although it should remain healthy.

BSC's sound risk management and benign operating environment in Chile have supported healthy asset-quality ratios. These remain adequate and show some improvement as a result of the shift toward less risky segments since 2012, among other measures taken. At June 30, 2015, the bank's nonperforming loans ratio was 2.72% (down from 3.17% at Dec. 31, 2012), and reserve coverage rose to 106.65%. Net charge-offs have also decreased since 2012 and, at 1.35% of gross loans, are at acceptable levels.

BSC's funding is independent from its parent, in line with Santander's subsidiary policies, and benefits from a stable and well-diversified deposit base (core deposits accounted for 68.4% of the total). It is also active in local and international bond issuance, with significant lines from local and foreign banks. In the past five years, it has diversified its foreign funding both by investor and geographically. In addition, it has maintained a large liquidity cushion.

In Fitch's view, BSC's capitalization levels are adequate for its current rating and compare well locally and by regional standards, especially considering the country's stable macroeconomic environment. At Aug. 31, 2015, BSC's Fitch Core Capital (FCC) ratio was 10.12%. Although BSC's FCC is slightly below the median for LATAM peers (10.6% as of Dec. 31, 2014) and for commercial banks globally with a VR of 'a+' (12.01% as of Dec. 31, 2014), this is compensated for by an adequate tangible common equity-to-tangible assets ratio (7.93% at June 30, 2015) that reflects the tougher risk weighting rules in Chile and by a high internal capital-generation capacity.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

At Aug. 31, 2015, BSC was the largest bank in Chile by total loans and the second largest by deposits, with market shares of 19.5% and 18.0%, respectively. This underpins BSC's Support Rating and Support Rating Floor, as there is an extremely high probability of state support, should it be needed.

KEY RATING DRIVERS - SENIOR UNSECURED, SECURED AND SUBORDINATED DEBT

BSC's senior unsecured bonds are rated at the same level as the bank's and National long-term rating, considering the absence of credit enhancement or subordination feature.

The rating of the mortgage bonds is based on BSC's National rating for senior unsecured issuances of 'AAA(cl)', Outlook Stable, a Fitch Discontinuity Cap (D-Cap) of 0 (full discontinuity, which implies a default of the bonds in case of issuer default), and uncertainties regarding the recovery potential provided by the related mortgage portfolio.

Fitch rates BSC's subordinated debt in the National scale two notches below its National long-term issuer rating. The two-notch difference considered the loss severity due to its subordinated nature (after default).

Deviation from Existing Criteria:

The covered bond criteria are normally applied to debt benefiting from a dual recourse against a financial institution and, should it fail, against a pool of assets. Here Fitch is applying the covered bond rating criteria although recourse against the cover assets is not directly available in some circumstances.

RATING SENSITIVITIES

IDRs, VR, SUPPORT RATING, SUPPORT RATING FLOOR AND NATIONAL RATINGS

The Outlook on BSC's long-term IDRs is Stable. Downward pressure for BSC's VR and IDRs could arise from sustained pressure on its profitability stemming from a rise in loan loss provisions, or from consistently lower capitalization. More specifically, BSC's VR could be downgraded if its ROAA falls and consistently remains below 1.3%, its Fitch Core Capital to Risk Weighted Assets ratio falls and is maintained below 9%. There is limited upside potential in the near future for BSC's VR.

RATING SENSITIVITIES -SUPPORT RATING AND SUPPORT RATING FLOOR

BSC's SR or SRF would only be affected by a downgrade of Chile's sovereign IDRs, which is considered unlikely at the present time.

Fitch has affirmed BSC's rating as follows:

--Foreign and local currency long-term IDRs at 'A+'; Outlook Stable;
--Foreign and local currency short-term IDRs at 'F1';
--Viability rating at 'a+';
--Support rating at '1';
--Support rating floor at 'A-';
--Long-term national rating at 'AAA(cl)'; Outlook Stable;
--Short-term national rating at 'N1+(cl)';
--Senior unsecured bonds at 'A+';
--National long-term rating at 'AAA(cl)';
--USD5 billion commercial paper program at 'F1';
--Senior secured bonds National long-term rating at 'AAA(cl)';
--Subordinated bonds national long-term rating at 'AA(cl)';
--National equity rating at 'Primera Clase nivel 1'.