OREANDA-NEWS. Fitch Ratings has affirmed Banco del Estado de Chile's (Banco Estado) foreign and local currency long-term Issuer Default Ratings (IDR) at 'A+' and 'AA-', respectively, and its Viability Rating (VR) at 'bbb'. A complete list of rating actions is provided at the end of this release.

KEY RATING DRIVERS - IDRs, VR, SENIOR UNSECURED DEBT, SUPPORT RATING, SUPPORT RATING FLOOR AND NATIONAL RATINGS

Banco Estado's IDRs and national ratings are driven by the extremely high probability of support from its owner, the State of Chile. The bank is not a company by shares and relates with the Chilean Government through the Ministry of Finance. Banco Estado represents an important instrument of the State of Chile for developing credit and monetary policies, plays a strategic social role for the government and has a systemic importance. Based on these drivers, the bank's IDRs are aligned with Chile's Sovereign foreign currency IDR ('A+'; Outlook Stable) and local currency IDR ('AA-'; Outlook Stable), and they also underpin its high support rating of '1' and support rating floor of 'A+'.

Banco Estado's VR reflects its strong liquidity given its high proportion of liquid assets (32.7% of its total assets as of Sept. 30, 2015) and sound funding structure based on a wide customer base. The bank's market position places it as one of the strongest competitors in the Chilean banking system, being the third largest bank measured by loans, and the first by deposits. Banco Estado's overall financial performance has been good in spite of high level of competition.

The bank's VR is limited by its low capital base, and lower, albeit steadily improving, credit quality in mortgage loans portfolio (although with a strong guarantee and additional provisions position) compared to local and international private sector peers (emerging market commercial banks with VR in the 'bbb' category).

Banco Estado's profitability levels have historically been limited compared to its private sector peers. However, its financial performance has been very stable, showing an acceptable level of profitability considering its state owned nature and its tax rate of 40%. Similar to other state-owned institutions, Banco Estado's operating expenses are high compared with private sector peers. This is a consequence of its extensive commercial network and its role in fostering bancarization levels in Chile.

Banco Estado has been able to consistently improve its non-performing loans to gross loans ratio in the past four years (3.11% as of Sept. 30, 2015 from 5.25% in 2010) and reserve coverage levels (165.53% as of Sept. 30, 2015 from 104.55% at Dec. 31, 2011), significantly reducing the gap with local and international peers.

Although its capital adequacy indicators improved with the recent capital injection received and the retention of 54.5% of its 2014 profits, Fitch believes that Banco Estado's equity ratios will remain relatively low, comparing unfavorably with local and international private sector banks in the same rating category. The second tranche for USD200 million of the capital injection totaling USD450 million announced last year is expected to be received before the end of 2015. Fitch welcomes this capital injection as it partly restores the bank's capital adequacy ratios and eases the pressure on its VR. However, as the objective of the capital increase is to expand lending to SMEs and residential mortgages, Fitch will monitor the evolution of the bank's capitalization in the medium term and considers that future earnings retention would be key for the bank to maintain its capitalization at adequate levels. In Fitch's view, capital levels are complemented by the bank's ample LLR cushion and the extremely high propensity and ability of the state of Chile to strengthen the bank's position if needed, especially as the bank will likely need a significant amount of capital when Basel III standards are adopted in Chile, which are still to be defined but will happen in the next few years.

Banco Estado's senior unsecured foreign currency bonds are rated at the same level of the bank's IDR, considering the absence of credit enhancement or subordination feature.

Fitch rates the national subordinated debt of Banco Estado two notches below its national long-term issuer rating. Fitch used the bank's long-term national rating as an anchor rating to notch down the subordinated debt, based on the likelihood that sovereign support will remain sufficiently strong to continue factoring support into Banco Estado's subordinated bonds with gone-concern loss-absorption feature. The two notch difference considered the loss severity due to its subordinated nature (after default).

RATING SENSITIVITIES

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

The Rating Outlook for the long-term IDRs and national rating is Stable, the same as the Outlook for Chile's sovereign ratings. Changes in the bank's IDRs, support, support rating floor and national ratings are contingent on sovereign rating actions for Chile.

Banco Estado's VR could be downgraded if its Fitch Core Capital (FCC) ratio consistently remains below 7% and if its loan loss reserve coverage, including voluntary loan loss reserves, falls and consistently remains below 100% of non-performing loans. Upward ratings potential for Banco Estado's VR would mainly arise from a significant and sustained improvement of its capitalization levels, with its FCC ratio improving and remaining above 9%.

Fitch has affirmed Banco Estado's ratings as follows:

--Foreign currency long-term IDR at 'A+'; Outlook Stable;
--Local currency long-term IDR at 'AA-'; Outlook Stable;
--Foreign and local currency short-term IDRs at 'F1';
--VR at 'bbb'
--Support rating at '1';
--Support rating floor at 'A+';
--Long-term foreign currency senior unsecured bonds at 'A+';
--Long-term national rating at 'AAA(cl)'; Outlook Stable;
--Short-term national rating at 'N1+(cl)';
--National long-term rating senior unsecured bonds at 'AAA(cl)';
--National long-term rating on its subordinated bonds at 'AA(cl)'.