Banco del Estado de Chile

FINANCIAL INSTITUTIONS
CREDIT OPINION
17 June 2016
Banco del Estado de Chile
Update to Credit Strengths & Challenges
Update
Summary Rating Rationale
Moody's assigns a baa2 standalone baseline credit assessment (BCA) to Banco del Estado
de Chile (Banco Estado) in line with its superior funding access and high liquidity, as well as
improving asset risk.
RATINGS
Banco del Estado de Chile
Domicile
Chile
Long Term Rating
Aa3
Type
LT Bank Deposits - Fgn
Curr
Outlook
Stable
Please see the ratings section at the end of this report
for more information.The ratings and outlook shown
reflect information as of the publication date.
As Chile's sole government-owned bank, Banco Estado plays an important public policy
role by (i) catering to low-income individuals with an explicit mandate towards promoting
home ownership and national savings, (ii) offering financing to small and mid-sized
enterprises (SMEs) and (iii) providing banking services to remote rural areas that are not
served by private sector alternatives. The bank's mandate also includes the promotion of
entrepreneurship and microfinance.
Exhibit 1
Rating Scorecard - Key Financial Ratios
Contact
Felipe Carvallo
52-55-1253-5738
VP-Senior Analyst
felipe.carvallo@moodys.com
Busy Juarez
52-55-1253-5735
Associate Analyst 1
busy.juarez@moodys.com
Maria Valeria
5411-3752-2611
Azconegui
VP–Senior Analyst
mariavaleria.azconegui@moodys.com
Aaron Freedman
52-55-1253-5713
Associate Managing
Director
aaron.freedman@moodys.com
CLIENT SERVICES
Americas
1-212-553-1653
Asia Pacific
852-3551-3077
Japan
81-3-5408-4100
EMEA
44-20-7772-5454
Source: Moody's Financial Metrics
The bank's large branch network and the expectation that it would receive government
support ensures it advantageous access both to stable core deposits from the largest
individual client base in Chile as well as to the capital markets, providing it a strong funding
profile. While the bank's nonperforming loan1 ratio of 3.3% as of March 2016 remains
above the system average, it has improved steadily over the past four years. However, the
baa2 BCA also considers the bank's weak capitalization and profitability. As a result of high
operating expenses related to the bank's mandate and extensive geographic coverage, a loan
mix geared towards low-yielding commercial and mortgage financing, its high liquidity, and
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
higher tax burden, the bank's net income of just 0.7% of tangible assets is well below that of its peers in Chile. In addition, the
Superintendencia de Bancos e Instituciones Financieras (SBIF) reports a Tier 12 capitalization ratio of 7.2%, the country's lowest.
Banco Estado's Aa3 long-term global local and foreign currency deposit ratings reflect Moody's assessment of very high government
support in line with its 100% ownership by the Republic of Chile, its significant policy roles and its status as Chile's largest deposittaking institution and mortgage lender. As such, government support translates into a substantial five notch uplift to Aa3, from Banco
Estado's BCA and Adjusted BCA of baa2.
Moody's also assigns long-/short-term Counterparty Risk Assessments (CR assessments) of Aa3 (cr)/P-1(cr) to Banco Estado.
Credit Strengths
»
Superior funding access and high liquidity
»
Improving asset risk in line with lower mortgage nonperforming loans
»
Banco Estado's BCA is supported by Chile "Strong +" Macro Profile
Credit Challenges
»
Capitalization is low, despite being regulatory compliant
»
Profitability vis-à-vis peers, reflects social mission, business mix and higher tax rate
Rating Outlook
The outlook is stable.
Factors that Could Lead to an Upgrade
The bank's low capitalization is a significant constraint on its standalone BCA. Given very high government support, an upward
movement on Chile's government bond rating of Aa3 would lead to upwards ratings pressure on the bank's debt and deposit ratings.
Factors that Could Lead to a Downgrade
Downward pressure on the bank's BCA would emerge if the bank's profitability and asset quality deteriorate substantially. Given very
high government support, a downgrade of the bank's BCA would not likely translate into a downgrade of the bank's debt and deposit
ratings.
Key Indicators
Exhibit 2
Banco del Estado de Chile (Consolidated Financials) [1]
Total Assets (CLP billion)
Total Assets (USD million)
Tangible Common Equity (CLP billion)
Tangible Common Equity (USD million)
Problem Loans / Gross Loans (%)
Tangible Common Equity / Risk Weighted Assets (%)
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%)
Net Interest Margin (%)
PPI / Average RWA (%)
3-162
12-152
12-142
12-132
12-122
Avg.
32558.8
48678.0
585.3
875.1
3.3
2.8
54.8
2.5
2.2
32549.6
45934.9
604.9
853.7
3.1
3.0
51.5
2.7
2.6
28116.2
46331.3
426.4
702.6
3.3
2.4
63.3
2.9
3.3
25560.3
48644.5
433.9
825.9
3.6
2.7
62.8
3.1
3.1
23153.3
48356.8
634.4
1324.9
4.1
4.3
57.4
3.0
3.4
8.93
0.23
-2.03
-9.83
3.54
3.05
58.04
2.84
2.95
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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Banco del Estado de Chile: Update to Credit Strengths & Challenges
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Net Income / Tangible Assets (%)
Cost / Income Ratio (%)
Market Funds / Tangible Banking Assets (%)
Liquid Banking Assets / Tangible Banking Assets (%)
Gross loans / Due to customers (%)
0.7
61.3
21.8
35.1
90.1
0.4
55.3
20.4
36.8
85.6
0.6
50.0
19.5
36.6
86.1
0.5
52.8
17.9
38.7
80.5
0.5
48.2
20.9
36.9
87.2
0.54
53.54
20.14
36.84
85.94
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel I; IFRS [3] Compound Annual Growth Rate based on IFRS reporting periods [4] IFRS reporting periods
have been used for average calculation [5] Basel I & IFRS reporting periods have been used for average calculation
Source: Moody's Financial Metrics
Detailed Rating Considerations
SUPERIOR FUNDING ACCESS AND HIGH LIQUIDITY
Funding and liquidity are key strengths of Banco Estado, reflected in its stable core deposit base, moderate loan-to-deposit ratio, and
ample store of high quality liquid assets. Banco Estado is the largest deposit-taking institution in Chile, with a 19.7% market share as of
March 2016, and is the market leader in savings deposits, with the largest number of clients (11 million), debit cards (9.5 million) and
internet clients (2.6 million), as of March 2016.
Core deposits comprise almost three quarters of the bank's funding, with customer deposits comprising the majority, while the rest
comes from institutional sources. Debt, issued both locally and abroad, constitutes another 17.2%, as of March 2016. Banco Estado
would likely benefit from flight-to-quality in times of stress.
Though market funds are somewhat high at 21.8% as of March 2016, it is among the lowest levels in the Chilean banking system
and largely in line with the bank's aim at matching its large residential mortgage book through long-term mortgage bonds (letras
hipotecarias) and issuances, that have a duration of about 11 years. Furthermore, in recent years the bank has diversified its market
funds by tapping global markets at advantageous terms. Its USD3 billion multicurrency global MTN program has allowed the bank to
diversify its investor base by tapping the U.S., European and Asian markets. Banco Estado in fact could fund its loan book entirely with
deposits if necessary, as reflected in its low loan-to-deposit ratio of just 90.1% as of March 2016, well below the system average of
118.9%, as of March 2016.
Well above the system average, liquid assets represent about a third of tangible banking assets and comprise a mix of cash, Aa3-rated
Chilean sovereign or central bank securities, or obligations issued by local financial institutions. The bank's investment portfolio is
generally of short duration, protecting the balance sheet against wide moves in interest rates.
CAPITALIZATION IS LOW, DESPITE BEING REGULATORY COMPLIANT
A significant constraint on Banco Estado's standalone strength is its overall low capitalization, even if we assess a high likelihood that its
high holdings of deferred tax assets (DTAs) could be realized because of (i) its government ownership and (ii) the Chilean government's
high rating (Aa3 stable).
Moody's capitalization seeks to emulate Common Equity Tier 1 and as such deducts intangibles because of their low loss absorption
ability in times of stress. Banco Estado's high holdings of DTAs reflect i) a much higher effective tax rate (additional 40% corporate tax
rate versus other banks' 24% in 2016), and ii) the large amount of "additional", or voluntary, countercyclical provisions the bank has
taken in recent years. The deduction of DTAs from Banco Estado's reported TCE therefore results in a low capitalization ratio.
Moody's nevertheless acknowledges that given Banco Estado's government ownership and the government's high rating of Aa3, there
is a high likelihood that its DTAs could be realized and as such our score for capitalization includes a substantial positive adjustment,
which nevertheless continues to exhibit capitalization as Banco Estado's weakest financial factor.
The bank's capitalization also includes the government's November 2015 injection of USD200 million in capital remaining from its
2014 total commitment of USD450 million; the previous USD250 million are reflected in 2014 year-end data.
We note that Banco Estado continues to be compliant with regulatory capital requirements of the Chilean regulator, with a total
capital ratio of 11.5% as of March 2016, up from 11.3% as of March 2015, well above the 8% minimum, and a 4.1% leverage ratio, up
from 3.7%, versus the 3% minimum.
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17 June 2016
Banco del Estado de Chile: Update to Credit Strengths & Challenges
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
IMPROVING ASSET RISK IN LINE WITH LOWER MORTGAGE NONPERFORMING LOANS
Banco Estado's asset quality continues to improve, with delinquencies declining to 3.3% as of March 2016, from 3.5% as of March
2015. The decline mainly reflects the reduction in residential mortgage NPLs via the government's debt restructuring program for low
income customers and as well as more conservative underwriting and provisioning standards. Residential mortgages comprise a high
38% of the bank's total loans. Residential mortgage NPLs declined to 6.1% of loans, from 6.5% as of March 2015, but are still more
than twice the system aggregate average of 2.8%. However, 26% of the mortgage portfolio benefits from government guarantees
that ensure full recovery. The bank also maintains provisions equal to 5.5% of the mortgage book. In the past the government asked
Banco Estado to increase both mortgage and SME lending under its stimulus program, a risk that is somewhat offset by the partial
government guarantees tied to the new loans. Today, the bank's mandate is based on increasing the competitiveness of SMEs and
entrepreneurship.
The performance of the bank's unsecured consumer loan portfolio has weakened over the past year and compares slightly worse than
the system averages. Consumer loan delinquencies increased to 2.4% as of March 2016, up from 1.4% as of March 2015.
The performance of the bank's commercial loan portfolio is more in line with the system, exhibiting a much stronger and a more stable
performance. As such, commercial loan delinquencies were 1.5% as of March 2016, slightly better than the system average.
Reserve coverage of problem loans has risen consistently for the past three years, to 92.9% as of March 2016, from 83.1% as of March
2015. The bank's large corporate borrower concentrations remain a latent risk, as in the case of most Chilean banks, however these
borrowers continue to present very low delinquencies.
PROFITABILITY VIS-À-VIS PEERS, REFLECTS SOCIAL MISSION, BUSINESS MIX, AND HIGHER TAX RATE
Banco Estado is the market leader in residential mortgages and the third largest lender overall. Its net interest margin remains firm and
fee capture has been improving aided by its marketing focus on growth in electronic payment, account management and card services,
as well as insurance and mutual funds services.
Banco Estado's profitability remains lower than that of its private sector peers primarily because of its asset mix and policy mandate,
for a net interest margin of 2.5%, versus the banking system's 3.1% as of March 2016. The bank's asset mix reflects the bank's emphasis
on low-yielding residential mortgages and corporate loans as well as a higher proportion of liquid assets, which tend to be lower
yielding than loans. The bank's higher operating costs are in part related to its nationwide distribution network that is designed to
serve customers throughout Chile. The cost-to-income ratio tends to be higher than that of private sector peers at 61.3%, versus the
system's 54.7%, and has increased substantially in the last three years in line with the bank's investment plan, from a low of 50.0% as
of year-end 2014. The bank is working on improving this ratio going forward through a more efficient use of costs. In addition, the bank
is assessed a very high tax rate that includes a 40% additional tax charged to all state-owned companies, on top of the 24% of other
commercial banks.
Banco Estado reported pre-tax income of CLP261.8 billion as of year-end 2015 and generated CLP68.4 billion during the first three
months of 2016, expanding 46% when compared to same period last year. Such expansion derives from a combination of a 11% - 12%
increase in net interest and non-interest income, aided by lower taxes and stable operating expenses While credit costs increased by
26% from last year, as a reuslt of new regulatory provisions for mortgages, these were financed by a release of additional provisions,
which allowed the bank to have a lower effective tax rate of 17%, versus first quarter 2015's 57%.
BANCO ESTADO'S BCA IS SUPPORTED BY A “STRONG+” MACRO PROFILE
Chile's macro profile benefits from solid macroeconomic fundamentals and an established track record of policy credibility and
predictability. The country’s moderate susceptibility to event risk is reflected its stable political environment, a favorable government
liquidity position offset by a slightly heightened external vulnerability due to a weaker international investment position. Chile's private
sector credit to GDP is among the highest in the region, but has been relatively stable, and is supported by strong credit culture and
credit risk management. While wholesale sources represent the lion's share of most banks' funding, customer deposits comprise the
majority, and refinancing risk is also mitigated by the relative depth of Chile's credit and capital markets.
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Banco del Estado de Chile: Update to Credit Strengths & Challenges
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Notching Considerations
GOVERNMENT SUPPORT
We assume a very high probability of government support of Banco Estado because of its government ownership, its significant policy
roles, and its large deposit and loan market shares. Banco Estado caters to low-income individuals with the key objectives of fostering
home ownership and finance and promoting national savings. The bank also lends to microfinance entities. Banco Estado acts as a
primary dealer of government securities and provides payroll and other transaction services to both government and private sector
enterprises. The bank is an important source of liquidity in the banking system and has played a countercyclical lending role from time
to time as in the case of the 2008 global financial crisis and Chile's 2014 economic stimulus program.
COUNTERPARTY RISK ASSESSMENT
Moody's assigns long- and short-term CR Assessments to Banco Estado of Aa3 (cr) and Prime-1 (cr). The CR Assessment benefits from
five notches of government support, in line with our support assumptions on deposits and senior unsecured debt. This reflects our
view that any support provided by governmental authorities to a bank which benefits senior unsecured debt or deposits is very likely
to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with our belief that governments are
likely to maintain such operations as a going-concern in order to reduce contagion and preserve a bank's critical functions.
About Moody's Bank Scorecard
Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in
conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard
may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong
divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to
reflect conditions specific to each rated entity.
Historical Ratios
For the problem loan ratio and profitability ratio, we review the latest three year-end ratios as well as the most recent intra-year ratio
where applicable, and base our starting point ratio on the weaker of the average of this period and the latest reported figure.
For the capital ratio, we use the latest reported figure.
For the funding structure and liquid asset ratios, we use the latest year-end figures as we believe them to be the most representative and
reliable.
Rating Methodology and Scorecard Factors
Exhibit 3
Banco del Estado de Chile
Macro Factors
Weighted Macro Profile
Strong +
100%
Historic Ratio
Macro
Adjusted Score
Credit Trend
Assigned Score
Key driver #1
Key driver #2
Solvency
Asset Risk
Problem Loans / Gross Loans
3.3%
a3
↑
a3
Expected trend
Sector
diversification
Capital
TCE / RWA
2.8%
caa3
←→
b3
Access to capital
Profitability
Net Income / Tangible Assets
0.5%
baa2
↑
baa1
Earnings quality
Financial Profile
Factor
Combined Solvency Score
5
17 June 2016
ba2
Return
on assets
ba1
Banco del Estado de Chile: Update to Credit Strengths & Challenges
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Liquidity
Funding Structure
Market Funds / Tangible Banking
Assets
Liquid Resources
Liquid Banking Assets / Tangible
Banking Assets
Combined Liquidity Score
Financial Profile
Business Diversification
Opacity and Complexity
Corporate Behavior
Total Qualitative Adjustments
Sovereign or Affiliate constraint:
Scorecard Calculated BCA range
Assigned BCA
Affiliate Support notching
Adjusted BCA
Instrument Class
Counterparty Risk Assessment
Deposits
Senior unsecured bank debt
20.4%
baa1
←→
a2
Deposit quality
Term structure
36.8%
a1
←→
a1
Stock of
liquid assets
Quality of
liquid assets
Government
Support notching
Local Currency
rating
4
5
5
Aa3 (cr)
Aa3
--
Foreign
Currency
rating
-Aa3
Aa3
a3
Loss Given
Failure
notching
1
0
0
Additional notching
0
0
0
a2
baa2
0
0
0
0
Aa3
baa1-baa3
baa2
0
baa2
Preliminary
Rating
Assessment
baa1 (cr)
baa2
baa2
Source: Moody's Financial Metrics
Ratings
Exhibit 4
Category
BANCO DEL ESTADO DE CHILE
Outlook
Bank Deposits
Baseline Credit Assessment
Adjusted Baseline Credit Assessment
Counterparty Risk Assessment
Senior Unsecured
Moody's Rating
Stable
Aa3/P-1
baa2
baa2
Aa3(cr)/P-1(cr)
Aa3
BANCO ESTADO, NEW YORK BRANCH
Outlook
Bank Deposits
Counterparty Risk Assessment
Senior Unsecured MTN
Stable
Aa3/P-1
Aa3(cr)/P-1(cr)
(P)Aa3
Source: Moody's Investors Service
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Banco del Estado de Chile: Update to Credit Strengths & Challenges
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MOODY'S INVESTORS SERVICE
Endnotes
1 Nonperforming loans equal the SBIF's defintion of cartera morosa a 90 días, or 90+ days past due loans, as can be found in the SBIF's Reportes Mensuales.
Nonperforming loans include consolidated loans past due for more than 90 days even when only one of or some debt payments (capital or interest) are
past due, as defined by the SBIF.
2 SBIF's capital básico (Tier 1) as a percent of risk-weighted assets, as reported in the SBIF's Indicadores Solvencia report
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MOODY'S INVESTORS SERVICE
FINANCIAL INSTITUTIONS
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Banco del Estado de Chile: Update to Credit Strengths & Challenges