Moody’s Investors Service has concluded its rating reviews on Banco de Chile, Banco del Estado de Chile (Banco Estado), and Banco Itau Chile. These reviews were initiated on 17 March 2015 (see press release at https://www.moodys.com/research/Moodys-reviews-global-bank-ratings–PR_321005), following the publication of Moody’s new bank rating methodology.Moody’s lowered the baseline credit assessments of Banco de Chile and Banco Estado, as well as the local currency deposit rating of Banco Estado and the subordinated debt rating of Banco de Chile. Moody’s also affirmed Banco de Chile’s long and short term deposit and debt ratings, with stable outlook. Moody’s also confirmed Banco Estado’s foreign currency debt and deposit ratings and affirmed the bank’s short term ratings.In addition, Moody’s upgraded Banco Itau Chile’s adjusted BCA and its long-term deposit ratings. Moody’s also upgraded the long term deposit and debt ratings of BBVA (Chile). Moody’s affirmed the ratings of Banco Santander Chile and Banco de Credito e Inversiones. The ratings of CorpBanca remain on review for upgrade. Lastly, Moody’s assigned a counterparty risk assessment to each of the seven rated Chilean banks.In general, the rating changes do not reflect either an improvement or a deterioration in the affected issuers’ credit fundamentals. Rather, the changes are a consequence of the implementation of our new bank methodology, which highlighted these issuers as being either positive or negative outliers at their previous rating levels. Moody’s considers these issuers to be more appropriately positioned at their current revised rating levels.Moody’s has also assigned Counterparty Risk (CR) assessments in line with its new bank rating methodology. CR assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than the likelihood of default and the expected financial loss suffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessments are an opinion of the counterparty risk related to a bank’s covered bonds, contractual performance obligations (servicing), derivatives (e.g. swaps), letters of credit, guarantees and liquidity facilities.RATINGS RATIONALEThe new banking methodology includes a number of elements that Moody’s has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the financial crisis and the fundamental shift in the banking industry and its regulation.In light of the new methodology, Moody’s rating actions generally reflect the following considerations: (1) the “Strong +” macro profile of Chile; (2) the banks’ core financial ratios; and (3) the likelihood of government support for these institutions.1) Chile’s “Strong+” macro profileChilean banks benefit from operating in an environment with a high degree of economic, institutional and government financial strength. Chile’s low susceptibility to event risk is the result of ample fiscal flexibility, low debt levels, and limited political transition risk. Chile’s credit to GDP is the highest among the large countries in Latin America, reflecting the relative maturity of its banking system. While customers provide the bulk of the banks’ funding, wholesale funding sources generally dominate the mix. At the same time, limited reliance on external funding helps shield Chilean banks’ vulnerability to post QE Fed tapering risk.2) Strong asset quality and profitability offset by more moderate capitalizationChilean banks’ BCAs (median baa2) also take into account their low problem loan ratios, and healthy profitability ratios. However, adjusted capitalization ratios remain modest compared to global peers. Despite substantial funding through deposits, the banks are increasingly using market funds to support loan growth. While this reliance on market funds exposes Chilean banks to increasing refinancing risks, these risks are partly mitigated by the relative stability and diversity of local institutional investors as well as a lengthening liability maturity profile. Liquid resources, while adequate, are also modest as banks take advantage of opportunities to put their balance sheets to work more profitably.3) Likelihood of government supportMoody’s ratings for the Chilean banks benefit from an average of two notches of uplift due to our assumption of the probability of government support given its strong capacity and demonstrated willingness to support system stability.CONCLUSION OF THE REVIEWBANCO DE CHILE’S BCA AND DATED SUBORDINATED DEBT LOWERED, BUT SENIOR RATINGS AFFIRMEDMoody’s lowered the standalone BCA of Banco de Chile to a2 from a1, reflecting the bank’s significant use of market funds and moderate tangible capitalization relative to similarly rated global peers. Nevertheless, Moody’s continues to consider Banco de Chile’s financial performance as supportive of an above average BCA on a global basis. The bank’s strong asset quality and core profitability are superior to its domestic and global rated peers’, reflecting its disciplined risk management and asset allocation practices, its market leadership, and diverse, efficient operations. Banco de Chile’s profitability also benefits from strong access to lower cost core deposits from its retail and corporate customers, as well as to long tenors in Chile’s relatively deep and diverse capital market.The downgrade of the subordinated debt rating to A3 from A2 is in line with the lowering of the adjusted BCA and reflects one notch of subordination to reflect greater loss severity in accordance with Moody’s notching practices for dated Tier 2 subordinated debt in countries such as Chile without advanced operational resolution regimes. Moody’s also affirmed Banco de Chile’s Aa3/Prime-1 long and short term local and foreign currency deposit ratings and the Aa3 senior debt ratings. These reflect Moody’s view of a very high probability of support from the Chilean government in case of need, given the bank’s large deposit and loan franchise. At the same time, Moody’s assigned a Aa3 (cr) CR assessment to Banco de Chile. The bank’s outlook is stable.Moody’s also withdrew the rating outlook on Banco de Chile’s subordinated debt rating for Moody’s own business reasons. Please refer to Moody’s Investors Service’s Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com. Outlooks, which provide an opinion on the likely rating direction over the medium term, are now assigned only to long-term deposit and senior debt ratings.BANCO ESTADO’S BCA AND LOCAL CURRENCY DEPOSIT RATING LOWERED; FOREIGN CURRENCY DEPOSITS AND SENIOR DEBT CONFIRMEDMoody’s lowered Banco Estado’s BCA by two notches to baa2 from a3 because of the bank’s weak tangible capitalization as defined under the new bank rating methodology. This assessment derives from the bank’s large amount of deferred tax assets (DTAs), which Moody’s views to be of low quality in times of stress, not unlike intangibles, and which therefore weaken the bank’s ability to absorb losses on a standalone basis. The DTA component of Banco Estado’s tangible common equity is very high relative to that of other Chilean banks reflecting its i) much higher effective tax rate as a government-owned bank (40% in addition to the corporate tax rate of 21% for 2014), and ii) the large amount of additional countercyclical provisions it has taken in recent years. Notwithstanding the lower BCA, Moody’s notes Banco Estado’s superior funding within the Chilean financial system, as well as its solid and improving asset quality. Profitability, while relatively modest, continues to strengthen through improving fee generation and cost efficiency.Banco Estado’s Aa3 foreign currency deposit and debt ratings were confirmed, and the local and foreign currency Prime-1 short term ratings were affirmed, reflecting Moody’s view that government support will be forthcoming for Banco Estado’s deposits and senior debt if necessary because of its 100% ownership by the Republic of Chile, its significant policy role, and its status as Chile’s largest deposit-taking institution and mortgage lender, and third largest lender overall.However, Moody’s downgraded the bank’s local currency deposit rating to Aa3 from Aa2, reflecting the change in the anchor rating for government support for Chile to Aa3 from Aa2 based on our revised assessment of the capacity of governments to provide support to banks. Banco Estado is the only Chilean bank affected by this revised assessment as its local currency debt rating was above that of the sovereign.Moody’s believes that the appropriate measure of a government’s ability to support banks is the government’s own Aa3 bond rating as it captures its fiscal limitations and therefore its ultimate capacity to provide support. Based on insights gained from historic experience in the global markets, Moody’s considers that in the case of a prolonged crisis, forbearance and liquidity measures, which were considered in the prior government support indicator, would be insufficient to restore confidence to a banking system and an outright recapitalization of financial entities would be necessary.Moody’s also assigned a Aa3 (cr) CR assessment to Banco Estado. The bank’s outlook has been revised to stable.BANCO ITAU CHILE’S ADJUSTED BCA AND DEPOSIT RATINGS UPGRADEDThe upgrade of Banco Itau Chile’s adjusted BCA to baa1 from baa2 reflects our revised assessment of the risk correlation, or dependence, between Itau Chile and its 99.99% parent, Itau Unibanco Holding S.A. (Itau, Baa3, Negative) to “high” from “very high” and the continuing assessment of a “very high” probability of support from the parent under Moody’s joint-default analysis as per the new bank rating methodology. The risk differentiation between parent and subsidiary reflects the fact that the Chilean subsidiary operates in a different country and operating and legal environment than the parent, has a different business mix, and is funded locally except for the parent’s 100% equity stake. Moreover, Itau Chile accounts for just less than 3% of its parent’s total assets and 4.4% of its net income. Nevertheless, it continues to benefit from its parent’s brand name and management oversight. The lower correlation results in more uplift for the subsidiary’s ratings.The upgrade of the bank’s local and foreign currency deposit ratings to A2 from A3 takes into account the revised adjusted BCA. Banco Itau Chile’s baa2 standalone BCA and Prime-2 short term ratings were also affirmed. The bank’s outlook is stable. At the same time, Moody’s assigned an A2 (cr) CR assessment to the bank.BBVA (CHILE)’S DEPOSIT AND DEBT RATINGS UPGRADEDThe upgrade of BBVA (Chile)’s local and foreign currency deposit and debt ratings to A3 from Baa1 reflects Moody’s revised assessment of the probability of government support for the bank’s ratings to “high” from “moderate”, consistent with the bank’s substantial (6%-7%) market shares and high visibility in the Chilean market.BBVA (Chile)’s baa3 standalone BCA and Prime-2 short term ratings were affirmed. The bank’s key strengths are its conservative loan mix, which results in strong asset quality, and its stable profitability. Profitability relative to peers’ nevertheless remains low, reflecting its low risk but low yield loan book, consisting of largely corporate loans and residential mortgages, but profitability has been improving has the bank has grown and diversified its business mix. The bank’s rating also considers its weak adjusted tangible capitalization and high reliance on wholesale funding that is partly mitigated by its increasing use of long term funds. Moody’s also assigned a A2 (cr) CR assessment to BBVA (Chile). The bank’s outlook remains stable.COUNTERPARTY RISK ASSESSMENTS ASSIGNED TO BANCO SANTANDER CHILE, BANCO DE CREDITO E INVERSIONES, AND CORPBANCAMoody’s affirmed the a2 BCA and Aa3/Prime-1 deposit and debt ratings of Banco Santander Chile. The outlook on the bank’s debt and deposit ratings remains stable due to a very high likelihood of government support. The bank’s BCA reflects its diverse revenue sources and strong profitability and efficiency, as well as strong risk management and access to core deposits in Chile. The BCA could, however, face downward pressure if the bank’s use of market funds increases or if asset quality or profitability does not improve as expected. Moody’s also assigned an Aa3 (cr) CR assessment to the bank.The a3 BCA and A1/Prime-1 deposit and debt ratings of Banco de Credito e Inversiones were also affirmed. However, the outlook remains negative reflecting uncertainties related to the pending acquisition of City National Bank of Florida as well as downward pressures on the bank’s standalone credit profile related to its increasing use of market funds and moderate capitalization. Moody’s also assigned an A1 (cr) CR assessment to the bank.The ba1 BCA and Baa3 deposit and debt ratings of CorpBanca are unchanged and remain on review for upgrade, pending completion of its merger with Banco Itau Chile. Moody’s has assigned a Baa2 (cr) CR assessment to the bank, which is also on review for upgrade in line with the other ratings.List of All Affected Ratings:Banco de Chile- Long-term global local currency deposit rating: Affirm at Aa3, stable outlook- Short-term global local currency deposit rating: Affirm at Prime-1- Long-term foreign currency deposit rating: Affirm at Aa3, stable outlook- Short-term foreign currency deposit rating: Affirm at Prime-1- Long-term foreign currency senior unsecured debt rating: Affirm at Aa3, stable outlook- Short-term foreign currency commercial paper rating: Affirm at Prime-1- Long-term global local currency senior unsecured debt program rating: Affirm at (P)Aa3- Long-term foreign currency senior unsecured debt program rating: Affirm at (P)Aa3- Long-term foreign currency subordinated debt rating: Downgrade to A3 from A2- Long-term global local currency subordinated debt program rating: Downgrade to (P)A3 from (P)A2- Long-term foreign currency subordinated debt program rating: Downgrade to (P)A3 from (P)A2- Baseline credit assessment: Lower to a2 from a1- Adjusted baseline credit assessment: Lower to a2 from a1- Long-term counterparty risk assessment: Assigned at Aa3(cr)- Short-term counterparty risk assessment: Assigned at Prime-1(cr)- Outlook: StableBanco del Estado de Chile- Long-term global local currency deposit rating: Downgrade to Aa3 from Aa2, stable outlook- Short-term global local currency deposit rating: Affirm at Prime-1- Long-term foreign currency deposit rating: Confirm at Aa3, stable outlook- Short-term foreign currency deposit rating: Affirm at Prime-1- Long-term foreign currency senior unsecured debt rating: Confirm at Aa3, stable outlook- Long-term foreign currency senior unsecured debt program rating: Confirm at (P)Aa3- Baseline credit assessment: Lower to baa2 from a3- Adjusted baseline credit assessment: Lower to baa2 from aa3- Long-term counterparty risk assessment: Assigned at Aa3(cr)- Short-term counterparty risk assessment: Assigned at Prime-1(cr)- Outlook: StableBanco Estado, New York Branch- Long-term foreign currency deposit rating: Confirm at Aa3, stable outlook- Short-term foreign currency deposit rating: Affirm at Prime-1- Long-term global local currency senior unsecured debt program rating: Confirm at (P)Aa3- Outlook: StableBanco Itau Chile- Long-term global local currency deposit rating: Upgrade to A2 from A3, stable outlook- Short-term global local currency deposit rating: Affirm at Prime-2- Long-term foreign currency deposit rating: Upgrade to A2 from A3, stable outlook- Short-term foreign currency deposit rating: Affirm at Prime-2- Baseline credit assessment: Affirm at baa2- Adjusted baseline credit assessment: Raise to baa1 from baa2- Long-term counterparty risk assessment: Assigned at A2(cr)- Short-term counterparty risk assessment: Assigned at Prime-2(cr)- Outlook: StableBBVA (Chile)- Long-term global local currency deposit rating: Upgrade to A3 from Baa1, stable outlook- Short-term global local currency deposit rating: Affirm at Prime-2- Long-term foreign currency deposit rating: Upgrade to A3 from Baa1, stable outlook- Short-term foreign currency deposit rating: Affirm at Prime-2- Long-term foreign currency senior unsecured debt rating: Upgrade to A3 from Baa1, stable outlook- Baseline credit assessment: Affirm at baa3- Adjusted baseline credit assessment: Affirm at baa2- Long-term counterparty risk assessment: Assigned at A2(cr)- Short-term counterparty risk assessment: Assigned at Prime-2(cr)- Outlook: StableBanco Santander-Chile- Long-term global local currency deposit rating: Affirm at Aa3, stable outlook- Short-term global local currency deposit rating: Affirm at Prime-1- Long-term foreign currency deposit rating: Affirm at Aa3, stable outlook- Short-term foreign currency deposit rating: Affirm at Prime-1- Short-term foreign currency commercial paper rating: Affirm at Prime-1- Long-term foreign currency senior unsecured debt rating: Affirm at Aa3, stable outlook- Long-term foreign currency senior unsecured debt program rating: Affirm at (P)Aa3- Baseline credit assessment: Affirm at a2- Adjusted baseline credit assessment: Affirm at a2- Long-term counterparty risk assessment: Assigned at Aa3(cr)- Short-term counterparty risk assessment: Assigned at Prime-1(cr)- Outlook: StableBanco de Crédito e Inversiones- Long-term global local currency deposit rating: Affirm at A1, negative outlook- Short-term global local currency deposit rating: Affirm at Prime-1- Long-term foreign currency deposit rating: Affirm at A1, negative outlook- Short-term foreign currency deposit rating: Affirm at Prime-1- Long-term foreign currency senior unsecured debt rating: Affirm at A1, negative outlook- Baseline credit assessment: Affirm at a3- Adjusted baseline credit assessment: Affirm at a3- Long-term counterparty risk assessment: Assigned at A1(cr)- Short-term counterparty risk assessment: Assigned at Prime-1(cr)- Outlook: NegativeBanco de Credito e Inversiones (Miami Branch)- Short-term global local currency commercial paper rating: Affirm at Prime-1CorpBanca- Long-term counterparty risk assessment: Assigned at Baa2(cr), On review for upgrade- Short-term counterparty risk assessment: Assigned at Prime-2(cr), On review for upgradeThe principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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