Fitch Ratings has affirmed Banco BTG Pactual Chile's (BTG Chile) 'bbb-' Viability Rating (VR) and 'BBB-' Long-Term (LT) Foreign and Local Currency Issuer Default Ratings (IDRs).

Fitch has also affirmed the bank's National Long-Term Rating at 'AA-(cl)'. The Rating Outlook on the Long-Term ratings is Stable.

Key Rating Drivers

VR, IDRs and National Ratings

Long-Term Issuer Default Rating Based on Viability Rating: Banco BTG Pactual Chile's (BTG Chile's) Long-Term (LT) Issuer Default Rating (IDR) and Long-Term National rating are driven by its intrinsic creditworthiness, as reflected in its 'bbb-' Viability Rating (VR). Fitch's assessment of the bank's business profile, currently 'bbb-', has a stronger impact on the assigned VR than the weighting would suggest (20%). Although the bank is part of a larger financial group, its franchise remains small, albeit growing, counterbalancing its solid financial profile that is currently captured by its 'bbb' category Key Rating Driver scores.

Business Profile High Influence: BTG Chile has a small franchise as a bank in Chile (about 0.9% of total loans as of YE22), but a long track record and a leading market position in investment banking, asset and wealth management, with more than 30 years of experience in Chile. This underpins the bank's diversified revenue stream, which has resulted in a solid financial profile. BTG Chile's strategy and execution have resulted in solid profitability, good asset quality, solid capitalization and adequate liquidity management in recent years.

Good Risk Profile and Contagion Risk Limited: The bank's asset quality, cost of risk and earnings generation, provide the entity an ample loss absorption capacity relative to peers. Fitch believes the bank's strong financial profile, independent management, funding and liquidity; limited direct exposure to its parent; strong local regulator capable of identifying and, if necessary, restricting transfers of capital and liquidity from the subsidiary to the parent; and the difference in operating environment (OE) with the parent would limit contagion risk, supporting BTG Chile's higher stand-alone credit profile.

Good Asset Quality Despite Portfolio's Concentrations: The bank's small size and its business model focused on corporate and large companies results in high portfolio concentration as the 20 largest debtors represented about 1.7x common equity and 43% of total loans as of February 2023. The bank's core asset quality metric, impaired loans ratio, stood at 0% at end-February 2022 (average 2019-2022: 0.99%). The bank's loan loss reserve to total loans stood at a comfortable 2.6% as of February 2023 and BTG Chile's credit exposures were also highly collateralized with about 100% loan to value.

Solid Financial Profile: BTG Chile's financial profile analysis incorporates the blended approach of the bank and non-bank criteria, specifically for traditional investment managers, since this business line is one of the bank's main revenue sources, which mostly originated from net fees (46% average of total operating income for 2019-2022). In addition, the EBITDA/fee revenue ratio was a solid 202% average over the past four years (2019-2022). The bank's profitability has been growing rapidly since 2017 with an average operating profit/risk-weighted assets (RWA) ratio of 2.8% for the last four years and it is expected to continue to surpass 2% in the near future. BTG Chile has a more solid and diversified income mix compared to other niche and small banks in Chile.

Sound Capital Ratios: Fitch expects BTG Chile's strong Common Equity Tier 1 (CET1) to RWA ratio (17.5% at February 2023) to continue to compare positively with small and niche banks in Chile, due to recurrent internal capital generation (payout ratio has been 0% historically) and more conservative loan growth projections for 2023. At the same date, the NBFI metric of gross debt to EBITDA ratio was 2.6x, and it is commensurable with 'bbb' category for traditional investment managers, although, naturally, the gross debt has increased due to the bank's reliance on senior debt as it grows. Fitch expects BTG Chile's relatively stable earnings generation capacity and organic growth to allow the CET1 ratio to be preserved within the rating category.

Independent, Concentrated Funding: The bank in Chile is self-funded and does not depend on parent facilities. Fitch expects the bank's loan to deposit ratio (123% average for the past four years) to remain around a level commensurate with its rating category. Deposit concentration was one of the major improvements as concentration is now about 24% for the 20 largest depositors in February 2023, compared to a higher 62% in YE21. Considering the bank's small size and short track record concentration ratios could be relatively more volatile in the future.

The bank's liquidity coverage ratio (LCR) stood at 208% and its net stable funding ratio (NSFR) at 98% as of February 2023. The core metric of traditional investment managers, EBITDA/interest expense coverage, was relatively low and stood at a 2.4x average over 2019-2022. At the same date, funding facilities from the central bank represented about 8.2% of BTG Chile's total funding, a figure similar to its peers.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

VR, IDRs and National Ratings

Downward pressure on BTG Chile's ratings could stem from a higher risk appetite that results in significantly weaker asset quality, which could affect the bank's profitability and, ultimately, its capitalization, with a sustained decline in the bank's CET1 ratio below 13% or its operating profit/RWA ratio below 2%;

National Ratings are sensitive to a weakening of creditworthiness relative to other Chilean issuers.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

VR, IDRs and National Ratings:

A potential upgrade of the bank's ratings is limited given its still relatively small domestic business profile;

BTG Chile's VR and IDRs are also limited as the ratings are at the typical maximum three-notch uplift from its parent's IDRs as per Fitch's criteria.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Debt Ratings: Fitch rates BTG Chile's senior unsecured bonds at the same level as the bank's national long-term scale ratings of 'AA-(cl)', as the likelihood of default of the senior debt is the same as that of the issuer. Fitch rates BTG Chile's National-scale subordinated debt 'A(cl)', two-notches below its national long-term issuer rating. The two-notch difference factors loss severity due to its subordinated nature (after default), coupled with no additional notching for non-performance risk given the subordinated debt's gone concern feature (triggered after the point of nonviability).

Support Rating: The 'b+' Shareholder Support Rating (SSR) reflects Fitch's view that BTG Chile's ultimate parent, Banco BTG Pactual S.A. has relatively limited capacity to support should the need arise, despite being very willing to do so. Fitch considers the Chilean operations as strategically important for Banco BTG Pactual S.A.; it is relatively small compared with the parent, but it plays an important role in the group due to proven business synergies in the regional expansion, and due to its correlation to the parent's reputational risk, considering they share the same brand.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade

Senior and subordinated debt ratings would generally move together with the bank's long-term national ratings. The subordinated debt would remain two-notches below the bank's long-term national ratings;

Reductions in BTG Chile's SSR is subject to the potential downgrade of the ultimate parent. In addition, the bank's SSR could be affected by a change in Fitch's opinion on its parent's propensity to provide support, which appears unlikely in the medium term.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Senior and subordinated debt ratings would generally move together with the bank's long-term national ratings. The subordinated debt would remain two-notches below the bank's national long-term rating.

A potential rating upgrade in the bank's SSR is unlikely considering the current Stable Outlook on the bank's ultimate parent, Banco BTG Pactual, S.A. LT IDRs (BB-/Stable).

VR ADJUSTMENTS

The VR of 'bbb-' has been assigned below the 'bbb' implied VR due to the following adjustment reasons: Business Profile (negative).

The Business Profile score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reasons: Group benefits and risks (positive) and Strategy and execution (positive).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

Banco BTG Pactual Chile's ratings are linked to those of its ultimate parent, Banco BTG Pactual S.A.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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