Fitch Ratings has published Chilean-based Banco Internacional's (Internacional) Long-Term (LT) Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BBB' and a Short-Term (ST) Foreign and Local Currency IDRs of 'F3'.

Fitch has also published Internacional's Shareholder Support Rating (SSR) of 'bbb' and Viability Rating (VR) of 'bbb-'. The Rating Outlook for the LT IDRs is Stable. At the same time, Fitch has assigned Internacional's proposed senior unsecured USD notes an expected rating of 'BBB(EXP)'.

These USD denominated notes will be issued for an amount of up to USD500 million with a tenor of five years, at a fixed interest rate to be set at the time of the issuance. The net proceeds will be used for general corporate purposes. The final rating is subject to the receipt of final documentation conforming to information already received by Fitch.

Key Rating Drivers

SSR, IDRs and VR

Support Driven Ratings: Internacional's IDRs are driven by the potential support from its parent company, Inversiones La Construccion S.A. (ILC), if needed, as reflected in the bank's SSR of 'bbb'. Fitch believes ILC's ability to support its subsidiary is reflected in its LT IDRs currently at 'BBB'. The parent propensity to provide support to Internacional is high as the bank is a key and integral part of the group's business and provides core products and services in the parent's core market. Moreover, propensity to provide support to the bank is highly influenced by the potential implications for the parent bank. Default would constitute a huge reputational risk to ILC and materially damage its franchise. The bank provides a key line of business to ILC's four strategic target sectors (pensions, insurance, banking and health) and represented about 30% of the parent's consolidated assets at March 2023.

Fitch also considered ILC's support record as a moderate importance factor in its SSR assessment. Internacional's parent has made a clear commitment to provide ordinary support for the bank's growth. ILC also made a commitment to the Chilean banking regulator to inject capital to the bank.

VR of 'bbb-' in Line with Implied VR: Internacional's assigned VR of 'bbb-' is in line with its implied VR and continues to reflect its position as a small- to medium sized bank in Chile as well its adequate financial profile relative to similarly rated local and international peers (universal/commercial banks in 'bbb' category operating environment).

Business Profile: Internacional's small, albeit growing, domestic franchise, is offset by its strong record of execution against stated goals over multiple periods, as well as its good access to customers and products as part of a larger group, ILC. As such, its assigned business profile score of 'bbb-' exceeds its implied 'bb' category score. In Fitch's view, Internacional's effective strategy along with a more tempered risk appetite, has allowed the bank to continue strengthening its capital and liquidity metrics, while containing further asset quality deterioration in a sluggish economic environment.

Controlled Asset Quality: The bank has successfully de-risked its loan portfolio while doubling its size over the past five years. Nevertheless, the downward trend in non-performing loans (NPLs) was followed by an increase in NPLs to 2.7% of gross loans in March 2023 from 1.7% at end-2021, mainly due to a few corporate customers in the real estate business with payment delays. Management expects to return NPLs to the 2% range in the near term. Fitch expects asset quality ratios to remain at current levels this year, however, a recession could pressure credit risks. Although reserve coverage remained below the local peer median (including additional reserves), it is commensurate with its business model and the loan portfolio's good collateralization.

Adequate Profitability: The bank's operating profit to risk weighted assets (RWA) ratio has been steadily above 1% for the last four years. Fitch's core metric increased to 1.9% at YE 2022 (from 1.7% at YE 2021), supported by a higher NIM and controlled loan impairment charges. Fitch expects further pressure on revenues and earnings due to the lower growth relative to historical trends, strong competition and higher credit costs over the medium term.

Stable Capital Metrics: Internacional'sCET1 ratio has been stable at around 9.74% in March 2023, due to a lower dividend payout; but this ratio still remains lower than its international peers. The total regulatory capital ratio reached 15.35% at this same date. Fitch expects the bank's core capital metric to remain stable in 2023, considering a capital injection of CLP25,000 million, recently approved at the extraordinary shareholder meeting held on April 25, 2023 to support loan growth (10%), and a dividend payout plan at a maximum of 30% over the next five years.

Concentrated, Wholesale Funding: Like many small and midsize Chilean banks, and due to the nature of Internacional's core business, improving its funding structure remains one of the bank's biggest challenges, especially due to its reliance on wholesale funding and the small proportion of low- or no-cost demand deposits. The bank's loans/deposits ratio at 144% as of March 31, 2023, is higher than other small and mid-sized banks, as the bank has made use of the secured funding facilities provided by the Central Bank of Chile in early 2020 (9.6% of the bank's total funding, as of March 31, 2023), which substituted a portion of customers deposits. In Fitch's view, the bank's liquidity buffer will remain high, driven by its solid LCR, which reached 258% on a consolidated basis at March 31, 2023.

Rating Sensitivities

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

SSR and IDRs

Internacional's SSR and IDRs are sensitive to a negative rating action on ILC's IDRs. In addition, the bank's IDRs and SSR could be affected by a change in Fitch's opinion on the parent's ability and propensity to provide support.

VR

A material deterioration in the Internacional's asset quality that results in a sustained decline in its operating profit to RWAs below 1% or a CET1 ratio consistently below 9% could be negative for its intrinsic creditworthiness.

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

SSR and IDRs

Internacional's SSR and IDRs are equalized with the IDRs of ILC, and could be upgraded in the case of a positive rating action on its ultimate parent's IDRs. An upgrade of these ratings over the rating horizon is highly unlikely as the parent's IDRs have a Stable Outlook.

VR

Limited upside potential for Internacional's VR over the near term, given its small franchise and size within the Chilean financial system.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

SENIOR UNSECURED DEBT

The expected rating of the senior unsecured global debt is at the same level of the bank's LT IDR of 'BBB', considering the probability of default of the bonds is the same of the issuer. The bonds rank equal in right of payment with all other present or future unsecured and unsubordinated obligations of the issuer. The notes will be effectively subordinated to secured indebtedness and to certain direct, unconditional and unsecured general obligations that in case of the bank insolvency are granted preferential treatment pursuant to Chilean law.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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

Internacional's senior unsecured debt ratings would move in line with the bank's LT IDR.

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

Internacional's senior unsecured debt ratings would move in line with the bank's LT IDR.

VR ADJUSTMENTS

The Business Profile score of 'bbb-' is above the 'bb' category implied score due to the following adjustment reason (s): Group Benefits and Risks (positive).

The Earnings & Profitability score of 'bb+' is below the 'bbb' category implied score due to the following reason: Historical and Future metrics (negative).

The Funding & Liquidity score of 'bbb-' is above the 'bb' category implied score due to the following reason (s): Liquidity Coverage (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 Internacional's IDRs and SSR are linked to the ratings of its parent company, Inversiones La Construccion 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.

(C) 2023 Electronic News Publishing, source ENP Newswire