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

Fitch has also affirmed the National Long-Term Ratings of Banco BICE and its holding company, BICECORP S.A., at 'AA+(cl)'. A full list of rating actions is at the end of this press release.

Key Rating Drivers

Banco BICE - VR, IDRs and National Ratings

Ratings Based on Intrinsic Creditworthiness: Banco BICE's (BICE, or the bank) Long-Term IDRs and National Rating are driven by its intrinsic creditworthiness, as reflected in its Viability Rating (VR) of 'bbb+'. The bank's VR exceeds its implied VR, as its risk profile has a higher influence on its assigned VR than the weighting would suggest (10%). In Fitch's view, the bank's conservative risk profile of 'a-', which is one notch above the operating environment (OE) assessment, will have a positive impact on BICE's financial metrics over the long term, beyond what is reflected by its current Key Rating Drivers (KRD) scores.

Solid Risk and Business Profile: The ratings also consider the bank's strong asset quality ratios, which are underpinned by Banco BICE's conservative risk management policies, as well as its business profile. Despite a modest market share of about 3.6% in loans in Chile, the bank's revenue and funding mix is more diversified than local peers. Although the bank's capital metrics are lower than similarly rated regional peers (universal/commercial banks with OEs scored in the 'bbb' category), excess loan loss reserves (LLRs) and high collateral also support Banco BICE's loss absorption capacity.

Sound Asset Quality: BICE's impaired loans ratio, which reached 0.83% as of YE 2022 (2019-2022 average: 0.56%), is commensurate with the implied 'bbb' category. Fitch assesses the bank's asset quality KRD score above its implied level at 'a-' due to higher collateral and reserves and historical and future metrics. BICE's total reserve coverage including additional voluntaries provisions of impaired loans (2.7x at YE 2022) is also strong relative to a peer average of 2.0x. The bank's small size and business model, which is focused on corporate and large companies, results in modest portfolio concentrations with the 20 largest debtors representing about 9% of gross loans and 0.87x common equity as of YE 2022 though this level is low compared with local peers.

Diversified Revenue Stream: BICE's more diversified operating revenues relative to its domestic peers, higher net interest margin, historically low credit impairment and tight cost control have underpinned the bank's operating profit-to-risk-weighted assets (RWA) ratio, which averaged 1.8% for 2022-2019 and stood at 2.5% at YE 2022, commensurate with its implied 'bbb' category score for earnings and profitability. Fitch expects this trend in profitability to decelerate in 2023 as inflation and interest rates begin to slowly decline and credit costs gradually increase or if the recession is deeper or longer than currently anticipated.

Capitalization Challenge: Fitch assesses BICE's capitalization score above its implied score at 'bbb-' based on the entity's low risk profile and its ample reserve coverage. BICE's common equity Tier 1 (CET1) ratio improved 127 basis points to 10.6% as of YE 2022. This reflected recurrent internal capital generation based on the bank's low dividend payout, averaging 29.6% over the last four years. BICE's additional voluntary LLRs, accounting for 0.83% of RWAs, also provide a buffer in the event of unexpected losses (total loss absorption capacity: 11.4%) while its total regulatory capital ratio stood at 15.3% at YE 2022. Banco BICE is filling a junior subordinated debt program eligible as additional Tier 1 capital (AT1); those instruments have going concern loss absorption capacity and its issuance would allow the bank to rise Tier 1 capital ratio above 12% of RWA.

Diversified, Stable Funding Mix: BICE's funding is predominantly wholesale though conservative liquidity management helps to mitigate this risk. BICE's loans-to-customer deposits ratio averaged 129% over the past four years and is commensurate with a 'bb' implied score. Fitch adjusted the funding and liquidity score to 'bbb+' considering the bank's access to stable long-term funding and good liquidity. BICE's consolidated liquidity coverage ratio stood at 140% at 4Q22, while its net stable funding ratio exceeded 100% as of the same date. Deposit concentration is moderate, with the 20 largest time deposits accounting for about 25% of total deposits as of YE 2022.

Rating Sensitivities

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

Banco BICE

VR, IDRs and National Ratings

Banco BICE's IDRs and VR could be downgrade if BICE's CET1 ratio is not maintained at a minimum of 10% over the rating horizon, either due to lower earnings retention or a marked increase in risk appetite;

In addition, Banco BICE's VR could be downgraded if its operating profit to RWA ratio falls and remains consistently below 1%.

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

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

Banco BICE

VR, IDRs and National Ratings:

A potential upgrade is limited given BICE's relatively modest domestic franchise and the current operating environment.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Senior Unsecured Debt: Fitch rates BICE's senior unsecured bonds at the same level as the bank's Long-Term IDRs and National Long-Term Ratings of 'BBB+' and 'AA+(cl)', respectively, as the likelihood of default of the senior debt is the same as that of the issuer. Banco BICE's senior unsecured debt rating of 'BBB+' would generally move in tandem with the bank's Long-Term IDR.

Junior Subordinated Debt: Fitch rates Banco BICE's National scale junior subordinated debt -AT1- at 'A+(cl)', three notches below its National long-term issuer rating. The three-notched from the anchor rating considers two-notches for loss severity (due to its expected poor recoveries upon non-performance), and one-notch for the non-performance risk (due to its deep subordination, significant incremental coupon risk). Given Chilean banks' AT1 coupons are not discretionarily cancellable, this feature explains one notching for non-performance risk, instead of the agency baseline of two notches.

Subordinated Debt: Fitch rates BICE's National scale subordinated debt at 'AA-(cl)', two notches below its National Long-Term Rating. The two-notch difference considers the loss severity due to its subordinated nature (after default), and no additional notching for non-performance risk given the subordinated debt's gone concern feature (triggered after the point of non-viability).

Government Support Rating: BICE's 'bb+' Government Support Rating (GSR) reflects the bank's small franchise within the Chilean financial system (3.5% of total customer deposits as of February 2023). In Fitch's view, this results in a moderate or low systemic significance with a more limited contagion risk despite the sovereign's consistently strong statements on support for the banking system.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Senior Unsecured Debt: Banco BICE's senior unsecured debt rating of 'BBB+' would generally move in tandem with the bank's Long-Term IDR.

National Debt Ratings: Senior, subordinated and junior subordinated National debt ratings would generally move together with the bank's Long-Term National Rating. The subordinated debt would remain two notches below the bank's National Long-Term Rating while the junior subordinated debt would remain three notches below the bank's National Long-Term Rating.

Government Support Rating: Banco BICE's GSR is sensitive to changes in Fitch's assessment about the ability and/or propensity of the sovereign to provide timely support to the bank. A potential rating upgrade in the bank's GSR is unlikely as Fitch does not consider Banco BICE to be a D-SIB in the Chilean financial system.

SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS

BICECORP S.A.

Fitch has affirmed BICECORP's National Long-Term Rating at 'AA+(cl)' and assigned a new National Short-Term Rating at 'N1+(cl)'. BICECORP's ratings are equalized to Banco BICE's National ratings. The equalization is mainly driven by the holding company's moderate double leverage (generally below 120%), and its prudent liquidity management. Equalization is also supported by the same jurisdiction of operations with its subsidiary; the holding company's 99.9% ownership of BICE and the long track record of dividends provided by the bank. Fitch also considers the contribution of BICECORP's life insurance company BICE Vida rated at 'AA+(cl)'/Stable.

The National ratings of BICECORP's senior unsecured debt issuances were also affirmed and 'AA+(cl)' and 'N1+(cl)' and those are rated at the same level as the entity's National ratings as the likelihood of default of the senior debt is the same as that of the issuer.

The rating of BICECORP's common shares, affirmed at 'Primera Clase Nivel 3(cl)' considers the holding company's solvency, reflected in its 'AA+(cl)' National Long-Term Rating, and the shares' poor liquidity.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

BICECORP S.A.

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

BICECORP's ratings are sensitive to any negative change in Banco BICE's IDRs;

The bank holding company's ratings could also be downgraded in the event of a material and sustained increase in BICECORP's double-leverage metrics (above 1.2x), or if Fitch perceives any weakening of the holding company's liquidity position and its management;

Additionally, a change in the dividend flows from the operating company or a material increase in debt levels at the holding company that affects its debt coverage ratios could also be detrimental to its ratings;

The rating of BICECORP common shares could be affected by a multiple notch downgrade of the entity's National Long-Term Rating.

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

BICECORP S.A.

Any upgrade would be linked to a similar rating action on Banco BICE, which appears unlikely over the rating horizon due to the Stable Outlook on the bank's long-term ratings.

VR ADJUSTMENTS

The VR of 'bbb+' has been assigned above the 'bbb' implied VR due to the following adjustment reasons: Risk Profile (positive);

The Business Profile score of 'bbb' has been assigned above the 'bb' category implied score due to the following adjustment reasons: Strategy and Execution (positive);

The Asset Quality score of 'a-' has been assigned above the 'bbb' category implied score due to the following adjustment reasons: Historical and Future Metrics (positive) and Collateral and Reserves (positive);

The Capitalization and Leverage score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reasons: Reserve Coverage and Asset Valuation (positive) and Risk Profile and Business Model (positive);

The Funding & Liquidity score of 'bbb+' has been assigned above the 'bb' category implied score due to the following adjustment reasons: Non-Deposit Funding (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

BICECORP S.A. National scale ratings are driven by to those of its main operating subsidiary, Banco BICE.

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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