Scotiabank Perú A : 22. INFORMES DE CLASIFICACIÓN DE RIESGO.

Firmado Digitalmente por:

FRANCISCO GUILLERMO RIVADENEIRA GASTANETA Fecha: 22/07/2022 02:38:20 p.m.

Scotiabank Peru S.A.A.

Primary Credit Analyst:

Camilo Andres Perez, Mexico City + 52 55 5081 4446; [e-mail]

Secondary Contact:

Ivana L Recalde, Buenos Aires + 54 11 4891 2127; [e-mail]

Table Of Contents

Credit Highlights

Outlook

Anchor: 'bbb-' For Banks Operating Only In Peru

Business Position: Sound And Stable Market Position Along With A Diversified Business Base

Capital And Earnings: High Capitalization Is A Credit Strength

Risk Position: Future Business Strategy Reflects Lower Risk Appetite

Funding And Liquidity: Adequate Funding Structure And Liquidity Environmental, Social, And Governance

Support: A Subsidiary Status Provides Rating Stability

Key Statistics

Related Criteria

Related Research

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Scotiabank Peru S.A.A.

Ratings Score Snapshot

Credit Highlights

Key strengths

• A solid market position as the third-largest bank in Peru with a diversified product offering;
• Sound prospects for earnings and capitalization; and
• Group support given that the bank is a strategically important subsidiary of The Bank of Nova Scotia (BNS; A+/Stable/A-1).

Key risks

Issuer Credit Rating

BBB/Stable/A-2

• Peru's macroeconomic and political woes could erode the domestic business conditions; and
• The rising cost of funding in the middle of a marked contractive monetary policy, but mitigated through higher lending interest rates.

The bank retains favorable intrinsic creditworthiness, but uncertainties over Peru's economic growth, in part due to

political instability, pressure the ratings. Scotiabank Peru S.A.A.'s stand-alone credit profile (SACP) remains at 'bbb+'. However, we cap the ratings on the bank to the 'BBB' foreign currency rating on Peru because of the sovereign influence on the bank's credit profile, given it's fully exposed to the country in the form of loans and investments.

Favorable credit fundamentals, but the COVID-19pandemic took a toll. We consider Scotiabank Peru to have a solid business profile given that it's the third-largest bank in Peru and given its sound business and income diversification. We expect conservative credit growth, rebounding earnings--after the hit in 2020 and part of 2021--and a flexible dividend policy will enable the bank keep its strong capital adequacy in 2022-2024. After the pandemic-induced hit in 2020, the bank's asset quality has improved notably during the last year due higher liquidity of borrowers and higher write-offs of past-due loans. On the other hand, Scotiabank Peru's funding and liquidity remains adequate, but

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Scotiabank Peru S.A.A.

competition to retain customer deposits has increased in the last few months amid higher interest rates, which has pressured the base and cost of funding.

Scotiabank Peru's subsidiary status results in ratings stability. We continue to view Scotiabank Peru as a strategically important subsidiary of BNS, which owns 98% of the former. The group support could add up to three notches to the rating above Scotiabank Peru's SACP, but up to one notch below the group credit profile. However, our ratings on Scotiabank Peru don't incorporate notching from group support at this point because of the sovereign rating constrains those on the bank. The subsidiary has a significant buffer against a potential deterioration in its SACP.

The agreement to sell CrediScotia doesn't have immediate impact on Scotiabank Peru's creditworthiness. In May 2022, Scotiabank Peru signed an agreement to sell its subsidiary, CrediScotia Financiera S.A. (CSF; not rated), to Grupo Unicomer Corp. (Unicomer; BB-/Stable/--), subject to regulatory approvals. We don't expect significant changes in Scotiabank Peru's credit profile if the transaction closes, because CrediScotia's loans and deposits represent less than 4% of Scotiabank Peru's total volumes. The bank's business position and capitalization would remain broadly the same, while asset quality would somewhat improve as CrediScotia carries higher credit risks given its focus on lower-income borrowers.

Outlook

The stable outlook on Scotiabank Peru reflects the outlook on Peru, and our expectation that the ratings on the bank will move in tandem with those on the sovereign in the next 12-24 months because of its high exposure to the domestic market. The stable outlook also incorporates the stability of the bank's intrinsic creditworthiness and our expectation that it will remain a strategically important subsidiary of BNS. The parent's potential support confers a buffer against hypothetical hits to the bank's SACP.

Downside scenario

We could lower the rating on the bank in the next 24 months if we were to take a similar action on the sovereign. A downward revision of the bank's SACP (for instance, as result of a lower capitalization or higher credit risks) wouldn't result in a downgrade, given that Scotiabank Peru is a strategically important subsidiary that could receive group support, which could result in up to three notches to the rating above the SACP.

Upside scenario

We could take a positive rating action on Scotiabank Peru if we were to take a similar action on the sovereign, while the bank's intrinsic credit profile remain unchanged. However, a sovereign rating change seems unlikely at this point.

Anchor: 'bbb-' For Banks Operating Only In Peru

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores

to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a bank operating in

Peru is 'bbb-'. Peru's economic risk reflects its low per capita GDP (about $6,000) and the banking industry's high

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Scotiabank Peru S.A.A.

exposure to cyclical sectors such as small- to mid-size enterprises (SMEs) and microlending. We forecast GDP growth of about 2.5% in 2022, following a rebound of 13.5% in 2021 from a sharp decline due to the pandemic in 2020. Due to political instability, investors will likely remain more cautious, resulting in meager GDP growth in the next two years.

The industry's asset quality is likely to weaken in the second half of 2022 and start recovering in 2023.

The industry risk for banks operating in Peru reflects a solid regulatory framework, with ample supervisory coverage and periodic risk-based supervision. The central bank and Superintendencia de Banca y Seguros (SBS)--which regulates banks and insurers--are very active. Moreover, Peru has implemented Basel III standards tailored for the domestic financial system. Despite Peruvian banks' strong profitability, it has weakened during the pandemic, but we expect a consistent recovery, as seen in 2021. We also believe the financial system has healthy capital metrics and a diversified funding mix with a significant share of deposits from loyal customers, as well as the government's ability to provide liquidity if necessary. The law on loan interest rate caps didn't significantly hamper banks' profitability, but additional similar measures could weaken the system's competitive dynamics.

Business Position: Sound And Stable Market Position Along With A Diversified Business Base

Scotiabank Peru remains the third-largest bank in Peru with a market share of 16.8% and 14.2% in terms of loans and deposits, respectively, as of May 2022. The bank's market share remains stable, although it has a lower share of loans guaranteed by the government under the Reactiva and FAE programs than those of other large banks in the country. At the end of May 2022, Reactiva loans accounted for 5% of Scotiabank Peru's total loan portfolio, compared with the average of 9% for the banking industry. On the other hand, we estimate that Scotiabank Peru's business size will decrease only slightly if the sale of CrediScotia materializes. Its market share would decline only 40-60 basic points under such a scenario.

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Scotiabank Peru S.A.A.

Chart 1

We consider Scotiabank Peru to have diversified operations thanks to a broad portfolio in terms of lending segments, products, and economic sectors. The bank mainly lends to corporations and large companies (46% of total loans), and SMEs (18%) as of May 2022. The remaining 36% of the bank's portfolio consists of retail loans, with a focus on consumer lending (15% of total loans), mortgages (17%), and credit cards (4%). We expect Scotiabank Peru to keep a somewhat higher exposure to corporations and large companies than the banking system average, particularly so if the sale of CrediScotia closes. We expect the bank to maintain a conservative growth strategy in 2022-2023, growing at single digits with focus on more secured segments such as payroll loans, mortgages, and corporate lending.

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