Fitch Ratings has affirmed Scotiabank Uruguay S.A.'s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+' and Viability Rating (VR) at 'bb'.

The Rating Outlook is Stable.

Fitch has withdrawn Scotiabank Uruguay's Support Rating of '2' as this support rating is no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on Nov. 12, 2021. In line with the updated criteria, Fitch has assigned Scotiabank Uruguay a Shareholder Support Rating (SSR) of 'bbb+'.

Key Rating Drivers

Scotiabank Uruguay's IDRs and SSR are driven by the support that Fitch believes the banks would receive from its ultimate parent, Bank of Nova Scotia (BNS; AA-/Negative). The bank's Foreign Currency Long-Term IDR is capped by Uruguay's Country Ceiling due to transfer and convertibility risks and is two notches above the sovereign's Foreign Currency IDR.

The subsidiary's IDRs are above Uruguay's sovereign ratings (BBB-/Stable), reflecting the high ability and propensity of support, if required, from its highly-rated parent, according to Fitch's criteria. Fitch believes that the propensity to support is driven primarily by the relatively limited role the subsidiary plays in the group given its small size relative to BNS, and the reputational risk of not providing such support, if needed, given the common branding.

There are multiple synergies with the parent, even though Scotiabank Uruguay plays a limited role in BNS's strategy, and Uruguay is not considered a core market for the parent. Additionally, the subsidiary's risk-management policies are aligned to those of the parent and to the local regulatory practices.

Scotiabank Uruguay's VR is driven by qualitative and quantitative factors. Its business profile is determined by its moderately-sized, but well-established franchise, as the fourth largest privately-owned bank in the country with diversified lending and bank services. In addition to its corporate and SME services, the bank is one of the key players in retail loans through its competitive credit card, mortgage and auto loan products. Scotiabank Uruguay's VR also considers its financial profile, which has seen positive trends in recent years in its asset quality and liquidity metrics.

The bank's capitalization ratios decreased by year end 2021 due to the impact of the valuation of the available for sale securities portfolio. The bank's CET1 decreased to 8.5% from 10.1% as of YE21. Historically, the bank has maintained relatively tight capital ratios partly due to the parent's capital allocation policy that allows its subsidiaries to operate with minimum regulatory capital levels. This approach is similarly taken by other foreign banks in the country. The parent company injected capital into the bank several times in the past to promote asset growth. Capital assessment benefits from the ordinary support from BNS.

Scotiabank's asset quality is satisfactory at December 2021 with a low NPL to total loan ratio of 1.3% which compares well to its peers. This compares well to the December 2020 ratio of 2.5%. Despite the pandemic, the bank managed to protect its asset quality driven by its more conservative origination and collection policies. At December 2021,lLoan loss reserves comfortably covered 313% of impaired loans.

Scotiabank's earnings have historically been somewhat volatile and a weakness for the financial profile. The closing of the economy continuing in 2021 caused net interest margins and fees to shrink while relevant investment and restructuring costs occurring at the same time, impacted the bank's profitability metrics as evidenced by the OP/RWA ratio of 0.3% at YE2021. Fitch expects some improvement in profitability metrics in 2022 as demand for credit and services generate more revenue and the bank benefits from the restructuring and digital platform investments that already have and will reduce recurring costs.

Rating Sensitivities

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

Scotiabank Uruguay's IDRs and SSR would likely move in line with any change to Uruguay's sovereign rating. In the event of changes in the sovereign ratings and/or country ceiling, Fitch expects that the bank's Local Currency IDR will likely remain two notches above the Local Currency sovereign rating. The IDRs SSR are also sensitive to a change in Fitch's views on BNS's ability and propensity to provide support, a scenario Fitch considers unlikely at present.

VR

The bank's VR could be downgraded if the bank fails to maintain its operating profits/risk weighted assets (RWA) metric above 0.5% and CET 1 above 8.5%.

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

Scotiabank Uruguay's IDRs and SSR would likely move in line with any change to Uruguay's sovereign rating. In the event of changes in the sovereign ratings and/or country ceiling, Fitch expects that the bank's Local Currency IDR will likely remain two notches above the Local Currency sovereign rating. The IDRs and SSR are also sensitive to a change in Fitch's views on BNS's ability and propensity to provide support, a scenario Fitch considers unlikely at present.

VR

Scotiabank Uruguay's VR could eventually be upgraded if the bank achieves sustainable earnings and profitability (i.e. sustains operating profits/RWA ratio above 1%)

VR ADJUSTMENTS

The Business Profile score of 'bb+' has been assigned above the implied score of 'b' due to Market Position.

The Capitalization and Leverage score of 'bb-' has been assigned above the implied score of 'b' due to Capital Flexibility and Ordinary Support.

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

The IDR ratings of Scotiabank Uruguay are driven by the rating of ultimate parent, Bank of Nova Scotia

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) 2022 Electronic News Publishing, source ENP Newswire