Banking - Bancoestado.cl

Transcription

www.moodys.com
Moody’s Global
Banking
Credit Analysis
September 2008
Table of Contents:
Summary Rating Rationale
1
Key Issues
2
Analysis of Rating Considerations
3
Discussion of Qualitative Rating Drivers 3
Franchise Value
3
Market Share and Sustainability
4
Geographic Diversification
4
Risk Positioning
5
Regulatory Environment
7
Operating Environment
7
Discussion of Quantitative Rating Drivers 7
Profitability
7
Liquidity
8
Capital Adequacy
8
Efficiency
8
Asset Quality
9
Discussion of Support Considerations
9
Company Annual Statistics
11
Moody’s Related Research
19
Analyst Contacts:
New York
1.212.553.1653
0 Jeanne M. Del Casino
VP - Senior Credit Officer
Banco del Estado de Chile
Santiago, Chile
Summary Rating Rationale
Moody’s assigns a bank financial strength rating (BFSR) of C+ to Banco del
Estado de Chile (BancoEstado), with a stable outlook, one of the highest BFSRs
assigned to Latin American issuers. BancoEstado reported $27.4 billion in assets
(Chilean Pesos CHP 13.765 billion), $16.7 billion in deposits, and $1.2 billion in
equity as of June 30, 2008. The bank earned $106.8 million for the full year 2007
and $65.4 million for the first six months of 2008.
BancoEstado is Chile’s third largest bank and is wholly-owned by the Republic.
The bank performs significant economic and social roles as a full service
commercial bank. Its primary mission is to promote home ownership and finance
and to promote national savings by providing banking services to low- and middleincome individuals, and to other underserved segments of the population.
The bank is also an active lender to large corporations and a leading provider of
international trade finance. BancoEstado has the most geographically dispersed
branch network in Chile and the most ATMs enhanced through its alliances with
local retailers D&S and La Polar. Management is further diversifying the bank’s
business mix through payment services, consumer, small business, and
microfinance lending, as well as through bancassurance with its partner MetLife of
the US.
M. Celina Vansetti
Senior Vice President
Felipe M. Carvallo
Analyst
Mexico City
52.55.1253.5700
15 David Olivares Villagomez
Vice President - Senior Analyst
This Credit Analysis provides an in-depth
discussion of credit rating(s) for Banco del
Estado de Chile and should be read in
conjunction with Moody’s most recent Credit
Opinion and rating information available on
Moody's website. Click here to link.
BancoEstado’s BFSR reflects its extensive and unique franchise within Chile as
the only public sector bank, its solid profitability and asset quality, and its relatively
low risk balance sheet. The bank’s profit ratios are lower than those of its large,
privately-owned peers, reflecting a more liquid and less risky balance sheet, which
results in lower interest margins and pre-tax profitability. Government ownership
lends itself to a certain amount of public scrutiny that may slow the bank’s ability to
keep costs low; however BancoEstado has been quite successful in managing its
expense growth in recent years.
Credit Analysis
Moody’s Global Banking
High loan growth and corporate borrower concentrations are important risks we see for BancoEstado and the
Chilean banks in general. While BancoEstado’s exposures tend to be to top-quality borrowers or projects, they
are still large relative to the bank’s profitability and capitalization. Banks also face stiff and increasing
competition in all customer segments within Chile’s relatively mature market where margins are already
relatively tight relative to other Latin American markets. Nevertheless, BancoEstado’s implicit government
guarantee and funding and market share advantages provide it with a significant competitive edge and allow
the bank to benefit from flights to quality.
BancoEstado’s Aa1 long term local currency deposit rating incorporates its C+ BFSR, which translates to a
baseline credit assessment of A2 and which is lifted four notches based on our assumption of full systemic
support in the event of high stress. This assumption is based on BancoEstado’s 100% government ownership
and policy mandate, as well as its important deposit franchise, the third largest in Chile. Therefore any
significant change in BancoEstado’s ownership would entail a credit event that could lead to a change in the
local currency deposit rating.
The bank’s A2 long term foreign currency deposit rating is constrained by the A2 country ceiling for foreign
currency deposits and is therefore sensitive to upward or downward movement in the foreign currency country
ceiling.
Upward pressure on the C+ BFSR could come about if BancoEstado's core profitability improves significantly
and the bank maintains strong asset quality and liquidity. Reduced borrower concentrations would also be an
important ratings driver. Downward pressure on the BFSR could result from a marked decline in financial
fundamentals or franchise value.
Key Issues
Unique public sector role: lower profit ratios for structural reasons
BancoEstado falls short of its large peers in terms of overall profitability, partly because of its social mission.
The bank has a relatively liquid balance sheet mandated by its owner as well as higher operating leverage
resulting from its "bancarización" mandate to penetrate underserved customer segments. Estado’s profit ratios
are therefore not entirely comparable to those of the private sector banks that are more profit-oriented and
devote a higher proportion of their balance sheets to riskier loan assets.
Slower economic growth, high inflation and interest rates could still
dampen profits
Chile’s economy slowed during 2008 to 4.3% year over year in the second quarter of 2008 versus the 6.2 %
reported in the prior year period. This was partly as a result of energy supply shortages during the first part of
the year. Growth this year has still been fueled by strong domestic demand and gross capital formation, which
is expected to result in a stronger showing by year end of between 4.5% and 5%. The economy is expected to
weaken again in 2009 however as a function of the global slowdown and financial market pressures.
For the moment BancoEstado’s credit business and earnings show a continued strong growth trend, though
higher inflation and volatile interest and exchange rate conditions have contributed to a slowing of that growth.
With local interest rates rising sharply during the year by about 200 basis points, from 6.25% to 8.25%
(monetary policy rate as of September 4, 2008), further increases are expected by year end.
While short term funding costs have risen, however, the resulting impact on bank net interest margins has so
far been counterbalanced by the rise in inflation, which serves to buoy spreads on UF-denominated 1 (inflationindexed) assets. So far, local liquidity remains ample despite turmoil in the global financial markets. However,
we remain cautious as to the potential effects of prolonged volatility in the international markets.
1
UF = Unidad de Fomento, Chile's inflation-linked currency unit.
2
September 2008 Credit Analysis Moody’s Global Banking - Banco del Estado de Chile
Credit Analysis
Credit costs continue to rise, though still manageable
As of June 30, 2008, BancoEstado’s credit costs absorbed a stable 33% of pre-provision profit, in line with the
system average, reflecting the bank’s conservative credit policies and strong profit performance. While the
level of credit costs is still low relative to BancoEstado’s record high of 53% in 2000, we consider it material,
and one to watch.
The bank has limited its losses so far; however, increasing provisions and write-offs point to consumer asset
quality deterioration. We expect the slower economy and higher inflation and interest rate environment to
continue to take its toll on borrower quality in the near term.
High borrower concentrations
BancoEstado presents high single borrower concentrations relative to both earnings and capital as do all the
large Chilean banks. In Moody’s view, high borrower concentrations increase a bank’s exposure to rapid asset
quality deterioration and hence increase the risks to earnings.
BancoEstado’s twenty largest group exposures tend to be with top quality borrowers and projects in the
financial services and corporate sectors; however, they remain large particularly relative to earnings.
Analysis of Rating Considerations
Discussion of Qualitative Rating Drivers
Franchise Value
Major retail bank with broad and diverse client base
BancoEstado’s franchise value reflects its importance as the third largest bank in Chile, its diversified earnings
stream and extensive operating footprint across Chile. The bank serves a broad range of clients consisting of
low- to middle-income individuals and companies that contribute to a fairly stable earnings stream.
Beginning in the 1990s, BancoEstado transformed its historically bureaucratic culture into a more nimble and
commercially-oriented one, and has reduced to a minimum its dependence upon public sector balance and
inflation-related revenues. The bank continues to explore opportunities to diversify its core lending and deposit
business through organic growth and strategic alliances.
BancoEstado should continue to enhance its franchise value by leveraging its existing market shares in
several business lines, its alliances with non-banks, and its public policy raison d'être. For example,
BancoEstado has significantly expanded its distribution of insurance products through its alliance with MetLife,
becoming the number 2 bank in Chile in providing insurance services to bank customers. Its ATM network has
been enhanced through membership in the Redbanc automated teller network and through alliances with D&S
and La Polar.
BancoEstado is also in a position to cross-sell multiple products to its massive client base given the still robust
economic scenario in Chile and to improve its competitive position through advances in technology and
service quality. The bank’s commitment to technology is already evident in a steady improvement in operating
returns and efficiency ratios and an exemplary alignment with private sector performance metrics in general.
In Chile, BancoEstado operates 313 branches and 30 special access points (Puntos de Atención de Cercanía,
PAC). The bank has a total of 1,133 ATMs, complemented by another 4,128 private ATMs (Redbanc), 1,088
sources for balances and deposit boxes, 300 CajaVecinas, and 25 branches of its ServiEstado subsidiary.
Internet Banking represents over 2 million on-line transactions. Since 2005, the New York branch offers trade
finance, working capital loans, and cash management services to Chilean corporations.
3
Credit Analysis
Market Share and Sustainability
Leading market shares in Chile
BancoEstado is the market leader in savings deposits and residential mortgages for low and middle income
individuals and also lends to large and medium sized corporations. Mortgages to low income customers are
made at arms length pricing by BancoEstado, while subsidies may be provided by the government, with the
bank acting only as administrator for such programs. The bank is also one of the largest providers of
administrative and cash management services to government-owned and private enterprises, including payroll
services. BancoEstado has one of the largest treasury operations in the country as a primary dealer in
government securities and also serves as an important source of liquidity to the Chilean financial system.
BancoEstado’s position among the top five banks in Chile as of June 30, 2008 is provided below.
BancoEstado ranks number 3 in all categories, except for net income where it ranks fourth, reflecting its higher
proportion of low margin securities and mortgages, higher expense base, and higher than average tax rate.
The bank’s loan (14%) and deposit (16.2%) market shares have gradually expanded in recent years as has its
share of the system’s net income (7%). Estado remains the leader in savings accounts with 87% of total
accounts and in mortgages with 25% of the total market, though Santander is a very close second. Banco de
Chile follows with 14.4% of total mortgages, Bci with 10%, and BBVA with 8%.
Market Share of Top 5 Chilean Banks
As of June 30, 2008
Total Deposits
Total Gross Loans
Banco Santander
20.8%
Banco Santander
20.6%
Banco de Chile
18.5%
Banco de Chile
19.3%
16.2%
13.9%
Banco de Crédito e Inversiones (Bci)
12.9%
Banco de Crédito e Inversiones
13.2%
BBVA
7.3%
BBVA
Total Net Income
7.6%
Total Equity
Banco Santander-Chile
32.2%
Banco Santander-Chile
20.3%
Banco de Chile
25.2%
Banco de Chile
17.7%
10.4%
BBVA
7.0%
14.7%
4.3%
9.3%
BBVA
5.7%
Source: Moody's, SBIF
Geographic Diversification
Despite national coverage, primarily Chilean focus limits earnings
diversification
BancoEstado is limited in its geographic diversification relative to global peers because of its largely Chilean
operations. Moody’s assesses geographic diversification based on the Gross Domestic Product (GDP) of a
bank’s operating footprint. Chile’s nominal GDP of US$163.9 billion for 2007 and population of some 15 million
are relatively small, even when compared to other large Latin American countries such as Brazil and Mexico,
and so the score for all Chilean banks is below average.
4
Credit Analysis
Earnings Stability
Retail focus and core funding contribute to relatively stable earnings profile
Moody’s believes retail banks have more predictable earnings to the extent that their consumer lending,
deposit, and transaction-based revenues comprise the lion’s share. This is an invaluable asset to banks in
times of stress. Given BancoEstado’s strong retail deposit base, granular lending base, and a relatively low
proportion of corporate and trading-related revenues, the stability of its earnings profile is above average.
BancoEstado derives more than half of its interest income and commissions from the consumer segment
(55%), followed by the financial services and corporate segment (including small and medium-sized
companies) (30%) and institutional customers (14%). About 80% of BancoEstado’s interest revenues originate
from traditional lending and deposit products and 15% from securities.
Risk Positioning
Policies and practices commensurate with risk profile and business mix
BancoEstado’s risk positioning score is hurt by its high single corporate borrower concentrations, endemic to
the large Chilean banks, and its single shareholder ownership by the Republic of Chile. However, its overall
credit, market, and liquidity risk management structure, practices, and financial reporting transparency support
a stable risk profile.
Corporate Governance
Government ownership equated to a closely held firm under one shareholder
BancoEstado’s corporate governance structure is comparable to the standards of private sector institutions.
Nevertheless, Moody’s equates BancoEstado’s government ownership to a closely held firm dominated by one
shareholder or family that could exercise undue influence on the bank’s operations. That said BancoEstado is
not permitted to lend to public sector entities and hence is more insulated than the typical public sector bank
from politically-based lending pressure. In addition, though a government-owned bank, BancoEstado meets
Moody’s test for an independent board of at least 25% of its members.
BancoEstado’s senior management is conservative and professional, drawn from the private sector.
Management has been effective in modernizing the bank and in transforming its traditionally bureaucratic
culture into a market-oriented and competitive institution.
Controls & Risk Management
High and improving standards and procedures
Management sets high standards for the bank's risk management and controls, supported by a well
established management structure and a deep bench of experienced credit and market professionals.
As an important depositary for public sector liquidity and public savings, the bank maintains a relatively
conservative investment and credit portfolio. The bank's trading activities are devoted mainly to managing its
government securities portfolio and to dealing in foreign exchange forwards on behalf of clients.
Financial Reporting Transparency
Timely and complete financial statements
BancoEstado’s financial reporting transparency is above average as is the case for most of the Chilean banks.
The bank publishes complete financial statements on a monthly basis and has employed International
Financial Reporting Standards (IFRS) since January 2008 in accordance with the regulations of the
Superintendency of Banks and Financial Institutions (SBIF).
5
Credit Analysis
The bank’s published financial statements provide comprehensive information about profitability, asset quality,
and capital. They are however limited with respect to individual business line performance, market risk
exposures, and VaR stress testing information, as well as details on the largest credits.
Credit Risk Concentration
High concentrations particularly as a percent of earnings
BancoEstado presents high borrower risk concentrations that are not uncommon to major lenders in Chile
partly because of their size, large lending books, and the limited depth of domestic loan sales and
securitization markets. The top twenty group exposures, including loans and net derivatives, are compared
against both pre-provision pre-tax profitability and tier one capital.
While BancoEstado scores very low for borrower concentrations, the bank's twenty largest exposures are with
top quality and highly rated borrowers in the financial services sector, and include solidly performing large
corporate or project-related exposures. During the last four years BancoEstado has expanded its consumer
lending activities, which should lead to greater diversification and granularity of the loan portfolio.
At the same time the bank reports relatively low industry concentrations, reflecting a diversified loan portfolio
consisting of financial services, construction, manufacturing, commercial, and energy companies in Chile. High
corporate sector concentrations are discouraged by the banking regulators.
BancoEstado’s exposure to residential mortgages is however by far the most highly concentrated in Chile at
almost 42% of total loans versus 23% for the total system. Delinquency levels on mortgages in Chile have
historically been contained and as of the date of this writing remain low at 1% for the system and about 2% for
BancoEstado. While household indebtedness in Chile has increased in recent years, it also remains low
relative to global averages.
Liquidity Management
Ample liquidity supported by stable core deposit base and high proportion of
liquid assets
BancoEstado’s strong liquidity position within the Chilean financial system derives from the combination of an
extensive and granular deposit base, its large holdings of liquid assets and low dependence on market
funding.
The bank’s large securities portfolio comprises about 22% of total assets versus the system average of 11.5%.
Core deposits represent a relatively high 75% of total loans vis-à-vis the system and large peer average of
55% and 51% of total liabilities. Its large demand and savings account base makes it less dependent upon
local institutional money (i.e., the AFPs or pension funds) for funding. Market funds relate to 49% of total
liabilities, mostly in the form of institutional deposits (16%), notes payable (i.e., letras hipotecarias – 18%),
bank borrowings and repurchase agreements (9%), and bonds (3%).
Estado is among the largest providers of institutional liquidity in the Chilean banking system. The bank has
been called upon to provide liquidity and/or administrative back-up to other banks in the system in case of
need, such as during the CORFO-Inverlink affair of 2003.
Market Risk Appetite
Large liquid holdings are proactively managed
BancoEstado’s market risk appetite is about average, reflecting its traditional deposit-taking and lending
profile. Market-related income contributes little to the bank’s bottom line and has historically been uneven,
earning between 3% and 17% of gross intermediation revenues over the past few years.
6
Credit Analysis
BancoEstado’s relatively large securities portfolio, 90% of which is categorized as available for sale, exposes
the bank to interest rate risk. The bank employs asset/liability management tools, including Value at Risk
models, in order to minimize the potential losses related to interest rate risk. The bank takes measured
positions in proprietary trading. Foreign exchange risk is limited to customer-based activities (= fee business)
and to a lesser extent, its investment portfolio.
Regulatory Environment
Moody’s assessment of Chile’s regulatory environment considers its proven institutional framework, the
independence of its regulatory body, and its 20-year history of setting and enforcing prudential standards. The
assessment also incorporates the supervisors’ effective enforcement of asset quality measurement and loan
loss provisioning rules, capital and liquidity regulations, and restrictions regarding related-party transactions.
We also consider the Chilean regulators’ track record of preventive and corrective measures and their
increasing commitment to transparency assisted by an increasingly user-friendly website.
The Chilean regulators continued in 2007 and 2008 to bolster bank regulatory and accounting standards
through the adoption of IFRS, the latter which became effective in January 2008, as well as improving risk
management regulations and guidance on market and operational risk. The system’s transition toward Basel II
dovetails with improvements in regulation and supervision that have been implemented during the last two
decades.
Operating Environment
Chilean banks operate within a relatively stable environment with a well established and effective institutional
framework. Our BFSR scorecard assesses a country’s operating environment based on three factors:
economic stability, the level of integrity and corruption prevalent in the country, and its legal system.
Chile’s economic stability is evaluated based on the standard deviation of Chile's GDP growth rates during the
last twenty years compared to that of other countries in the world. Chile’s economic stability scores low relative
to that of developed countries because of its uneven growth trend and the slightly negative GDP growth
experienced during 1999. This measure should therefore improve over time.
The level of integrity and corruption is measured using the World Bank index, which ranks 212 countries
worldwide based on six different parameters including voice and accountability, political stability and absence
of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. In this regard,
Chile compares very favorably with both local and global peers.
The predictability and fairness of the Chilean legal system also compares very favorably to other countries and
is evaluated based on our chosen proxy of the typical time (i.e., one to two years) it takes to foreclose on a
residential mortgage.
Discussion of Quantitative Rating Drivers
Profitability
Is profit expansion sustainable for second half of 2008 and 2009?
Banco Estado’s 2007 earnings rose 5.8% in peso terms to US $106.8 million, primarily reflecting higher trading
and mark-to-market gains and affiliate income as net interest income rose a slight 1.8%. The adjusted net
interest margin (including hedges) declined 3% from 3.33%, due mainly to higher funding rates that largely
offset the benefits of growth in commercial and mortgage loan volumes. Provisions have also taken a larger
bite out of earnings throughout the year (39% up from 30% in 2006). Net income from fees and commissions
were also weaker by 4.7%.
BancoEstado continued to control operating costs, which grew a modest 4%, despite strong business growth.
Pre-provision profit to average risk-weighted assets improved slightly to 3% from 2.8%, boosted by increased
7
Credit Analysis
income from subsidiaries and affiliates, and non-operating income. Return on average assets and equity
remained relatively stable at 0.46% and 9.7%, respectively, reflecting higher provisions and monetary correction.
First half 2008 results continued the positive trend with an improved net interest margin that benefits from
rising inflation and a stronger pre-provision profit to average risk-weighted assets ratio. Rising funding and
provisioning costs were therefore offset by higher income on inflation-indexed assets, a general widening of
spreads, and good cost control.
It remains to be seen whether and to what extent current volatile conditions in the global markets coupled with
the high inflation and interest rate scenario in Chile will affect the country and the bank’s performance in the
coming quarters.
While BancoEstado's risk-weighted recurring earnings power falls short when compared to that of its large
private sector peers, its earnings power is comparable to the global peer average. Pre-provision profit to riskweighted assets has averaged 2.9% for the last three years versus 3.6% for its private sector peer group.
BancoEstado's operating expense base relative to earnings reflects in part the bank's mission to increase
banking penetration throughout Chile as well as continuous technology upgrades of its branch and ATM
network and other points of sale. BancoEstado's higher cost structure and tax rate (56.5%) claim more of the
bottom line than do those of the other banks, however, net income has grown healthily in recent years.
BancoEstado has been generating higher net interest income and fees aided by new business alliances and
products (e.g., insurance, factoring, ATMs, and electronic banking). Nevertheless, the bank’s fee generation
capacity and pricing policy remains limited because of its mandate to offer financial services to underbanked
segments throughout Chile. Fee coverage of operating expenses – at an improved 33% for the first six months
of 2008 - remained below the system average of 38%.
Liquidity
Conservative balance sheet liquidity
BancoEstado’s liquidity is well above average as a result of the bank's low dependence on market funds, high
proportion of readily marketable liquid assets, and good asset quality. Expensive market funds represent a
small percentage of the bank’s funding. BancoEstado also maintains relatively low loan leverage with a 60%
loan to asset ratio as compared with the system average of 68% and large peer average of 72%. Cash and
highly liquid, marketable government securities represent about 32% of total assets as compared with 22% for
the system.
Capital Adequacy
Solid tier one capital supports risk profile
BancoEstado's capitalization ratios are good compared to global peers. The bank’s tier one capital ratio of
7.1% as of June 30, 2008 well exceeds the Chilean regulator’s minimum regulatory standards. Though this
ratio is below the system’s 9.2% and its rated peers’ 8.6%, we consider it adequate in the context of
BancoEstado’s implicit government support, asset mix, and level of risk undertaken by the bank.
Efficiency
Low efficiency relative to private sector rivals due to social mission and
extensive network
BancoEstado's efficiency ratio compares very well to the global average, but less well to local peers such as
Banco Santander Chile and Banco de Chile that have a track record of globally competitive efficiency ratios.
Given its developmental role, management expects the bank’s efficiency ratio to remain above the system
average (it is presently 7 percentage points higher).
BancoEstado has nevertheless gradually improved its operating efficiency, reaching a ratio of 56.9% as of
June 2008 from 60.85% in June of 2007 supported by both higher operating revenues and contained expense
8
Credit Analysis
growth. Increasing economies of scale will depend on the continued streamlining and automation of the bank's
operations given the breadth of its network and social mission.
BancoEstado has undertaken important investments in technology and innovative products. The bank’s lowcost Caja Vecina in which small shops provide everyday banking services, ServiEstado, and ATM network
have helped improve the bank’s automated transaction ratio.
Asset Quality
Problem loans remain manageable, but are on the rise
BancoEstado presents a well diversified asset mix, consisting primarily of loans (60.6% of the balance sheet)
and A1-rated Chilean government securities and Central Bank paper (21.7%). The corporate loan portfolio
contributes 48% of total loans relating mainly to high quality national and international corporations. Lending to
individuals comprises 52%, with over 80% representing residential mortgage loans.
Loan growth of 23.3% was slightly higher for BancoEstado than the Chilean system’s 21.7% for the twelve
months ended June 2008 and higher than the year earlier’s 14.3%, reflecting strong expansion of both the
commercial and consumer loan portfolios. We expect slower loan growth in the latter part of 2008 and into
2009 because of higher interest rates and delinquencies.
Asset quality deteriorated during 2007 as non-performing loans (NPLs), mainly to consumers, rose a sharp
78.6% on a nominal basis to reach 1.2% of gross loans, a 50 basis point increase from the record lows of a
year earlier. As of June 30, 2008, the NPL ratio rose a further 7 basis points, but a 14 basis point increase
when adjusted for loan growth. Reserve coverage declined due mainly to write-offs but still covered 135% of
problem loans, down from 171% as of year end 2007, and below the three-year average of 220%. Problem
loans also represented a high of 14.5% of reserves plus shareholders’ equity, up from the prior three year
average of 9.6%.
This trend is in line with rising non-performers within the Chilean system, whose loan portfolio has been
growing in the double digits for the past five years with a special emphasis on consumer credit. Nevertheless,
BancoEstado's rate of increase continued to surpass that of the system this year. Though non-performing
loans are still at a manageable level, they are the highest the bank has reported since 2003 and its ratio is the
highest among the four largest banks in Chile.
In our last report we had anticipated asset quality deterioration as a result of loan seasoning and double digit
loan growth.. This has come to fruition, and therefore we remain cautious as to the pace of deterioration. We
expect NPL ratios to continue to rise in the coming quarters, particularly in light of slower loan growth.
Discussion of Support Considerations
Full systemic support incorporated in deposit ratings
Moody's assigns a global local currency deposit rating of Aa1 for BancoEstado, incorporating the bank's
baseline credit assessment of A2 that is directly mapped from the C+ BFSR. The deposit rating is then lifted to
Aa1, reflecting full systemic support because of the bank’s 100% government ownership, policy mandate, and
the importance of its retail deposit franchise in the Chilean financial system.
Moody's assesses Chile as a high support country because of the Chilean authorities' high level of interest and
willingness to support the stability of the financial system. The support probability is measured against Chile's
Aaa local currency country ceiling for deposits. This ceiling represents the risk that an important bank would be
allowed to default upon local currency deposits either due to a lack of local currency resources or the
imposition of a domestic deposit freeze.
9
Credit Analysis
Exhibit A: Mapping the BFSR to the Baseline Credit Assessment (BCA)
The discussions of qualitative and quantitative rating drivers presented in this report forms the
analytical basis for assigning a Bank Financial Strength Rating (BSFR) of “C+” to Banco del Estado
de Chile.
BFSRs are Moody’s opinions on the intrinsic safety and soundness of a bank enterprise and, in
effect, address the susceptibility of a particular institution to financial distress.
The BFSR array of ratings is not on Moody’s traditional rating scale (Aaa, Aa, etc.). There is a
useful method, however, for translating BFSRs to Moody’s traditional scale – the baseline credit
assessment. In effect, the baseline credit assessment measures a bank’s stand-alone default risk
assuming there is no systemic or other external support.
Banco del Estado de Chile’s “C+” BFSR maps to a baseline credit assessment of A2, yet,
considering external support factors, its deposit ratings are Aa1.
BFSR/Baseline Risk Assessment Mapping for Banco del Estado de Chile
10
BFSR
Baseline Credit Assessment (BCA)
A
Aaa
A-
Aa1
B+
Aa2
B
Aa3
B-
A1
C+
A2
C
A3
C-
Baa1
C-
Baa2
D+
Baa3
D+
Ba1
D
Ba2
D-
Ba3
E+
B1
E+
B2
E+
B3
E
Caa1
E
Caa2
E
Caa3
Credit Analysis
Company Annual Statistics
06/30/08
12/31/07
12/31/06
12/31/05
12/31/04
2,510
1,541
1,748
1,478
853
BALANCE SHEET (US$ Million)
Assets
Cash and Cash Equivalents
Short-Term Interbank Investments
Investments in Securities
Held-to-Maturity
Trading
365
-
-
-
-
6,078
6,722
5,254
6,519
4,526
555
-
-
-
-
59
-
-
-
-
5,464
-
-
-
-
8,953
8,263
7,002
7,997
5,379
16,986
15,769
12,483
11,276
8,800
Short-Term Loans
-
2,335
2,228
1,866
1,611
Interbank Loans
-
-
31
191
185
Commercial Loans
-
1,558
1,563
1,191
1,024
Consumer Loans
-
164
133
119
99
Trade Finance
-
439
421
343
299
Other Loans
-
174
80
22
3
Long-Term Loans
-
9,322
6,417
5,350
3,643
Available-for-Sale
Liquid Assets
Loans, Leases, Disc. Notes
Interbank Loans
-
-
-
-
0
Commercial Loans
6,775
4,297
3,119
2,922
2,181
Consumer Loans
1,817
1,609
1,264
1,109
857
Trade Finance
839
93
122
154
147
Leasing & Discounts
461
419
261
243
138
7,095
2,904
1,650
922
320
-
7
10
15
18
Bills of Exchange Repass
-
3,915
3,728
3,964
3,454
Net Contingent Assets
-
-
-
-
0
Non Performing Loans
215
189
99
81
74
Mortgage Loans
Restructured Loans
Less: Loan Loss Reserves
Total Net Loans
291
324
219
191
160
16,696
15,444
12,264
11,085
8,641
-
-
-
0
-
23,140
22,166
17,518
17,604
13,166
Net Adjust & Control Acct.
Total Risk Assets
Repurchase Agreements
424
54
99
221
242
Other Investments
-
70
46
26
53
Investments in Subs. & Affiliates
8
71
51
47
36
Net Futures Operations
966
30
27
80
141
Other Assets
972
663
433
517
427
Fixed Assets (Net)
-
282
234
221
188
Less Other Provisions
-
0
0
0
8
28,019
24,878
20,156
20,194
15,099
Total Assets
11
Credit Analysis
06/30/08
12/31/07
12/31/06
12/31/05
12/31/04
-
12,267
10,228
11,265
7,786
Demand Deposits
4,719
5,474
3,995
3,219
2,792
Savings Deposits
3,877
-
-
-
-
Time Deposits
8,506
6,746
6,189
8,024
4,982
15
47
44
22
12
Liabilities
Short Term Deposits
Other Time Deposits
Interbank & Other Long Term Deposits
Total Deposits
Short-Term Due to Banks
-
3,271
2,282
1,316
829
17,116
15,538
12,510
12,582
8,616
1,417
72
740
350
843
-
38
430
334
778
Domestic (ST)
Foreign (ST)
-
35
309
17
65
Notes Payable
-
4,168
3,894
4,069
3,400
1,058
1,327
680
966
545
Long-Term Due to Banks
-
420
200
257
245
Domestic (LT)
-
-
-
9
17
Foreign (LT)
-
420
200
248
229
Total Borrowed Funds
2,474
5,987
5,515
5,642
5,033
Bonds & Debentures
5,183
1,020
305
146
142
-
3
3
0
-
702
-
-
-
-
Subordinated Bonds
739
682
510
359
192
Other Liabilities
609
470
359
596
341
-
0
0
-
33
26,824
23,701
19,203
19,325
14,357
Net Contingent Liabilities
Total Liabilities
Paid in Capital
8
8
8
8
7
1,156
15
12
12
10
-
1,070
842
797
643
(27)
(22)
(3)
(25)
2
58
106
94
77
80
1,195
1,176
953
868
742
28,019
24,878
20,156
20,194
15,099
Off-Balance Sheet Amounts:
-
-
-
-
-
Futures Operations
-
373
122
9,608
8,732
Contingents
-
674
667
368
269
Adjust & Control Acct.
-
1,337
452
963
1,196
Capital & Legal Reserves
Other Reserves
Equity Adjustment Account
Net Income
Total Shareholders' Equity
Total Liabilities and Shareholders’ Equity
12
Credit Analysis
06/30/08
12/31/07
12/31/06
12/31/05
12/31/04
-
-
-
-
-
1,168
2,014
1,306
1,205
767
-
1,653
1,021
937
659
Interest on Securities
-
273
233
-
-
Other Interest Income
-
87
52
269
108
738
1,396
738
743
431
Savings and Time Deposits
-
808
368
315
140
-
64
51
44
19
Notes Payable
-
496
296
366
264
Due to Banks, Domestic
-
5
4
6
3
Due to Banks, Foreign
-
6
13
5
4
-
17
6
7
2
430
617
568
462
336
Income Statement (US$ Million)
Interest Income
Loan Income
Interest Expense
Other Interest Expense
Net Interest Income
Non Interest Income
39
123
56
59
88
16
124
48
25
40
Forex Operations (Loss)
(134)
(1)
6
24
40
Other Operations (Loss)
157
(0)
3
11
8
Trading & Marked-to-Market (Loss)
Gross Revenue from Intermed.
Net Commission and Fee Income
Gross Operating Revenue
468
740
624
521
424
110
154
151
141
117
579
894
775
663
541
Operating Expenses
329
515
464
402
349
Personnel Expense
214
319
300
261
224
General and Admin. Expenses
115
196
163
141
125
250
379
311
260
192
Net Operating Income
Net Income from Loan Sales/Securitizations
2
9
11
-
-
Non Operating Income
-
23
12
9
41
Non Operating Expense
-
12
45
32
43
Net Income from Subsid. and Affiliates
Pre Provision Profit
Net Provisions
1
23
18
17
18
252
422
307
254
207
82
165
92
55
50
-
-
-
-
-
Voluntary Provisions
Recoveries
-
-
-
-
-
Monetary Correction
(25)
(48)
(11)
(19)
(10)
Net Income Before Tax
145
209
204
180
147
80
103
110
103
66
65
106
94
77
80
NPL / Gross Loans & Leases
1.27
1.20
0.79
0.72
0.84
NPLs / Prev. Yr. Gross Loans
1.56
1.52
0.88
0.92
1.01
134.99
171.33
221.19
234.81
216.63
Income Tax
Net Income
Ratios
Asset Quality (%)
Reserve Coverage / NPL
13
Credit Analysis
06/30/08
12/31/07
12/31/06
12/31/05
12/31/04
1.71
2.06
1.76
1.69
1.81
NPLs / (Share Eq.+ Loan Loss Res.)
14.49
12.61
8.46
7.66
8.17
NPLs / Pre Provision Profit
42.68
44.89
32.27
31.92
35.59
Reserves / Gross Loans & Leases
Provisions / Avg. Gross Loans
1.00
1.17
0.78
0.55
0.62
23.25
26.32
10.71
28.13
20.68
Commercial
39.88
37.13
37.51
36.47
36.42
Mortgage
41.77
43.25
43.09
43.34
42.88
Consumer
10.70
11.24
11.19
10.89
10.87
Trade Finance
4.94
3.37
4.35
4.41
5.07
Leasing
2.71
2.66
2.09
2.15
1.57
Interbank
0.00
0.00
0.25
1.69
2.10
Other
0.00
2.35
1.52
1.04
1.08
ROAA
0.49
0.47
0.47
0.44
0.58
ROAE
10.99
9.99
10.33
9.57
11.61
3.79
3.11
3.23
3.00
2.81
56.86
57.61
59.84
60.69
64.55
Net Commission & Fee Inc. / Op. Revenue
19.05
17.18
19.46
21.35
21.66
Net Commission & Fee Inc. / Op. Expenses
33.50
29.81
32.52
35.18
33.56
PPP / Total Avg. Assets
1.91
1.87
1.52
1.44
1.51
PPP / Risk Wtd -BIS- Assets
3.06
3.06
2.73
2.69
2.76
PPP-EstConsumWOffs / Risk Wtd -BIS- Assets
2.93
3.01
2.67
2.66
2.73
Pre-Tax Income / Total Avg. Assets
1.10
0.93
1.01
1.02
1.07
17,412
15,606
11,953
10,548
8,353
4.26
4.73
4.73
4.30
4.92
10.52
10.78
11.13
10.66
10.13
7.11
7.35
7.59
7.88
8.33
Core Deposits / Loans
75.64
77.49
81.58
99.71
88.34
Loans / Total Assets
60.62
63.38
61.93
55.84
58.28
Loans / Total Deposits
99.24
101.48
99.79
89.62
102.14
Liquid Assets / Total Assets
31.95
33.22
34.74
39.60
35.63
Liquid Assets / Deposits
52.31
53.18
55.97
63.56
62.43
Loan Growth
Loan Mix (%)
Profitability (%)
NIM
Oper. Expenses / Oper. Income
Capital (%)
BIS Risk Assets (US$ Million)
Equity / Total Assets
BIS Total Capital Ratio
BIS Tier 1 Ratio
Liquidity (%)
14
Credit Analysis
06/30/08
12/31/07
12/31/06
12/31/05
12/31/04
1,322
768
930
757
474
193
-
-
-
-
3,203
3,347
2,797
3,338
2,515
BALANCE SHEET (Ch$ Billion)
Assets
Cash and Cash Equivalents
Short-Term Interbank Investments
Investments in Securities
Held-to-Maturity
Trading
Available-for-Sale
292
31
2,879
Liquid Assets
4,718
4,115
3,727
4,095
2,989
Loans, Leases, Disc. Notes
8,951
7,852
6,644
5,774
4,891
Short-Term Loans
-
1,163
1,186
955
895
Interbank Loans
-
-
17
98
103
Commercial Loans
-
776
832
610
569
Consumer Loans
-
82
71
61
55
Trade Finance
-
218
224
176
166
Other Loans
-
87
43
11
2
Long-Term Loans
-
4,642
3,415
2,739
2,025
Interbank Loans
-
-
-
-
0
3,570
2,140
1,660
1,496
1,212
Consumer Loans
957
801
673
568
477
Trade Finance
442
46
65
79
82
Leasing & Discounts
243
209
139
124
77
Commercial Loans
Mortgage Loans
3,739
1,446
878
472
178
Restructured Loans
-
4
5
8
10
Bills of Exchange Repass
-
1,950
1,984
2,030
1,919
Net Contingent Assets
-
-
-
-
0
Non Performing Loans
113
94
53
42
41
Less: Loan Loss Reserves
153
161
117
98
89
8,798
7,690
6,527
5,676
4,802
Total Net Loans
Total Risk Assets
-
-
-
0
-
12,193
11,038
9,324
9,014
7,317
224
27
53
113
135
-
35
24
13
30
Other Investments
Investments in Subs. & Affiliates
4
35
27
24
20
509
15
14
41
78
Other Assets
512
330
231
265
237
Fixed Assets (Net)
-
140
124
113
105
Less Other Provisions
-
0
0
0
5
14,765
12,388
10,728
10,340
8,391
Total Assets
15
Credit Analysis
06/30/08
12/31/07
12/31/06
12/31/05
12/31/04
6,108
5,444
5,768
4,327
2,726
2,126
1,648
1,552
Liabilities
Short Term Deposits
Demand Deposits
2,487
Savings Deposits
2,043
Time Deposits
4,482
3,359
3,294
4,108
2,769
8
24
23
12
7
Other Time Deposits
Interbank & Other Long Term Deposits
Total Deposits
Short-Term Due to Banks
-
1,629
1,215
674
461
9,019
7,737
6,658
6,442
4,788
746
36
394
179
468
-
19
229
171
432
Domestic (ST)
Foreign (ST)
-
17
165
8
36
Notes Payable
-
2,075
2,073
2,083
1,890
557
661
362
495
303
Long-Term Due to Banks
-
209
107
132
136
Domestic (LT)
-
-
-
5
9
Foreign (LT)
-
209
107
127
127
Total Borrowed Funds
1,304
2,981
2,935
2,889
2,797
Bonds & Debentures
2,731
508
162
75
79
-
2
2
0
-
370
-
-
-
-
Subordinated Bonds
389
340
272
184
107
Other Liabilities
321
234
191
305
189
-
0
0
-
18
14,135
11,802
10,221
9,896
7,979
Net Contingent Liabilities
Total Liabilities
Paid in Capital
4
4
4
4
4
609
7
6
6
6
-
533
448
408
357
(14)
(11)
(2)
(13)
1
31
53
50
39
45
630
586
507
445
412
14,765
12,388
10,728
10,340
8,391
Futures Operations
186
65
4,920
4,853
Contingents
336
355
188
150
Adjust & Control Acct.
666
241
493
664
Capital & Legal Reserves
Other Reserves
Equity Adjustment Account
Net Income
Total Shareholders' Equity
Total Liabilities and Shareholders’ Equity
Off-Balance Sheet Amounts:
16
Credit Analysis
06/30/08
12/31/07
12/31/06
12/31/05
12/31/04
616
1,003
695
617
426
-
823
544
480
366
Interest on Securities
-
136
124
Other Interest Income
-
44
28
138
60
389
695
393
381
240
Savings and Time Deposits
-
402
196
161
78
-
32
27
22
11
Notes Payable
-
247
158
187
146
Due to Banks, Domestic
-
2
2
3
2
Due to Banks, Foreign
-
3
7
3
2
-
9
3
4
1
Net Interest Income
226
307
302
237
187
Non Interest Income
20
61
30
30
49
8
62
26
13
22
Forex Operations (Loss)
(70)
(1)
3
12
22
Other Operations (Loss)
83
(0)
1
5
5
247
369
332
267
236
58
76
80
72
65
305
445
412
339
301
Income Statement (Ch$ Billion)
Interest Income
Loan Income
Interest Expense
Other Interest Expense
Trading & Marked-to-Market (Loss)
Gross Revenue from Intermed.
Net Commission and Fee Income
Gross Operating Revenue
Operating Expenses
173
256
247
206
194
Personnel Expense
113
159
160
134
125
61
98
87
72
69
132
189
166
133
107
General and Admin. Expenses
Net Operating Income
Net Income from Loan Sales/Securitizations
1
4
6
Non Operating Income
-
11
6
4
23
Non Operating Expense
-
6
24
16
24
Net Income from Subsid. and Affiliates
Pre Provision Profit
Net Provisions
0
12
10
9
10
133
210
164
130
115
43
82
49
28
28
-
-
-
-
-
Voluntary Provisions
Recoveries
-
-
-
-
-
(13)
(24)
(6)
(10)
(6)
77
104
108
92
81
42
51
58
53
37
34
53
50
39
45
NPL / Gross Loans & Leases
1.27
1.20
0.79
0.72
0.84
NPLs / Prev. Yr. Gross Loans
1.56
1.42
0.91
0.85
0.95
134.99
171.33
221.19
234.81
216.63
Monetary Correction
Net Income Before Tax
Income Tax
Net Income
Ratios
Asset Quality (%)
Reserve Coverage / NPL
17
Credit Analysis
06/30/08
12/31/07
12/31/06
12/31/05
12/31/04
1.71
2.06
1.76
1.69
1.81
NPLs / (Share Eq.+ Loan Loss Res.)
14.49
12.61
8.46
7.66
8.17
NPLs / Pre Provision Profit
42.68
44.89
32.27
31.92
35.59
Reserves / Gross Loans & Leases
Provisions / Avg. Gross Loans
1.03
1.14
0.79
0.53
0.60
23.30
18.18
15.07
18.06
13.18
Commercial
39.88
37.13
37.51
36.47
36.42
Mortgage
41.77
43.25
43.09
43.34
42.88
Consumer
10.70
11.24
11.19
10.89
10.87
Trade Finance
4.94
3.37
4.35
4.41
5.07
Leasing
2.71
2.66
2.09
2.15
1.57
Interbank
0.00
0.00
0.25
1.69
2.10
Other
0.00
2.35
1.52
1.04
1.08
ROAA
0.51
0.46
0.48
0.42
0.57
ROAE
11.30
9.69
10.52
9.21
11.27
3.90
3.02
3.29
2.90
2.73
56.86
57.61
59.84
60.69
64.55
Net Commission & Fee Inc. / Op. Revenue
19.05
17.18
19.46
21.35
21.66
Net Commission & Fee Inc. / Op. Expenses
33.50
29.81
32.52
35.18
33.56
PPP / Total Avg. Assets
1.96
1.82
1.55
1.39
1.46
PPP / Risk Wtd -BIS- Assets
3.14
2.97
2.78
2.59
2.68
PPP-EstConsumWOffs / Risk Wtd -BIS- Assets
3.02
2.91
2.72
2.55
2.64
Pre-Tax Income / Total Avg. Assets
1.13
0.90
1.03
0.99
1.04
9,175
7,771
6,362
5,401
4,642
4.26
4.73
4.73
4.30
4.92
10.52
10.78
11.13
10.66
10.13
7.11
7.35
7.59
7.88
8.33
Core Deposits / Loans
75.64
77.49
81.58
99.71
88.34
Loans / Total Assets
60.62
63.38
61.93
55.84
58.28
Loans / Total Deposits
99.24
101.48
99.79
89.62
102.14
Liquid Assets / Total Assets
31.95
33.22
34.74
39.60
35.63
Liquid Assets / Deposits
52.31
53.18
55.97
63.56
62.43
Loan Growth
Loan Mix (%)
Profitability (%)
NIM
Oper. Expenses / Oper. Income
Capital (%)
BIS Risk Assets (Ch$ Billion)
Equity / Total Assets
BIS Total Capital Ratio
BIS Tier 1 Ratio
Liquidity (%)
18
Credit Analysis
Moody’s Related Research
Credit Opinion:

Banco del Estado de Chile, September 2008
Company Profile:

Banco del Estado de Chile, September 2007 (104709)
Banking System Outlook:

Chile, July 2007 (103948)

Andean Banks, February 2008 (107477)
Banking Statistical Supplement:

Chile, April 2008 (108667)
Country Statistics:

Chile, May 2008
Special Comment:

Moody’s Outlook for Latin American Banks, October 2007 (105399)

Bank Ratings and Government Bond Ratings, August 2007 (103903)

Moody’s First Annual Survey of Latin American Banks’ Single Client Exposures, May 2007 (103239)
Rating Methodologies:

Guidelines for Rating Bank Junior Securities, April 2007 (102726)

Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology, March 2007
(102639)

Bank Financial Strength Ratings: Global Methodology, February 2007 (102151)

Piercing the Country Ceiling: An Update, January 2005 (91215)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication
of this report and that more recent reports may be available. All research may not be available to all clients.
19
Credit Analysis
Report number: 111584
Author
Analyst
Production Associate
Jeanne M. Del Casino
Felipe Carvallo M.
Shubhra Bhatnagar
© Copyright 2008, Moody’s Investors Service, Inc. and/or its licensors and affiliates (together, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED
HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED,
FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH
PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR
WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of
human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes
no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such
information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting
from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers,
employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such
information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if
MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial
reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not
statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS,
COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION
IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any
investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation
of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.
MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred
stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from
$1,500 to approximately $2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also
maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist
between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in
MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director
and Shareholder Affiliation Policy.”
20