Scotiabank Peru S.A.A - SMV
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Scotiabank Peru S.A.A.
Primary Credit Analyst:
Ivana L Recalde, Buenos Aires (54) 114-891-2127; ivana.recalde@spglobal.com
Table Of Contents
Major Rating Factors
Outlook
Rationale
Related Criteria
Related Research
Firmado Digitalmente por:
FRANCISCO GUILLERMO
RIVADENEIRA GASTAÑETA
Fecha: 30/07/2020 05:55:48 p.m. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 1Scotiabank Peru S.A.A.
Additional
SACP bbb+ + Support +3 + Factors -3
Anchor bbb- Issuer Credit Rating
ALAC
Support 0
Business
Position
Strong +1
Capital and
Strong +1 GRE Support 0
Earnings
Risk Position Adequate 0 Group
BBB+/Stable/A-2
Support +3
Funding Average
0 Sovereign
Liquidity Adequate Support 0
Major Rating Factors
Strengths: Weaknesses:
• A strategically important subsidiary of The Bank of • The pandemic's harsh impact on the Peruvian
Nova Scotia (BNS; A+/Stable/A-1); economy, mitigated by actions taken by the
• Sound market position as the third-largest bank in authorities;
Peru with a diversified product offering; and • Weaker asset quality metrics than the banking
• Good profitability and capitalization in line with the system's average ; and
group's strategy. • Still high dollarization on the bank's balance sheet.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 2Scotiabank Peru S.A.A. Outlook: Stable The stable outlook on Scotiabank Peru S.A.A. reflects that on Peru and our expectation that the bank will maintain its status as a strategic subsidiary of BNS. This support confers a buffer against multiple impacts on the bank's stand-alone credit profile (SACP). Downside scenario We could lower the rating on Scotiabank Peru in the next 24 months if we downgrade the sovereign. A downgrade of the parent or a drop in the bank's SACP wouldn't result in a downgrade of Scotiabank Peru, given that the latter is a strategic subsidiary to the parent that could still receive up to three notches of support under a downside scenario. Upside scenario The ratings on Scotiabank Peru will likely move in tandem with the sovereign rating. We could raise the rating on Scotiabank Peru if we upgrade the sovereign and if the bank's strategic status to the group and all other factors remain unchanged. This scenario is more remote at this point. Rationale We consider Scotiabank Peru to have a sound business profile--stemming from its position as the third-largest bank in Peru--and its business diversification, resulting in significant revenue stability. Its solid cash generation and flexible dividend policy, and Peru's low credit growth have translated into sound capitalization metrics, with our projected RAC ratio at 10%-11% for the next 12-18 months. The ratings on the bank also reflect its satisfactory risk profile, with a focus on lending and managing mismatches; and its suitable asset quality given its business mix. We believe the bank has a funding structure that relies on deposits and is in line with those of peers, and has adequate liquidity metrics to face short-term obligations. Also, we consider actions taken by the central bank to ensure stability and liquidity in the system. Given all these factors, Scotiabank Peru's SACP remains at 'bbb+'. We continue to view Scotiabank Peru as a strategically important subsidiary of its parent, BNS, which owns 98% of the former. The bank operates in the same business line as its parent and plays a relevant role in the group's global strategy. The bank's integration with its parent supports its risk management frameworks, products, and systems. The group support could add up to three notches to the rating above the bank's SACP (but up to one notch below the group credit profile). However, the sovereign rating constrains the ratings on the bank. Therefore, our ratings on Scotiabank Peru don't incorporate notching from potential extraordinary group support at this point. We rarely rate financial institutions above the sovereign where they're domiciled because many of the same economic factors that cause sovereign stress also affect these entities. Anchor:'bbb-' for banks operating only in Peru Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for banks operating only in Peru is 'bbb-'. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 3
Scotiabank Peru S.A.A.
Peru's economic risk reflects its low per capita GDP (about $7,000) and manageable economic imbalances, but also its
relatively high exposure to dollar-based lending and micro-lending, and to cyclical sectors such as small- to mid-size
enterprises (SMEs). Despite the government's strong stimulus package to help offset the hit to the economy from
social-distancing measures, the pandemic and the world's weaker demand for commodities have hit Peru's economy
hard. We expect credit growth in 2020 to be driven by loans guaranteed by the Treasury that are distributed through
the banking system, accounting for 8% of GDP. We expect nonperforming loans (NPLs) to increase due to the
economic contraction to about 3.9% in 2020 and moderate to 3.6% in 2021. However, we believe the risk of mounting
credit losses in Peru is higher than we previously expected, and could dent banks' profitability and capitalization.
In general, we consider the industry risk for banks operating in Peru to be lower than that of its international peers in
the same BICRA group. We believe Peru has a sound regulatory framework, with ample supervisory coverage and
periodic risk-based supervision under a highly professional regulator. Both the central bank and Superintendencia de
Banca y Seguros (SBS)--which regulates banks and insurance companies--are very active. Moreover, Peru is fairly far
along in implementing Basel III standards tailored for the domestic financial system. Peruvian banks have benefited
from strong profitability and adequate capitalization levels. We also believe the country's financial system has a
healthy and diversified funding mix with a significant share of deposits from loyal customers, as well as strong
government support to provide liquidity if needed.
Table 1
Scotiabank Peru S.A.A. Key Figures
--Year-ended Dec. 31--
(Mil. PEN) 2019 2018 2017 2016 2015
Adjusted assets 75,339.8 66,281.6 60,192.1 57,674.2 59,501.0
Customer loans (gross) 54,202.3 49,975.7 44,902.4 41,855.9 40,156.0
Adjusted common equity 8,910.1 8,239.9 7,567.7 6,594.2 5,643.5
Operating revenues 5,620.0 4,811.3 4,556.1 4,350.5 4,112.7
Noninterest expenses 2,023.3 1,753.8 1,677.1 1,648.3 1,642.9
Core earnings 1,521.0 1,291.4 1,227.5 1,179.4 1,026.5
PEN--PEN-Peruvian nuevo sol. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Business position: Business stability and diversification will help cope with the pandemic
We view Scotiabank Peru's business position as a credit strength. The bank has a diversified business profile, operating
in retail and wholesale banking segments. This, together with its position as the third-largest bank in Peru, result in
healthy business stability. As of March 2020, Scotiabank Peru had a market share of 17.7% in terms of total loans and
15.7% in terms of deposits (including its subsidiary, Creditscotia Financiera [not rated]). Moreover, Crediscotia
Financiera has a leading position in the Peru's financial companies' sector.
Scotiabank Peru's peers, Banco de Credito del Peru (BBB+/Negative/A-2) and Banco BBVA Peru
(BBB+/Negative/A-2), have market shares of 37.3% (including MiBanco) and 20.7%, respectively, in terms of loans
but have similar business diversity to that of Scotiabank Peru.
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 (43% of total loans), and
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 4Scotiabank Peru S.A.A.
SMEs (17%) as of March 2020. The remaining 40% of the bank's portfolio consists of retail loans, with a focus on
consumer lending (16% of total loans), mortgages (14%), credit cards (9%), and small business loans and microcredit
(1%), exposures that are in line with industry average. In the consumer segment, the bank has a partnership with
Cencosud and offers insurance products thanks to global agreements with Cardif.
The bank has been able to take advantage of its relatively high economies of scale and the parent's operational
expertise, while continuing to focus on digital transformation and efficiency. These factors allowed Scotiabank Peru to
cope with rising competition. The bank's net interest income makes up about 80% of total operating revenue, while the
remaining 20% consists of fee income and foreign exchange operations.
Over the short to medium term, we expect the pandemic and the regulator's response to contain the impact to
influence the strategy and performance of the bank and the banking industry. In this sense, we expect part of
Scotiabank Peru's lending growth in 2020 to come from loans guaranteed by the government as part of "Reactiva Peru"
programs that intend to preserve payment chain in the economy and ensure working capital availability to enterprises
coping with the economic lockdowns. These loans are funded with repos that the central bank provides at low rates.
Despite lower margins, these loans would carry low losses given the high levels of guarantees. We expect such loans
to make up a lower portion of Scotiabank Peru's total loans than its lending market share.
Table 2
Scotiabank Peru S.A.A. Business Position
--Year-ended Dec. 31--
(%) 2019 2018 2017 2016 2015
Loan market share in country of domicile 17.2 17.1 16.9 16.5 16.3
Deposit market share in country of domicile 14.9 14.5 14.6 14.7 14.8
Return on average common equity 15.8 15.0 15.8 17.3 17.0
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 5Scotiabank Peru S.A.A. Chart 1 Chart 2 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 6
Scotiabank Peru S.A.A. Capital and earnings: Capitalization in line with strategy, despite system-wide hit to results We expect Scotiabank Peru to remain well capitalized, with a projected RAC ratio of 10%-11% in the next 12-18 months. Like other banks in the country, Scotiabank Peru's profitability in 2020 would suffer from a significant increase in provisioning to cope with the pandemic effects, mitigated by a reduction in dividend payments and subsequent recovery in results starting in 2021. Our base-case scenario incorporates the following assumptions: • Steep contraction in Peru's GDP in 2020 with a recovery in 2021; • Loan portfolio growth in 2020 driven in part by Reactiva Peru programs and continued growth in 2020 as long as the economy starts to rebound. Risk-weighted assets calculations incorporates guarantees provided by the government. • NPLs deteriorating to about 4.5% over the upcoming quarters after the phase out of extensions of loan payment, compared with the 3.9% average for the past three years. • Flat net interest margins (NIMs) incorporating guaranteed loans and higher proportion of corporate loans that charge lower rates, mitigated by falling funding costs (related to Reactiva Peru); • Operational costs increasing at lower-than-inflation rate in 2020 due to cost-containment actions (in 2019, costs consisted of the incorporation of Cencosud) and higher-than-inflation pace in 2021; • Return on assets (ROA) at about 1% in 2020, compared with 2% in 2019, and recovering in 2021; and • No dividend distribution in 2020 as part of the action to strengthen capital to cope with the pandemic, and resuming in 2021 but with flexibility to adjust them if needed. Our RAC ratio compares our definition of total adjusted capital (TAC) to our risk-weighted assets (RWAs). We apply our risk-adjusted capital framework (RACF) to banks consistently across the globe, and it's independent of national regulations and banks' internal risk measurements. We intend our RACF to adjust the banks' capital and the value of assets and exposures to reflect degrees of risk more consistently than is reflected in regulatory ratios. These adjustments can result in significant differences between our capital ratios and the regulatory ones. For example, the main difference between our RAC ratio and the common equity Tier 1 among Peruvian banks is that we apply higher risk weights to sovereign exposures given our rating on Peru (while the regulatory risk weight is 0%), and we have higher risk weights to loan exposures given our evaluation of the country's economic risk. RAC metrics could be impacted by the rising economic risk for banks operating in the country amid a weakening economy. Due to the pandemic, we would increase the risk weights we apply to Peruvian banks. However, this wouldn't have an impact on the final rating on the bank, because it would be compensated by potential extraordinary support provided by the parent. Scotiabank Peru's BIS regulatory ratios are in line with those of other large banks in the system, at 14.7% at the end of March 2020 and well in excess of the regulator's minimum regulatory capital level of 10%. We consider Scotiabank Peru's quality of capital and earnings to be sound, given that its total adjusted capital consists of only paid-in capital and its profitability has remained sound over time. In addition, we view the bank's quality of earnings as healthy. It has solid efficiency ratios, at 35%-36%. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 7
Scotiabank Peru S.A.A.
Table 3
Scotiabank Peru S.A.A. Capital And Earnings
--Year-ended Dec. 31--
(%) 2019 2018 2017 2016 2015
Tier 1 capital ratio 12.0 11.6 13.0 11.5 10.0
Adjusted common equity/total adjusted capital 100.0 100.0 100.0 100.0 100.0
Net interest income/operating revenues 78.2 79.5 78.8 77.4 74.4
Fee income/operating revenues 12.2 13.4 14.0 15.3 14.4
Market-sensitive income/operating revenues 9.0 6.0 6.6 6.8 10.6
Noninterest expenses/operating revenues 36.0 36.5 36.8 37.9 39.9
Preprovision operating income/average assets 5.0 4.8 4.8 4.6 4.6
Core earnings/average managed assets 2.1 2.0 2.1 2.0 1.9
Risk position: Somewhat weaker asset quality metrics than the average banking system
Scotiabank Peru has satisfactory risk management, supported by a well-diversified loan portfolio by customer and
economic sector, good underwriting capabilities underpinned by its parent's oversight, low complexity of operations
with a focus on lending, and adequate management of mismatches. The bank isn't significantly exposed to single-name
concentration: its top 20 group exposures represented about 19% of its total portfolio and 1.2x total adjusted capital at
the end of 2019. Scotiabank Peru continues to focus on traditional banking operations. In this regard, there are no
complex products or exposure to sophisticated derivatives operations (mostly used for hedging purposes),
asset-backed securities, collateralized debt obligations, or structured credits.
Amid a deep contraction in GDP due to the pandemic, we expect part of the bank's lending growth in 2020 to come
from Recativa Peru loans that have lower margins but lower losses. Loan portfolio mix will consist of a smaller share of
retail loans and higher participation of loans to SMEs and companies. In 2021, we expect growth to come from a
robust economic rebound. In 2020, asset quality metrics would be influenced by the extension in loan payments, and
the deterioration would deepen starting in the fourth quarter of 2020. Cost of risk is increasing in these quarters as the
bank is generating additional provisions.
The bank's historical asset quality metrics are weaker than industry average, given its lending to lower income
borrowers through Crediscotia Financiera and higher-than-system levels of guarantees that take a longer time to
charge off. By the end of March 2020, consolidated NPLs (90 days past due, including figures of Creditscotia) were
3.3% of total loans. If we consider only the bank's operations, NPLs were 3.0% as of March 2020, compared with the
2.5% banking system average. We expect net charge-offs to increase from the average of 2.5% in customer loans (and
2% in previous years) including nonbank financial institutions. We could revise our assessment of the bank's risk
position to moderate if NPLs to total loans and net charge-offs rise significantly higher than the industry average.
The level of dollar-denominated loans has been a concern for Peruvian financial system despite a consistent decline in
the past decade thanks to the central bank's measures. Dollarization remains higher than those of regional peers such
as Brazil, Chile, Colombia, and Mexico--about 31% as of March 2020 for Peru's banking industry (and 26% for its total
financial system including nonbank lenders). Although Peruvian banks generally offer dollar-denominated loans to
borrowers with revenues in that currency such as exporters, we believe there's still a portion of such loans offered to
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 8Scotiabank Peru S.A.A.
non-dollar revenue generators. Scotiabank Peru's dollar-denominated loans accounted for 27% of total loans
(Scotiabank Peru and CrediScotia) as of March 2020, similar to the industry average.
Table 4
Scotiabank Peru S.A.A. Risk Position
--Year-ended Dec. 31--
(%) 2019 2018 2017 2016 2015
Growth in customer loans 8.5 11.3 7.3 4.2 21.4
Total managed assets/adjusted common equity (x) 8.6 8.1 8.0 8.8 10.6
New loan loss provisions/average customer loans 3.1 2.7 2.8 2.7 2.7
Net charge-offs/average customer loans 2.5 1.9 2.0 2.0 2.0
Gross nonperforming assets/customer loans + other real estate owned 3.9 4.0 3.6 3.6 3.3
Loan loss reserves/gross nonperforming assets 138.3 131.8 138.3 134.0 137.2
Chart 3
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 9Scotiabank Peru S.A.A. Chart 4 Funding and liquidity: Satisfactory funding structure and industry liquidity strengthened by central bank actions We consider Scotiabank Peru to have average funding compared with the industry norm and adequate liquidity. Its funding mainly consists of core deposits, which account for 70% of its consolidated funding base. The remaining 30% are interbank credit lines and other financial obligations. The bank's core customer deposit base remained sound with no major concentrations, and we don't expect major changes in this regard. The bank is continuing to expand its deposit base while accessing the debt capital markets, underscoring its solid financial flexibility. We consider that Scotiabank Peru manages asset and liability risk well. The bank performs stress test analyses and has contingency plans in place. According to our methodology, the bank's stable funding ratio (SFR) averaged 103% average in the past three years. Scotiabank Peru's nationwide distribution network and sound presence have fostered the third-largest deposit base in Peru, a competitive advantage given its stability and the relatively lower cost of a deposit base than of other funding sources. We believe that Scotiabank Peru has adequate liquidity. Like other banks in the system, it uses government securities as a primary instrument for liquidity management. The bank's broad liquid assets (mainly consisting of sovereign bonds and cash and reserves in the central bank) in average covered 1.6x its short-term wholesale fundingover the last three-years. Senior and subordinated bonds, which mature in less than a year, account for 45% of the short-term wholesale funding is and short-term repos represent 55%. We consider the bank's maturities for the next two years to be manageable. Under the scenario of the pandemic, the central bank took actions to ensure stability and liquidity in the system including repo lines related to Reactiva Peru program. In addition, we consider Scotiabank Peru would count with support of its parent if needed, scenario that is not our base case at this point. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 10
Scotiabank Peru S.A.A.
As of March 2020, the bank's assets in foreign currency represented about 34% of total assets and its foreign currency
liabilities accounted for 44% of total liabilities (similar to the industry average). The bank has hedged the portion of the
balance sheet that isn't naturally matched with cross-currency swaps.
Table 5
Scotiabank Peru S.A.A. Funding And Liquidity
--Year-ended Dec. 31--
(%) 2019 2018 2017 2016 2015
Core deposits/funding base 69.0 72.3 74.0 72.3 69.6
Customer loans (net)/customer deposits 114.6 118.5 112.6 111.6 104.6
Long-term funding ratio 82.7 85.9 86.5 83.9 83.8
Stable funding ratio 105.2 99.7 105.1 102.8 111.7
Short-term wholesale funding/funding base 19.6 16.2 15.5 18.3 17.9
Broad liquid assets/short-term wholesale funding (x) 1.6 1.5 1.7 1.5 1.8
Net broad liquid assets/short-term customer deposits 20.1 13.7 17.4 15.1 25.2
Short-term wholesale funding/total wholesale funding 63.4 58.7 59.5 65.9 59.0
Narrow liquid assets/3-month wholesale funding (x) 2.5 2.4 2.4 2.0 3.0
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Chart 5
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 11Scotiabank Peru S.A.A.
Related Criteria
• General Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• Criteria | Financial Institutions | Banks: Quantitative Metrics For Rating Banks Globally: Methodology And
Assumptions, July 17, 2013
• Criteria | Financial Institutions | Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011
• Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And
Assumptions, Nov. 9, 2011
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Related Research
• Outlooks On Four Peruvian Banks Revised To Negative From Stable On Deepening Economic Risks, July 16, 2020
• Policy Responses To COVID-19 Varies Among Latin America's Central Banks, Report Says, June 3, 2020
•
Anchor Matrix
Economic Risk
Industry
Risk 1 2 3 4 5 6 7 8 9 10
1 a a a- bbb+ bbb+ bbb - - - -
2 a a- a- bbb+ bbb bbb bbb- - - -
3 a- a- bbb+ bbb+ bbb bbb- bbb- bb+ - -
4 bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb -
5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+
6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+
7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b+
8 - - bb+ bb bb bb bb- bb- b+ b
9 - - - bb bb- bb- b+ b+ b+ b
10 - - - - b+ b+ b+ b b b-
Ratings Detail (As Of July 30, 2020)*
Scotiabank Peru S.A.A.
Issuer Credit Rating BBB+/Stable/A-2
Issuer Credit Ratings History
20-Aug-2013 BBB+/Stable/A-2
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 12Scotiabank Peru S.A.A. Ratings Detail (As Of July 30, 2020)*(cont.) 29-Aug-2012 BBB/Positive/A-2 11-Jul-2012 BBB/Stable/A-2 Sovereign Rating Peru Foreign Currency BBB+/Stable/A-2 Local Currency A-/Stable/A-2 Related Entities Bank of Nova Scotia Australia Branch Issuer Credit Rating A+/Stable/A-1 Senior Unsecured A+ Scotiabank Capital Trust Preferred Stock Canada National Scale Preferred Share P-2 Preferred Stock BBB Scotiabank Chile Issuer Credit Rating A/Negative/NR Scotiabank Inverlat, S.A. Issuer Credit Rating BBB/Negative/A-2 CaVal (Mexico) National Scale mxAAA/Stable/mxA-1+ Senior Unsecured CaVal (Mexico) National Scale mxAAA Scotia Inverlat Casa de Bolsa S.A de C.V. Grupo Financiero Scotiabank Inverlat Issuer Credit Rating CaVal (Mexico) National Scale mxAAA/Stable/mxA-1+ The Bank of Nova Scotia Issuer Credit Rating A+/Stable/A-1 Commercial Paper Foreign Currency A+/A-1 Local Currency A-1 Canada National Scale Commercial Paper A-1(MID) Preferred Stock Canada National Scale Preferred Share P-2 Canada National Scale Preferred Share P-2(Low) Preferred Stock BBB Preferred Stock BBB- Senior Subordinated A- Senior Unsecured A+ Senior Unsecured A-1 Short-Term Debt A-1 Subordinated A- Subordinated BBB Subordinated BBB+ Subordinated BBB- *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 13
Scotiabank Peru S.A.A. Ratings Detail (As Of July 30, 2020)*(cont.) across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 30, 2020 14
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