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

Fitch has also affirmed BICE's National Long-Term Ratings 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

Prudent Risk Profile Highly Influenced on Ratings: Banco BICE's ) VR of 'bbb+' drives its Long-Term IDRs and National Rating. The bank's VR it is above the implied level as its risk profile has a higher influence on BICE's creditworthiness due to its prudent underwriting standards reflected in good asset quality metrics and low credit losses. Fitch's assessment of the bank's risk profile is 'a-' is one notch above the operating environment (OE) assessment.

BICECORP and Grupo Security's Transaction: The recent signed purchase agreements at the holding companies does not have an immediate impact on BICE's ratings. Fitch believes that this could be slightly positive from a credit perspective on a net basis, as the combination could enhance the entity's franchise, its competitive and market position, as well as other key rating factors. Execution risks are seemingly moderate at this point, in view of the relative similarities in strategies, business lines and corporate cultures among the two involved entities. Fitch will explore further whether there could be any material overlaps in borrower, sector, or depositor concentration that could represent a challenge in a post-integration stage.

Consistent Business Profile: Fitch's assessment of Banco BICE's implied business profile is 'bb'; this is based on the bank's four-year average total operating income below USD1.000 million (USD410 million); however, Fitch's assessment is at 'bbb'/Stable and consider as positive the bank's stable business model focus on low risk services and products. With a market share of about 3.6% in loans in Chile, the bank's revenue and funding mix is more diversified than local small to mid-sized peers.

Conservative Risk Profile: The bank's strong asset quality ratios are underpinned by Banco BICE's conservative risk management policies and business profile, key attributes the agency expects to be preserved in light of a future merger. Although the bank's capital metrics are lower than similarly rated international peers (universal/commercial banks with VR scored in the bbb+ rating category), excess loan loss reserves (LLRs) and high credit collateral also support Banco BICE's loss absorption capacity. The bank's additional-voluntaries LLRs represented 0.8% of RWA (i.e., total loss absorption capacity - common equity Tier 1 [CET1] plus additional LLRs of about 12.1%).

Sound Asset Quality: Fitch expects BICE's asset quality metrics to remain stable and better than closest peers. BICE's impaired loans ratio, which reached 0.66% as of YE 2023 (2020-2023 average: 0.64%), is commensurate with the implied 'bbb' rating category. Fitch assesses the bank's asset quality rating score above its implied level at 'a-' due to higher collateral and reserves. BICE's total reserve coverage including additional voluntaries provisions of impaired loans (3.1x at YE 2023) is also strong relative to a peer average of 1.7x. Loan portfolio concentrations is low with the 20 largest debtors representing about 8% of gross loans and 0.75x common equity as of February 2024).

Diversified and Improved 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 positive trend in profits. The operating profit-to-risk-weighted assets (RWA) ratio, which averaged 2.0% for 2020-2023 and stood at 2.3% at February 2024, commensurate with its implied 'bbb' category score for earnings and profitability. Fitch expects this trend in profitability to be preserved across 2024 as inflation and interest rates will continue to decline at a more slowly rhythm and credit and non-financial costs are well controlled.

Capitalization Benefited from Low Growth: Fitch assesses BICE's capitalization score above its implied score at 'bbb-' based on the entity's low risk profile with consistent earning generation. BICE's CET1 ratio improved 55 basis points to 11.1% as of YE 2023 due to more cautious loans' growth. The bank's moderate dividend pay-out, averaging 33% over the past four years. Fitch's forecasts BICE's CET1 to be maintained above 10.5% within the rating horizon considering a higher pay-out ratio (55% for 2024 and 50% in 2025-2027). In addition to the conservation and countercyclical buffers to be fully loaded in 2024, BICE will have a capital charge to comply with Basel III Pillar 2 of 0.5% of its RWA to be constituted in 25% at June 2024 and the balance within next three years.

Diversified, Stable Funding Mix: BICE's funding is predominantly wholesale, although conservative liquidity management helps to mitigate this risk. BICE's loans-to-customer deposits ratio averaged 135% 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 284% at 1Q24 in advance of the payment of central bank facilities, while its net stable funding ratio (NSFR) rose 98% as of the same date. Deposit concentration is moderate, retail-costumers deposits represented about 41% of total and with the 20 largest depositors accounting for about 27% of total customer deposits as of Feb. 28, 2024.

Rating Sensitivities

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

VR, IDRs and National Ratings

Banco BICE's IDRs and VR could be downgraded 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

VR, IDRs and National Ratings:

A potential upgrade is limited considering BICE's highly ratings given its moderate domestic franchise and the current OE.

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. The National Long-Term mortgage note Rating (senior secured) of 'AA+(cl)' is based on Banco BICE's National Long-Term Rating for senior unsecured debt.

Junior Subordinated Debt: Fitch rates Banco BICE's National scale junior subordinated debt -additional Tier 1- 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 nonviability).

Government Support Rating: BICE's 'bb+' Government Support Rating (GSR) reflects the bank's small franchise within the Chilean financial system (about 3.5% of total customer deposits as of February 2024). 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, senior secured, 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 ratings are equalized to Banco BICE's ratings. The equalization is mainly driven by the holding company's moderate double leverage (generally below 120%), and a prudent liquidity management. Equalization also considered the same jurisdiction of operations with its bank subsidiary; the holding company's 99.9% ownership of BICE and the long track record of dividend flows 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 announcement merger agreement is expected to occur at the BHC level and, in Fitch's view, it could be slightly positive from a credit perspective, as it could enhance the overall business and risk profile of the combined entities, without materially negatively affecting the resulting financial profile. However, the final impact on both BHCs and their operating subsidiaries cannot be assessed entirely with the available information at present.

Fitch's preliminary base case is that the common equity double leverage (defined as equity investments in subsidiaries plus BHC intangibles, divided by BHC common equity) of the combined BHC would be slightly above 120%, considering the proposed structure of the transaction, although it would converge below this figure with the next two years once the transaction is completed.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

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:

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' rating 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: 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: Nondeposit Funding (positive).

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, due to either their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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