Fitch Ratings has placed Banco Security's (BS) Long- and Short-Term Issuer Default Ratings (IDRs), Long-Term National Ratings, Viability Rating (VR) on Rating Watch Positive (RWP).

Fitch has also placed BS's holding company, Grupo Security (GS) National Ratings on RWP. Fitch has additionally affirmed the Government Support Rating (GSR) at 'bb+' and the National Short-Term Ratings of BS at 'N1+(cl)', the highest level on the rating scale. A full list of rating actions is below.

BS and GS' placement on RWP reflects the positive credit implications on BS and GS for being part of BICECORP Group, upon completion of the merger, which creditworthiness is stronger as reflected in Banco BICE ratings of 'BBB+'/Stable and BICECORP of 'AA+(cl)'/Stable).

The merger's completion of the holcos is expected by the end of 2024. Fitch expects GS to benefit due to its highly business/commercial correlation that would arise with Bicecorp and BICE. The rating uplift in GS will depend on the final double leverage at the resulting BHC (Bicecorp) but would likely be equalized with Bicecorp ratings. Fitch will resolve GS's RWP upon completion of the transaction, subject to customary closing conditions being met. This includes relevant regulatory and shareholders approvals. Fitch expects the Rating Watch's resolution will occur more than six months in the future, which is outside of Fitch's normal Rating Watch time horizon.

Key Rating Drivers

Banco Security - VR, IDRs and National Ratings

Consistent Business Profile: BS's IDRs and National Ratings are driven by its VR. The bank's VR of 'bbb' has been assigned above its implied VR due to Fitch's assessment the bank's prudent business model focus on low risk products resulted in stable asset quality metrics. BS's proven risk profile, currently at 'bbb+', underpins the bank's ability to sustain its consistent financial profile. The bank's small, albeit growing, franchise compared to regional and local peers, and consistent strategy, are also considered.

BICECORP and Grupo Security's Transaction: The recent agreement at the holding companies does not have an immediate impact on their subsidiaries' ratings. Fitch believes that this is slightly positive from a credit perspective on a net basis, as the combination and for GS could enhance the entity's franchise, its competitive and market position, as well as other key rating factors until GS is absorbed by BICECORP.

At the bank level, BS could improve its risk profile in advance of the merger, including a better loan origination according to BICE Group' proven low risk culture along the cycle. Therefore, business volumes, and profitability can be positive accordingly. Lastly, BS could benefit by lower funding costs as local market investor or creditors probably would take this transaction as a better risk profile due to BICE group's stronger creditworthiness.

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. However, Fitch will further explore whether there could be any material overlaps in borrower, sector, or depositor concentration that could represent a challenge in a post-integration stage.

Stable Asset Quality Metrics: BS's business model focuses on a relatively lower-risk segment (corporate lending), which has resulted in stable asset quality ratios that compare favorably to similarly rated international peers (universal/commercial banks in bbb category operating environments). Impaired loans averaged around 1.7% over the past five years, and stood at 2.0% at December 2023, while loan loss reserve coverage of these loans has been maintained above 1x, with near 70% collateralized loan portfolio. However, BS's business model focus also results in moderate portfolio concentrations. The 20 largest debtors represented 11.2% of gross loans and 0.9x common equity at 2023, comparing well against its international and domestic (mid-sized Chilean banks) peers. Fitch believes BS has demonstrated an adequate ability to balance risks in times of volatile financial markets.

Improved Profitability: Fitch expects profitability to decrease in 2024 as inflation and interest rates begin to slowly decline and credit costs might gradually increase, or if the economy growth recovery takes longer than currently anticipated. 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.

Net interest margins (NIM) close to 4.4% of average earning assets, low credit costs and controlled expenses due to BS's digital efficiency plan supported BS's record profitability in 2023. Therefore, BS's operating profit to risk weighted assets ratio reached 2.7% from around 1.0% in recent years due to the pandemic.

Capitalization Benefited from Low Growth: Fitch expects retained earnings and a low loan growth environment for commercial and corporates in 2024, to sustain the bank's common equity Tier 1 (CET1) ratio around its current level. BS's CET1 to risk-weighted assets (RWA) reached at 10.8% at YE 2023 (from 9.9% in 2022), due to greater earnings retention and more conservative RWA when compared to previous periods as loans grew flat during the year. The bank's moderate dividend pay-out, averaging 39% over the past four years.

While the assigned capitalization and leverage score is above its implied 'bb' category, Fitch views the banks capitalization as adequate given its risk profile. Fitch's forecasts BS's CET1 to be maintained above 10.5% within the rating horizon considering a higher pay-out ratio (60% for 2024). In addition to the conservation and countercyclical buffers to be fully loaded in 2024, BS will have a capital charge for Pillar 2 of 1.25% of its RWA to be constituted within next three years.

Concentrated Funding; Good Liquidity Coverage Ratio (LCR): BS's loans to customer deposit ratio reached 187% at YE 2023 and compares unfavorably with similarly rated international peers. This is due to the bank's high level of bond debt (36% of total liabilities), which provides long-term funding to match its assets, and has replaced institutional deposits and Chilean central bank facilities. Fitch considers the bank's strong liquidity coverage, and non-deposits funding as positive deviation factors in its assessment.

At December 2023, liquid assets covered 46% of total short-term interest-bearing liabilities, a figure consistent with a good consolidated liquidity coverage ratio (LCR) of 281% at December 2023, well above the regulatory limit of 100%. The net stable funding ratio stood above 100% at the same date. Deposit concentration is high with the 20 largest time depositors accounting for about 35% of total short-term funding as of YE 2023. Chilean central bank facilities represented 12.8% of total funding, a figure in line with domestic peers.

Rating Sensitivities

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

VR, IDRs and National Ratings

The ratings are on RWP, therefore negative rating action is unlikely;

BS's IDRs and VR could be downgraded if BS's CET1 ratio is sustained below 10% over the rating horizon, either due to lower earnings retention or a marked increase in risk profile;

In addition, BS's VR could be downgraded if its operating profit to RWA ratio falls and remains consistently below 1%;

National Ratings are sensitive to a weakening creditworthiness relative to other Chilean issuers.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

VR, IDRs and National Ratings

Fitch believes that, independent of successful execution on the transaction, upward rating momentum is unlikely in the near term;

A potential upgrade if the bank's VR and IDRs is limited given its relatively modest domestic franchise;

National Ratings are sensitive to strengthening creditworthiness relative to other Chilean issuers.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Banco Security - National Ratings and Senior Debt

Senior Unsecured Debt: Senior unsecured debt ratings are at the same level as BS's 'AA(cl)' National Ratings, as Fitch views the likelihood of default of the senior debt is the same as that of the issuer.

Secured Debt: The 'AA(cl)' National Long-Term Mortgage Note Rating (senior secured) is based on Security's National Long-Term Rating for senior unsecured debt.

Junior Subordinated Debt: Fitch rates BS'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 BS's 'A+(cl)' National scale subordinated debt two notches below its National Long-Term issuer 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 going concern feature (triggered after the point of non-viability).

Government Support Rating: The GSR at 'bb+' reflects the bank's small franchise within the Chilean financial system (2.3% of customer deposits at YE 2023). Fitch believes this results in a moderate or low systemic significance with a more limited contagion risk, despite the sovereign's consistently strong statements of support for the banking system.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

OTHER DEBT AND ISSUER RATINGS - RATING SENSITIVITIES

National Debt Ratings: Senior, 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.

GSR: BS'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 BS to be a D-SIB in the Chilean financial system.

SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS

GRUPO SECURITY S.A. (GS)

GS's National long-term rating and senior unsecured debt ratings are one notch below its main generating asset, BS. The ratings reflect the bank holding company's (BHC) double leverage, which has been historically above 120%, and compares unfavorably to other local BHCs. Fitch also considers that the BHC operates in the same jurisdiction as the bank, and BS's constant flow of upstreamed dividends to GS.

GS's double leverage and individual financial debt to equity ratios reached 130% and 0.33x, respectively, at YE 2023. Dividend coverage of financial expenditures of about 6x is in line with other similarly rated Chilean BHCs on the national scale.

The rating of GS's common shares of 'Primera Clase Nivel 3(cl)' considers GS's solvency, reflected in its 'AA-(cl)' National Rating, and the poor liquidity of its shares and market value of the entity. GS's senior unsecured bonds are rated at the same level as its National long-term rating, considering the absence of credit enhancement or subordination features.

The announcement merger agreement is expected to occur at the BHC level (Bicecorp) 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.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

GRUPO SECURITY S.A. (GS)

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

Fitch expects to resolve the Positive Watch after completion of the contemplated transaction at year end, under the proposed terms;

GS's ratings would remain one notch below BS's and would move in tandem with any negative rating actions on its main operating subsidiary;

A deterioration of GS's individual financial debt metrics, specifically an increase in its double leverage ratio to levels consistently higher than 130%, could be negative for creditworthiness, 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 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:

Fitch expects to resolve the Positive Watch after completion of the contemplated transaction at year end, under the proposed terms;

Any upgrade would be linked to a similar rating action on BS, which appears unlikely in the rating horizon;

The rating of common shares could be upgraded together with an improved liquidity and market value of the company.

VR ADJUSTMENTS

The 'bbb' VR 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' category implied score due to the following adjustment reasons: Strategy and Execution (positive).

The Earnings & Profitability score of 'bb+' has been assigned below the 'bbb' category implied score due to the following adjustment reasons: Historical and Future Metrics.

The Funding and Liquidity score of 'bbb' has been assigned above the 'b' category implied score due to the following adjustment reasons: Liquidity Coverage and Non-deposits 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

Grupo Security ratings are driven by those of Banco Security.

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, either due to 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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