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

In addition, Fitch has affirmed the Banco Ripley's Short-Term IDRs at 'F3'. Fitch has also affirmed the bank's National Long- and Short-Term ratings at 'A+(cl)' and 'N1+(cl)', respectively. The Rating Outlooks on the Long-Term ratings is Stable.

Fitch has also withdrawn the bank's Shareholder Support Rating (SSR) and assigned a Government Support Rating (GSR) of 'no support' (ns). The SSR withdrawal does not impact the bank's IDR and National Ratings, as these are derived from its intrinsic credit profile reflected in its VR. Simultaneously, Fitch has assigned a 'ns' GSR, as support for Banco Ripley from authorities is not expected, due to Fitch's views of the bank's limited contagion risk in case of default.

Fitch is withdrawing Banco Ripley's SSR as it is no longer considered relevant to the agency's coverage.

Key Rating Drivers

IDRs and National Ratings Based on VR: Banco Ripley's Long-Term IDRs are based on its 'bbb-' VR. The bank's VR is in line with its implied VR and reflects sound capital and liquidity metrics that align with its concentrated business model. The VR also reflects a record of stable earning generation capacity despite post-pandemic pressures. Fitch expects these metrics to continue within the rating horizon for the bank.

The bank's VR is offset by its small franchise and weaker asset quality due to its consumer lending focus. The bank's risk profile also supports its VR and considers a risk management commensurate with its business model and adequate reserve coverage of impaired loans, which provides a cushion to absorb expected losses in more volatile business segments.

Small Domestic Franchise: Fitch's assessment of Banco Ripley's business profile score is 'bb+' based on the bank's four-year average total operating income (USD258 million), commensurate with the implied 'bb' score. Banco Ripley reported a 3.0% market share in consumer loans (6.5% in credit cards) at end-April 2024; however, loans to costumers only accounted for about 0.4% of the Chilean banking system's (excluding operations abroad). This reflects the bank's less diversified business model and reliance on consumer lending. The bank's business profile benefits significantly from the strong domestic franchise of its ultimate parent, Ripley Corp S.A., and its position as a solid retail-financial services player in Chile.

Asset Quality Commensurate to Risk Profile: Banco Ripley's asset quality score of 'bb+', measured by impaired loans greater than 90 days (2020-2023 average: 3.6%), is below the implied 'bbb' score due to impaired loan formation, as material write-offs due to the short duration of credit cards have reduced its stock. Impaired loans slightly improved and stabilized in the first four months of 2024 (4M24) at 4.9% of gross loans, while net charge-offs were higher at 12.7%.

Asset quality ratios are in line with pre-pandemic trends and reserve coverage remained sound at 2.6x including voluntaries credit impairment reserves. Fitch expects credit quality to improve toward historical levels amid a more benign operating environment, with the ratios remaining in line with the assigned score.

Profitability Pressured by Higher Credit Costs: Banco Ripley's operating profit to risk-weighted assets (RWAs) score was downgrade to 'bbb-' from 'bbb' in line with the implied Key Rating Driver (KRD) and Stable Outlook. It also considers the latest available ratio at 3.2% in 1Q24 after a negative 2023 (2020-2023 average: 1.7%). Fitch expects improved profitability, supported by controlled credit costs and increased net interest margin (NIM), with a modest loan growth. Fitch believes the bank has adequate loss absorption capacity, although eroded profitability in recent years could impact the implied score within the rating horizon.

Sufficient Capital Ratios: Banco Ripley's capital is appropriate for its more limited business model and small relative size within the banking system, with a common equity Tier 1 (CET1) ratio of 16.65% at 1Q24. This is commensurate with the implied 'bbb' score, and compares favorably to the system level of 11.75% (latest available figure at February 2024). Capitalization ratios are also in line with peers in the consumer lending segment and with other small local and regional specialist banks.

The banks' internal capital policy requires the maintenance of a minimum total capital ratio of at least 200bps above the regulatory minimum, as a cushion to support potential pressure on asset quality, considering the bank's concentrated business model. During the 2024 regulatory supervision of capital adequacy, the bank did not require an additional pillar 2 requirement charge.

Conservative Asset and Liability Management: Banco Ripley's adjusted funding and liquidity score of 'bbb-' is above the implied score of 'bb', which reflects its still relatively high, although decreasing, loans/deposit ratio (four-year average: 129.2%). This will allow the bank to reach the KRD implied score within the rating horizon. Despite its concentrated depositor base, the agency considered liquidity coverage a positive deviation factor, as the bank's short-term liquidity coverage ratio (LCR) has remained solid for the past four years at a higher 564% for 1Q24. Improving costumer deposit sources continue to benefit the net stable funding ratio of 107% for 1Q24.

Limited Contagion Risk: Fitch believes the bank's strong financial profile, independent management, funding and liquidity, limited direct exposure to its parent. Fitch also believes the banking industry's regulatory framework, with its strong local regulator capable of identifying and, if necessary, restricting transfers of capital and liquidity from the subsidiary to the parent, would limit contagion risk, supporting Banco Ripley's higher stand-alone credit profile relative to its ultimate parent.

Rating Sensitivities

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

VR, IDRs and National Ratings

Banco Ripley's VR and IDRs could be pressured by a sustained decrease in capital and profitability metrics as a consequence of deteriorating asset quality. Specifically, a sustained decline in the CET1 below 13% together with the operating profit/RWA ratio below 1.5% could result in a negative rating action.

A negative assessment regarding the creditworthiness between of the bank and its parent company.

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

Although a potential rating upgrade is limited by its business profile, over the medium term, the National Long-Term Ratings could be upgraded if Banco Ripley is able to improve its business profile by increasing levels of TOI, while maintaining its solid financial profile with an operating profit to RWA ratio consistently above 3%.

A consolidation of a more diversified funding could also trigger an upgrade with a loans/deposit ratio consistently below 125% including a stable portion of retail funding.

National Long-Term Ratings are also sensitive to a strengthening of creditworthiness relative to other Chilean issuers.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

National Debt Ratings: Fitch rates Banco Ripley's senior unsecured bonds at the same level as the bank's National Long-Term Rating of 'A+(cl)', 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) has also been affirmed at 'A+(cl)' and is based on Banco Ripley's National Long-Term Rating.

Government Support Rating (GSR): The 'ns' GSR reflects the bank's small franchise within the Chilean financial system (less than 1% of customer deposits at march 2024). Fitch believes this results in 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

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

National Debt Ratings: The debt ratings would generally move together with the bank's National Long-Term Ratings.

GSR: There is no downside potential for the GSR; however, upside potential is limited and can only occur over time with a material growth of the bank's systemic importance.

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

National Debt Ratings: The debt ratings would generally move together with the bank's National Long-Term Ratings.

GSR: upside potential is limited and can only occur over time with a material growth of the bank's systemic importance.

VR ADJUSTMENTS

The asset quality score of 'bb+' has been assigned below the 'bbb' category implied KRD score for the following adjustment reason: impaired loan formation (negative).

The funding and liquidity score of 'bbb-' has been assigned above the 'bb' category implied KRD score for the following adjustment: reason: liquidity coverage (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.

External Appeal Committee Outcomes

In accordance with Fitch's policies the Issuer appealed and provided additional information to Fitch that resulted in a rating action for SSR that is different than the original rating committee outcome.

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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