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Rating Action:

Moody's confirms Banco Santander-Chile and Banco de Chile's deposit and debt ratings, and downgrades BCAs to a3

12 Dec 2016

New York, December 12, 2016 -- Moody's Investors Service today confirmed the deposit and debt ratings of Banco Santander-Chile (Santander) and Banco de Chile and downgraded their respective baseline credit assessments (BCAs). Both banks' outlooks are stable. These actions conclude the reviews for possible downgrade that were initiated on both banks on 25 August 2016.

The following ratings for Santander have been confirmed: long-term global local and foreign currency deposit ratings at Aa3, long-term global local and foreign currency senior unsecured debt ratings at Aa3, and long-term foreign currency MTN program rating for senior unsecured notes at (P)Aa3. The following ratings for Banco de Chile have been confirmed: its long-term global local and foreign currency deposit ratings at Aa3, long-term foreign currency senior unsecured debt rating at Aa3, and long-term global local and foreign currency MTN program rating senior unsecured notes at (P)Aa3. Moody's also confirmed the long-term foreign currency counterparty risk assessment at Aa3(cr) assigned to both Santander and to Banco de Chile.

At the same time, Moody's downgraded Santander's BCA and adjusted BCA to a3, from a2. Moody's also downgraded Banco de Chile's BCA and adjusted BCA to a3, from a2, and the bank's global local and foreign currency MTN program rating for subordinated notes to (P)Baa1 from (P)A3. No subordinated issuances under Banco de Chile's MTN program are rated by Moody's.

A detailed list of affected ratings and assessments is provided below.

RATINGS RATIONALE

Notwithstanding the downgrades of the banks' BCAs, Moody's confirmed their deposit and senior unsecured debt ratings at Aa3 to reflect the very high probability that the banks' bondholders and depositors will receive government support in a situation of financial stress because of the banks' very large deposit and loan franchises and the material systemic consequences of an unsupported failure. The ratings now benefit from three notches of uplift from the banks' a3 BCAs and they remain at the same level as Moody's Aa3 government bond rating for Chile, with a stable outlook.

Moody's downgrade of the baseline credit assessments of Santander and Banco de Chile incorporates the increased risks to the banks' earnings and asset quality stemming from prospects of continued slowdown in Chile's economy and relevant market shifts that have changed the competitive landscape. Notwithstanding these challenges, the banks continue to be the most highly rated in Latin America because they benefit from Chile's still solid macro fundamentals and institutional framework, as well as diversified loan portfolios, solid risk management and leading market shares that continue to sustain ample margins.

Profitability has fallen since 2013 as a result of declining loan growth, introduction of lending rate caps and more stringent provisioning requirements in Chile. Going forward, the combination of lower policy rates and gradually increasing taxes until 2018, and an expected decrease in inflation, will limit banks' earnings generation capacity in Chile. Santander's net income to tangible assets decreased to 1.4% as of September 2016, from 1.8% as of year-end 2014, while Banco de Chile's declined to 1.8%, from 2.1%.

Although Santander and Banco de Chile continue to enjoy good access to stable, core funding, Moody's expects funding costs to increase going forward, as a result of the introduction of Basel III liquidity requirements. The banks will face stiff competition for retail deposits from each other and other large banks in the system, as well as from pension and mutual funds, which have traditionally attracted the bulk of savings in Chile. Despite the weaker earnings generation, both banks will remain highly profitable compared to global peers.

While the derisking strategies adopted by both banks have helped contain asset quality deterioration despite the deceleration in Chile's economy, they have limited capacity to expand these strategies without further impairing earnings generation. Chile's economic growth will remain subdued for the next several years because of low copper prices and a weakened labor market, coupled with low business and consumer confidence, all of which will negatively affect borrowers' repayment capacity over the coming years. Of particular concern is the asset risk in the banks' commercial portfolios, and specifically in industries related to mining, homebuilding, non-bank financial services and the fishing industry.

Banco de Chile's MTN program rating for subordinated notes, which is not likely to benefit from government support in Moody's view, was downgraded in line with the BCA. The sub debt is notched down from the BCA to reflect lower expected recovery in the event of a bank failure because of its lesser priority of claim. No subordinated issuances under Banco de Chile's MTN program are rated.

The stable outlook considers the banks' strong risk management and efficient operations that will allow the banks to maintain robust intrinsic financial fundamentals through the outlook period, despite the expected deterioration in profitability and asset quality.

WHAT COULD CHANGE THE RATINGS

Further downward ratings pressure would accumulate if asset quality deteriorates more than currently anticipated, result in sustained challenges to the banks' earnings generation and capitalization.

LIST OF ALL AFFECTED RATINGS

The following ratings and assessments were downgraded:

Issuer: Banco Santander-Chile

Baseline credit assessment, to a3 from a2

Adjusted baseline credit assessment, to a3 from a2

Issuer: Banco de Chile

Baseline credit assessment, to a3 from a2

Adjusted baseline credit assessment, to a3 from a2

Long-term foreign currency MTN program rating for subordinated notes, to (P)Baa1 from (P)A3, on review for downgrade

Long-term local currency MTN program rating for subordinated notes, to (P)Baa1 from (P)A3, on review for downgrade

The following ratings and assessments were confirmed:

Issuer: Banco Santander-Chile

Long-term counterparty risk assessment at Aa3(cr)

Long-term local currency deposit rating at Aa3, stable

Long-term foreign currency deposit rating at Aa3, stable

Long-term local currency senior unsecured debt rating at Aa3, stable

Long-term foreign currency senior unsecured debt rating at Aa3, stable

Long-term foreign currency MTN program rating for senior unsecured notes at (P)Aa3

Issuer: Banco de Chile

Long-term counterparty risk assessment at Aa3(cr)

Long-term local currency deposit rating at Aa3, stable

Long-term foreign currency deposit rating at Aa3, stable

Long-term foreign currency senior unsecured debt ratings at Aa3, stable

Long-term foreign currency MTN program rating for senior unsecured notes at (P)Aa3

Long-term local currency MTN program rating for senior unsecured notes at (P)Aa3

Outlook:

Issuer: Banco Santander-Chile

Outlook changed to Stable from Rating under Review

Issuer: Banco de Chile

Outlook changed to Stable from Rating under Review

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Banco Santander-Chile is headquartered in Santiago, Chile and reported CLP35.8 trillion in assets, as of September 2016.

Banco de Chile is headquartered in Santiago, Chile and reported CLP31.0 trillion in assets, as of September 2016.

The date of the last Rating Action for Banco Santander-Chile was 17 November 2016.

The date of the last Rating Action for Banco de Chile was 1 September 2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Felipe Carvallo
Vice President - Senior Analyst
Financial Institutions Group
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M. Celina Vansetti
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No Related Data.
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