Fitch: Itaú Corpbanca affirmed at ‘BBB-‘; Outlook Stable

Fitch Ratings has affirmed Banco Itaú Corpbanca Colombia S.A.’s (Itaú Colombia) Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) at ‘BBB-‘.

Itaú Colombia established operations in Colombia in 2012 as part of the regional expansion strategy of its parent, Banco Itaú Corpbanca (formerly Corpbanca). This strategy was complemented by Banco Itaú Corpbanca’s integration with its ultimate parent in Brazil. The Colombian franchise has already benefited from Itaú Group’s strong risk management culture and adoption of the Itaú brand. It should see additional benefits once the business model in Colombia is completed.

Key Ratings DriversVR and IDRS

Itaú Colombia’s LT Local and Foreign Currency IDRs are driven by its ‘bbb-‘ Viability Rating(VR). The bank’s VR is highly influenced by its company profile and resilient asset quality. Itaú Colombia’s ratings also consider its tight capital levels, weak profitability, sound risk management,as well as its strong liquidity management in line with Colombian market and Basel 3 internal considerations.The affirmation reflects Itaú Colombia’s stabilized asset quality trends and sustained capital metrics despite a challenging economic cycle in Colombia. The bank has also continued worked extensively to implement its Brazil-based parent’s expansion strategy. Itaú Colombia’s ratings are higher than those implied by the potential for support from its ultimate parent (Itaú Unibanco Holding, BB/Stable) in consideration of its own intrinsic credit profile, given Colombia’s stronger operating environment relative to Brazil’s.

Fitch has affirmed the following ratings:

• Long-Term Foreign and Local Currency IDR at ‘BBB-‘; Outlook Stable
• Short-Term Foreign and Local Currency IDR at ‘F3’;
• Viability rating at ‘bbb-‘;
• Support Rating at ‘3’;
• Support Rating Floor at ‘BB+’;

The Colombian market experienced lingering systemic asset deterioration during 2018, but Itaú Colombia’s asset quality leveled off ahead of its local peers and is showing signs of improvement. Impairment loans ratio fluctuated between 2.9% and 3.1% during 2018 in contrast with the Colombian banking system, which reached 3.7% at September 2018. The focus on implementing Itaú’s commercial and retail strategy for its loan portfolio narrowed its asset growth. The legacy of corporate loans in difficulties continues to explain part of its asset deterioration. By segment, the corporate portfolio deteriorated 30 bps versus the system’s 100 bps asset deterioration; the retail portfolio improved its asset quality in 110 bps as the systems improved in 60 bps, while mortgage deterioration of 80 bps was above the 20 bps of the banking system.

Itaú Colombia’s profitability has been low as it adapts to the new business model and a low economic cycle. Pressures on loan impairment charges, technological integration, brand launch and strategic adjustments constrained operational revenues generated during the last three years. Fitch expects Itaú’s profitability to gradually improve in the coming years, while the bank further supports the parent’s revenue and geographic diversification strategy. Operating profit to risk weighted assets remains weak at -0.2% as of September 2018. This was well below regional peers at 1.75% for the same period and below the average of the last two years of 0.26%.

Fitch views the bank’s capital as relatively tight, although there is some comfort when considering its ample loan loss reserves, good asset quality and sound risk management. Its current capitalization metrics are lower than those of similarly rated peers (universal commercial banks in a ‘bbb’ operating environment), and Fitch considers this one of the constraints on the bank’s VR. The bank’s Fitch Core Capital (FCC) ratio was 9.64% at September 2018, underpinned by asset value decrease and net income losses.

The bank maintains good liquidity levels that provide some relief from managing the concentrated liability structure. The moderate franchise gives a limited competitive advantage and generally influences funding costs. However, the deposit structure is working toward a composition of stable resources, in line with the more conservative liquidity policies and liquidity coverage ratios; this includes mid- to long-term time deposits, domestic and overseas bond issuances, and increased retail funding.

Support Rating & Support Rating Floor

The bank’s Support Rating (SR) of ‘3’ and Support Rating Floor (SRF) of ‘BB+’ are driven by its moderate systemic importance and its growing share of retail deposits, although this is still modest when compared to domestic systemically important banks. Fitch believes that there is some probability that the bank would receive sovereign support if needed, and this underpins its SR and SRF. SRFs indicate the minimum level to which the entity’s LT IDRs could fall as long as Fitch does not change its view on potential sovereign support.

Rating Sensitivities VR and IDRS

Upside potential for Itaú Colombia’s ratings is limited over the short to medium term, given its moderate-size franchise and low profitability. Negative rating action could arise from a material further deterioration in asset quality that erodes the bank’s FCC ratio, profitability or loan reserve coverage of impaired loans (to below 9% or 100%, respectively).

Additionally, although Fitch considers the subsidiary’s credit profile to be mostly independent from that of its ultimate parent, the VR and IDRs may be pressured in a scenario of further downgrades of Itaú Unibanco Holding (BB/Stable), because, under Fitch’s criteria, the intrinsic credit profile of a subsidiary bank cannot be completely delinked from that of its parent. Considering the stable outlook on the parent, Fitch does not consider this as a likely scenario in the foreseeable future.

Support Rating & Support Rating Floor

Upside potential for the SR and SRF is limited and can only occur over time with a material gain of the bank’s systemic importance. Upside potential on the SR could also occur over time from a material improvement of the parent company’s ratings. These ratings could be downgraded if the bank loses material market share in terms of retail customer deposits.

Additionally Fitch has withdrawn the following ratings for commercial reasons:

• National long term rating at ‘AA+(col)’; Outlook Stable
• National short-term rating at ‘F1+(col)’;
• Senior unsecured national bonds at ‘AA+(col)’;
• Subordinated national bonds at ‘AA(col)’.