Fitch Ratings has affirmed Banco BBVA Peru's (BP) Viability Rating (VR) and Issuer Default Ratings (IDRs) at 'bbb' and 'BBB', respectively.

The Rating Outlook for the Long-Term IDRs is Stable.

Fitch has also withdrawn BP's Support Rating as it is no longer relevant to the agency's coverage following the publication of Fitch's updated Bank Rating Criteria on Nov. 12, 2021. In line with the updated criteria, Fitch has assigned BP a new Shareholder Support Rating (SSR) of 'bbb'.

Key Rating Drivers

VR, IDRs AND SENIOR DEBT

BP's IDRs are driven by its 'bbb' VR, which is in line with the implied VR and equivalent to the support rating. The bank's robust business profile and sound financial profile support its VR. However, BP's VR is constrained by Peru's operating environment and Long-Term IDR due to limited geographic diversification outside of Peru and material exposure to foreign currency (FC).

BP's robust business profile, with its strong position as Peru's second largest bank and sizable market share of around 20% by loans and deposits, also influences its VR. BP's VR also reflects its good, but slightly deteriorated, asset quality and ample reserves, consistent profitability, as well as its ample and diversified funding base.

As Fitch anticipated, BP's asset quality deteriorated during 2021 due to lower growth (5.74% in 2021, from 19.74% in 2020) and the increasing loans under refinancing process after the Reactiva program ended. 90-days PDLs, reached 3.28% at YE 2021 (3.03% at YE 2020). Nevertheless, BP's asset quality remained adequate for its rating category. Fitch expects the PDL ratio will remain stable or slightly improve during 2022, thanks to a higher loan growth expectation. However, some headwinds are present due to the political uncertainty that weighs on economic recovery.

Reserves remain high thanks to the voluntary provisions from 2020, and cover 1.9x the 90-day PDLs at YE 2021, below 2020 levels (2.0x), but still above the LLR coverage from the 2017-2019 period. Fitch considers this level adequate, given the level of historical losses and the current expected deterioration on the credits under relief programs.

BP's performance during 2021 benefited from stable NIM and lower loan impairment charges, which returned to pre-pandemic levels. In addition, devaluation resulted in higher FX income from derivatives and fee income returned to its usual level. The amount of Reactiva loans in the portfolio remains high and is a weight on NIM, due to their lower interest rates compared to the usual commercial loans.

Operating profit to risk-weighted assets increased to 2.68% (YE 2020: 1.17%; 2017-2019 average: 3.01%) and is expected to return to pre-pandemic levels in 2022. Non-interest revenues maintained their sizable contribution of above 30% of total revenues, and consist of recurrent net fees and commissions from account maintenance, credit/debit card usage, asset management, corporate finance advisory and transfers, among others.

Capital metrics are weak relative to similarly rated (commercial universal banks in 'bbb' operating environment) and regional peers, although capitalization is enhanced by ordinary support from its ultimate parent. The YE 2021 ratios were above regulatory requirements, with a regulatory capital ratio of 14.13%. In turn, BP's YE 2021 FCC ratio was at a relatively tight 11.7%, similar to YE 2020. This was supported by lower loan growth and still positive mix thanks to Reactiva loans, which have lower weighting compared to the usual commercial loans.

The relatively limited FCC is partially offset in Fitch's evaluation by BP's still-adequate loan loss reserves create an additional cushion for risk absorption, as they exceed 90-day PDLs in an amount equivalent to 22% of the FCC at YE 2021. Fitch also considers ordinary support from the parent bank to assessment capitalization metrics. Conservative dividends payout ratio policy, even after 2020's difficult results, should sustain capital conservation and support loans growth in 2022.

Funding is stable and diversified with wider access to domestic and abroad capital markets and adequate matching in currency and tenure. Capital markets funding provides the bank with lower funding costs and long-term funding, which improves asset/liability matching. During 2021, deposits returned to historical levels after pension funds withdrawals and lower investment and expenses from clients. As a consequence, the core Fitch metric of loans to deposits ratio is trending toward pre-pandemic levels (YE 2021: 119%, 2017-2019 average: 110.3%).

Rating Sensitivities

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

VR, IDRs AND SENIOR DEBT

Any negative rating action on the sovereign or in Fitch's operating environment assessment would also lead to a similar action on BP's VR;

BP's IDR and Outlook are driven by its VR. However, if the VR were downgraded, the Long-Term IDRs could become support-driven and remain one notch below the parent's Banco Bilbao Vizcaya Argentaria (BBVA), given Fitch's 'higher of' approach and assessment that the subsidiary is strategically important;

BP's VR could be negatively affected if the bank's asset quality deteriorates significantly causing a sustained decline of the bank's operating performance and capital cushions (a sustained decline in the bank's FCC/adjusted RWA ratio to less than 10% assuming the maintenance of excess reserves and non-core loss absorbing capital or operating profit to RWA below 2.5%);

BP's senior debt ratings would move in line with their respective Long-Term IDRs.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

There is limited upside potential for BP's VR given the sovereign's current rating and Stable Outlook;

Over the medium term, ratings can be upgraded by the confluence of an improvement of the operating environment and the bank's financial profile;

BP's IDRs could benefit from a significant improvement of its parent's ability to provide support, as evidenced by BBVA's IDR;

BP's senior debt ratings would move in line with their respective Long-Term IDRs.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

SHAREHOLDER SUPPORT RATING

The Peruvian operations are part of BBVA's presence in Latin America, and Fitch believes that BBVA Peru is of strategic importance to the BBVA Group's business dynamics, underpinning the bank's support rating of 'bbb'. Therefore, Fitch anticipates that support from the parent should be forthcoming, if required. South America is considered a key market for BBVA globally, becoming an important part of revenues. Peru is strategic for BBVA in Spain as it is the second largest bank in the country and the largest among foreign banks. BBVA owns 92.24% of BP.

SUBORDINATED DEBT

The subordinated debt is rated 'BB+' reflecting its baseline notching for loss-severity to two notches from the entity's Long-Term VR.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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

SHAREHOLDER SUPPORT RATING

BP's SSR would be affected by a negative change in BBVA's ability or willingness to support the bank.

SUBORDINATED DEBT

The subordinated notes' rating is sensitive to any changes in BP's VR.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

SHAREHOLDER SUPPORT RATING

BP's SSR would be affected by a positive change in BBVA's ability or willingness to support the bank.

SUBORDINATED DEBT

The subordinated notes' rating is sensitive to any changes in BP's VR.

VR ADJUSTMENTS

The Operating Environment score has been assigned above the implied score due to the following adjustment reason: Sovereign Rating (positive);

The Capitalization and Leverage score has been assigned above the implied score due to the following adjustment reason: Capital flexibility and ordinary support (positive).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

Entity / Debt

Rating

Prior

Banco BBVA Peru

LT IDR

BBB

Affirmed

BBB

ST IDR

F2

Affirmed

F2

LC LT IDR

BBB

Affirmed

BBB

LC ST IDR

F2

Affirmed

F2

Viability

bbb

Affirmed

bbb

Support

WD

Withdrawn

2

Shareholder Support

bbb

New Rating

senior unsecured

LT

BBB

Affirmed

BBB

subordinated

LT

BB+

Affirmed

BB+

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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