Scotiabank Perú A : 22. INFORMES DE CLASIFICACIÓN DE RIESGO. 10. INFORMACIÓN FINANCIERA Y MEMORIA ANUAL.

Scotiabank Peru S.A.A.

Key Rating Drivers

Parent Support: Scotiabank Peru S.A.A.'s (SBP's) Issuer Default Ratings (IDRs) and Shareholder Support Rating (SSR) are based on expected support from its parent, The Bank of Nova Scotia (BNS, 'AA-'/Negative). Fitch Ratings' assessment of support for SBP places high importance on its role in the group as a strategically important subsidiary. It is capped by the country risks related to transfer and convertibility reflected in the country ceiling of 'BBB+' and constrains Fitch's assessment of the ability of the shareholder to support its subsidiary. SBP's Local Currency (LC) IDR is consistent with a maximum uplift of two notches above Peru's sovereign rating. Our rating also incorporates SBP's operational integration with the parent.

Credit Profile Sensitive to Operating Environment: SBP's Viability Rating (VR) is in line with the implied VR, which is underpinned by its solid business profile and capitalization. Fitch believes the credit profile is sensitive to a material deterioration in the local operating environment (OE) or a negative sovereign rating action.

Solid Capital Levels: Although SBP continues to report one of the strongest capitalization metrics among the largest Peruvian banks, it has decreased in respect to its peak in 2020 (14.8%). Fitch Core Capital/risk-weighted assets (FCC/RWA) stood at 13.8% as of December 2021. In Fitch's view, the capital ratio is explained by growth in secured loans, recurrent earnings generation and a flexible dividend payout. Loss absorption was also enhanced by higher loan loss allowances coverage. Fitch's capitalization assessment is a rating strength and supports the current VR, as the assessment highly benefits from ordinary support from its ultimate parent.

Risk Appetite Underpinned Asset Quality: SBP's adjustment to its risk appetite contributes to the return of asset quality to pre-coronavirus pandemic levels. Additionally, continued tuning of its internal models and ongoing monitoring of the loan portfolio and warning signals, as well as a strengthened collection process, have contributed to asset quality performance. As expected by Fitch, consolidated PDL decreased to 3.9% at YE21 from 6.5% at YE20, a result close to its average for 2016-2019 of 3.6%. Meanwhile, assets under forbearance programs decreased to 5% of gross loans as of December 2021, which compares favorably to the average for Peruvian banks (YE21: 11%).

Operational Profits Recovery: In Fitch's opinion, SBP's partial recovery on profitability is explained by risk appetite adjustments, good efficiency levels and solid business generation amid local political uncertainty pressures. Although loan portfolio rebalancing and lower interest rates decreased business volume, SBP's operational profit recovery was supported on lower than expected provisions for expenses and greater contributions from subsidiaries and fees. The operating profit to RWA ratio was 1.8% at YE21, still below its good pre-pandemic levels, but better than the 0.4% at YE20.

Adequate Liquidity and Stable Funding: SBP has appropriately managed its liquidity to fund asset growth while closely matching the maturities of its liabilities. SBP's funding profile is strengthened by its diversified mix of deposits, short-term funding and long-term debt. SBP conforms with Basel III regulatory liquidity requirements and significantly reduced its historical asymmetry of loans/deposits in LC versus foreign currency (FC). Its loans to customer deposits ratio of 124.7% as pf December 2021 is explained by SBP's usage of long-term debt that aims for a composition of stable resources in line with the liquidity policies and coverage ratios. Core deposits decreased 3% during 2021 due to an outflow of funds during the first half of 2021 as part of election process uncertainty.

Rating Report │ April 26, 2022

Banks

Universal Commercial Banks

Peru

Bank Rating Criteria (November 2021)

Future Flow Securitization Rating Criteria(May 2021)

Related Research

Weakening Governance a Risk for PeruEconomy, Ratings (March 2022)

Fitch Affirms Bank of Nova Scotia at 'AA-';Outlook Negative (July 2021)

Fitch Affirms Scotiabank Peru's IDR at 'BBB+';Outlook Stable (April 2022)

Analysts

Robert Stoll [phone] Pena [phone]

fitchratings.com

1

Ratings
Foreign Currency
Long-Term IDR	BBB+
Short-Term IDR	F1
Local Currency
Long-Term IDR	A-
Short-Term IDR	F1
Viability Rating	bbb
Shareholder Support Rating	bbb+
Sovereign Risk
Long-Term Foreign-Currency
IDR	BBB
Long-Term Local-Currency IDR
Country Ceiling	BBB
Outlooks
Long-Term Foreign-Currency
IDR	Stable
Long-Term Local-Currency IDR	Stable
Sovereign Long-Term Foreign-
Currency IDR	Stable
Sovereign Long-Term Local-
Currency IDR	Stable
Applicable Criteria

Banks

Universal Commercial Banks

Peru

Rating Sensitivities

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

• • A rating upgrade of SBP's Long-Term LC IDR is unlikely in the near future. Over the medium term, this rating could be upgraded if the parent's ratings are upgraded, or if Fitch's support assessment of SBP changes to an equalization of its IDRs with those of the parent, but it is subject to constraints on the maximum uplift above the sovereign rating.

• • While unlikely in the current operating environment (OE), SBP's Long-Term FC IDR would be upgraded if Peru's sovereign rating and Country Ceiling were to be upgraded.

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

• • Under Fitch's current support assessment and a multiple notch downgrade scenario from BNS, SBP's IDRs will likely remain at the level determined by its own VR or one notch below its parent's IDR, whichever is higher, but subject to sovereign rating and Country Ceiling considerations.

• • Pressure on SBP's VR could arise from a significant asset quality or profitability deterioration that erodes SBP's reserve and capital cushion, specifically, operating profit/RWA sustained below its historical average of 2.0% and an FCC ratio below 10%.

Other Debt and Issuer Ratings: Key Rating Drivers

Subordinated Debt: SBP's subordinated debt rating of 'BBB' is one notch below what Fitch considers the appropriate anchor rating, the bank's own support-driven LT FC IDR of 'BBB+'. This anchor rating is capped by Peru's country ceiling, which addresses transfer and convertibility risks, so the overall notching for this issue rating is only one notch lower than the anchor to reflect loss severity risk partially mitigated by institutional support, instead of the baseline case of two notches lower.

Other Debt and Issuer Ratings: Rating Sensitivities

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

• • SBP's subordinated debt ratings would move in line with the bank's LT FC IDR.

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

• • SBP's subordinated debt ratings would move in line with the bank's LT FC IDR.

Debt Rating Classes

Rating Level Subordinated: Long-Term

Rating BBB

Source: Fitch Ratings.

Banks

Universal Commercial Banks

Peru

Ratings Navigator

Scotiabank Peru S.A.A.

ESG Relevance:

Banks

Ratings Navigator

Significant Changes

The Rating Outlook on the LT IDRs is Stable. Despite OE pressures, which include a slow recovery of the GDP, due greater political uncertainty and the challenging investment and business environment, SBP's core financial metrics have sufficient headroom to maintain its current ratings.

Banks

Universal Commercial Banks

Peru

Brief Company Summary

Business Model

Diversified Business Model

SBP has a diverse and stable business model and its overall business is weighted toward commercial traditional banking and increasingly retail operations. Its reliance on volatile businesses is modest. Likewise, on the funding side, SBP is funded roughly 50% corporate / 50% retail and therefore counts on a stable and diversified deposit base.

SBP is 98.05% owned by The Bank of Nova Scotia (BNS) ('AA-'/Negative by Fitch, July 2021), Canada's third-largest banking group with increasing focus on Latin America and the Caribbean. SBP is BNS's third-largest investment outside of Canada after Mexico and Chile and is part of Scotiabank's Pacific Alliance strategy. Within BNS Canada, SBP contributed roughly 2% of assets and 5% of income as of December 2021.

Management and Strategy

SBP's management is experienced and well-focused, while the corporate culture of the firm is consistent with BNS's culture. Management has successfully guided complex merger and acquisition processes and solidified its position in the Peruvian market. This has resulted in a high degree of confidence at the parent level, with SBP entrusted with some strategic regional functions like overseeing BNS's smaller operations in the southern cone.

SBP Strategy Aligns with BNS's Global Vision

The bank's strategy aims to achieve balanced and profitable growth, while increasing its profitable and stable customer base, improving operational efficiency and enhancing clients' digital experience. SBP's credit cards include Cencosud, its retail portfolio is highly profitable and is viewed as a strategic objective to strengthen its consumer financing, and a credit card business in Peru, which aligns with BNS's global vision to increase scale in Pacific Alliance countries.

The bank adjusted its growing strategy toward mortgage and secured portfolios. Although the strategic plan was affected by the coronavirus pandemic, cost control, a decrease in risk appetite and digital transformation contributed to the business plan's adjustment.

For the commercial loan portfolio, the bank's main objective is to build long-term relationships with its customers, satisfy their needs and requirements with both local and international financial products and services, leveraged on its deep knowledge of its customers and specialized units in corporate finance, cash management, transaction banking and leasing. SBP is also focused on diversifying funding from retail and wholesale sources, as well as maintaining contingent lines. The bank is also focused on maintaining a liquid portfolio of assets and a diversified FX, while monitoring liquidity ratios, gaps and performing stress tests on these.

Execution

Fitch considers SBP's execution to be adequate, as it generally meets its business and financial objectives in different stages of the economic cycle. The bank's digital transformation has been central to improving speed of service, increasing its client focus, and simultaneously reducing its operating costs. During the last year SBP continued to transform its digital channels, increased its secured loans contribution (mortgages, payrolls) as well as resilient sectors, and used Reactiva funds for the commercial sector and its small-sized and medium-sized (SME) portfolio.

SBP's 2021 annual performance shows a recovery in profitability boosted by the de-risking strategy that increased mortgage and corporate loans, as well as low-cost funding. However, the economic recovery was narrowed by political uncertainty during the first half of the year. Further, inflation pressures and the international crisis also started to impact private investments. Nevertheless, Peruvian average adherence to relief programs decreased to 4.9% in 2021, down from 21% in 2020.

SBP Loan Portfolio

(2018-2021)

Corporate & Commercial Loans (LHS)

Other Consumer/Retail Loans (LHS)

Residential Mortgage Loans (LHS)

Loans/Total Assets (LHS)

Market Share (RHS)

(%)

18.4

15.5

69.8	70.3
61.9

17.4

100

15.2

80

60

40

20

0

2021 2020 2019 2018

Source: Fitch Ratings, Fitch Solutions.

SBP Gross Revenues

(2018-2021)

NIM/Operating Income (RHS)

Other Operating Income (LHS)

Net Fees and Commissions (LHS)

Net Interest Income (LHS)

($)

6,000

5,000

4,000

3,000

2,000

1,000

0

2021 2020 2019 2018 Source: Fitch Ratings, Fitch Solutions.

(%)

20

15

10

5

0

(%)

82

80

78

76

74

72

Banks

Universal Commercial Banks

Peru

Risk Appetite

Underwriting Standards

Risk Profile Aligned with its Parent BNS

Scotiabank Peru's underwriting standards are in line with international guidelines and processes, and these include internally-defined exposure limits, collateral requirements and internal risk ratings. SBP's underwriting standards are generally in line with industry practices and reflect medium-term expectations. The bank has a three-year comprehensive risk appetite framework and it provides quarterly, follow-up reports to the board of directors. The bank's risk management structure is fully integrated with that of its parent, and it applies all of BNS's global risk management policies.

Credit risk policies are set by the board of directors which also is in charge of defining credit portfolio limits, approving related-party transactions, and monitoring monthly results. The bank's main financial risk is credit risk. This is expected, given the importance of its credit portfolio, which represented 70% of its assets as of December 2021. SBP has established risk management practices that not only follow local regulatory standards but also are fully integrated with those of its parent, with the aim of achieving a diversified and stable portfolio and financial profits.

Adequate Risk Controls

The bank has strict parameters to monitor, measure, control and mitigates risks. It has specific procedures and policies for: leadership, risk appetite, and measurement, including follow up procedures. The bank's credit risk is mitigated by adequate diversification by economic sector and by a moderate concentration among its largest debtors. The combination of moderate risk appetite, strengthened risk management processes, and a stringent collection process should continue to sustain the loan portfolio's relatively good performance.

SBP followed regulatory guidance in term of forbearance programs that started in the second quarter of 2020. Approximately 5% of the loan portfolio received relief at YE21 (YE20: 29%). Adequate loan performance and conservative measures implemented in 2020 (relief credits that do not return to normal at YE20 migrated to past due loans) decreased the weight of provisions on profitability. The recession pressured credit costs in 2020, with loan impairment charges consuming 93% of pre-impairment operating profit as of December 2020, compared with an average of 44% for 2015-2019. As of December 2021, impairment charges returned gradually to their historic average (41%).

Growth

Political Uncertainty Narrows Asset Growth

Amid a regional economic recovery during 2021 after the 2020 contraction, political uncertainty during the first half of the year, generally conservative approaches to replace Reactiva funds, a decrease in liquidity and inflation pressures explained the banking sector's growth rate.

During 2021, SBP's loan growth of 7.3% was similar to the Peruvian system's 7.4% rate, and was focused on secured portfolios, mortgages and corporate loans. Deposits decreased 2.8% and was marked by an outflow of funds from the country during the first part of the year, and bank efforts to increase transactional and saving accounts, which contributed to lower funding costs.