Fitch Ratings has affirmed Credicorp Bank, S.A.'s (Credicorp) Long-Term Issuer Default Rating (IDR) at 'BB+', Short-Term IDR at 'B' and Viability Rating (VR) at 'bb+'.

Fitch has also affirmed the Long- and Short-Term National Ratings at 'AA(pan)' and 'F1+(pan)', respectively. The Rating Outlook for the Long-Term IDR and Long-Term National Rating has been revised to Negative from Stable.

The revision of the Outlook reflects Credicorp's diminished profitability in 2022 and Fitch's expectations that the improvement in the operating profit to risk-weighted assets (RWA) ratio in 2023 may not be high enough to sustain a four-year average ratio of 1.5%, which is the Fitch's sensitivity for a rating downgrade. The Negative Outlook also reflects Fitch expectations that capitalization could decrease over the ratings horizon given the moderate profitability and future strategic plans.

Key Rating Drivers

Pressured Financial Profile: Credicorp's international and national ratings are underpinned by its intrinsic creditworthiness, captured in its VR. The bank's financial profile is adequate, albeit with an expected decrease in profitability and capitalization factors, despite its moderate market position and some leadership in the retail lending segment.

Operating Environment Weigh: Fitch's 'bb+' assessment of the Panamanian banking system's operating environment (EO) weighs the recovery of the banks' performance and continued normalization of the payment behavior of loans with relief measures. The current environment provides an opportunity for the bank to recover from the pressures of the past two years, although OE risks will tilt increasingly to the downside in 2023 due to the adverse global economic scenario.

Consolidated Business Model: The bank consolidated business model, which underpinned the business profile factor, is demonstrated in its strong knowledge of the retail segment, evident in the recent pandemic period with a reasonable control on the increment of deterioration, comparing well with the local industry despite a business mix prone to higher deterioration. The business model has a market focus of retail banking with 78% of total loans coming from retail loans including mortgages; the rest is corporate business. However, the bank has a modest franchise with a market participation in terms of asset and deposits of 1.6% that Fitch believes could increase progressively given a new growth strategy.

Good Asset Quality: Due to the bank's conservative risk profile loan quality remains good despite having increased after the finalization of the pandemic relief measures in Panama. With historical delinquency ratios below 1%, the bank reached a ratio of 1.8% in FY 2022. This is reasonable given Credicorp's retail-oriented loan book and compares below the local industry and in line with the rating category and peers. The delinquency ratios, in Fitch view, should remain close to 2.0% in the short to medium term.

Moderate Profitability: As of June 2022, the operating profitability to RWA ratio was 0.7%, comparing below the four-year average of 1.7% and the system's average (0.9%). The higher loan provisions and the contraction of the revenue from the investment in the insurance affiliate are the main drivers of the profitability decrease. Recovery prospects are focused on business growth, but Fitch's base scenario does not expect a return to pre-pandemic levels until the medium term. Recovery prospects are also influenced by the adverse external economic environment and investment valuation performance.

Sound Capital: Credicorp's capitalization continue to be one of the strengths of the bank's financial profile. As of June 2022, the CET1 ratio to RWA was 18.9%. This level provides a good cushion for absorbing potential credit losses combined with the good loan loss allowance coverage. However, capital levels could decrease given Fitch's expectations of credit growth.

Funding Profile Stable: The funding structure of Credicorp is retail deposits based (86.9% of total funding) and complemented by local issuance programs and long-term international financial institutions. The entity maintains a steady loan to deposits ratio with an average of 94% (Jun22: 89.6%). Liquidity is good at the bank with liquid assets representing 39.2% of total customer deposits as of June 2022.

Rating Sensitivities

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

A sustained operating profit-to-RWA ratio below 1.5% or a CET1 ratio below 15.0%.

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

Upward movements in Credicorp's IDR, National Ratings and VR, are unlikely in the short to medium term due to the Negative Outlook for the IDR;

The Negative Outlook on Credicorp's IDR would be revised to Stable if the recovery of the profitability is stronger than expected and allows the bank to maintain a four-year average of 1.5% of the operating profit to RWA ratio, while maintaining a CET1 above 15%.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Senior Unsecured Debt

Credicorp's senior unsecured debt is rated at the same level as the bank's national rating, as in Fitch's view, the likelihood of default on the debt is the same as for Credicorp.

GSR

The GSR of 'ns' reflects that, while possible, external support cannot be relied upon, given the banking system's large size regarding economy and weak support stance due to Panama's lack of a lender of last resort.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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

Credicorp's senior unsecured debt rating would be downgraded in case of negative rating action on the bank's national ratings.

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

Credicorp's senior unsecured debt rating would be upgraded in case of positive rating action on the bank's national ratings.

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

The GSR is at the lowest possible levels and so cannot be downgraded.

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

As Panama is a dollarized country with no lender of last resort, an upgrade of the GSR is unlikely.

VR ADJUSTMENTS

The Operating Environment score of 'bb+' has been assigned below the 'bbb' implied score due to the following adjustment reason: Reported and future metrics (negative).

The Business Profile score of 'bb' has been assigned above the 'b' implied score due to the following adjustment reasons: Business Model (positive), Strategy and execution (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.

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