New York, July 6, 2022 — Moody’s Investors Service (“Moody’s”) today assigned Baa3 long-term local and foreign currency issuer ratings to the Caja de Compensación de Asignación Familiar de Los Andes (Caja Los Andes), as well as short-term ratings – term rating of local and foreign currency issuers of P-3. The issuer’s outlook is stable.
The following ratings were given to Caja de Compensación de Asignación Familiar de Los Andes:
Long-term local currency issuer rating of Baa3
Short-term rating of Prime-3 local currency issuers
Baa3 long-term currency issuer rating
Prime-3 Short Term Currency Issuer Rating
– Assigned Outlook: Stable
The Baa3 issuer ratings assigned to Caja Los Andes incorporate the company’s high capitalization and strong track record of risk management discipline. The ratings also reflect Caja Los Andes’ consistent earnings and cash generation, despite the company’s exposure to high-risk social lending to low-income people, through various economic cycles in Chile. The company’s operation benefits from government policies aimed at fostering financial inclusion through private not-for-profit corporations with a social mission to serve low-income people. Caja Los Andes has maintained strong profitability over the past five years despite high operating and credit costs. Nevertheless, the company is challenged to cope with its highly concentrated and short-term funding structure, which limits its liquidity and short-term cash flow with large short-term maturities.
Historically, the company’s capitalization has been solid, supported by its recurring profitability and the full retention of its earnings. In March 2022, its tangible common capital (TCE) to tangible assets reached 39.1%, a level well above similarly rated Chilean banks.
On the other hand, the Baa3 issuer ratings incorporate the company’s high levels of credit impairment, relative to peer banks and cooperatives in Chile, and reflect the social purpose of its loan portfolio. The company offers attractive rates for individuals who have limited access to bank loans. Over the past five years, Caja Los Andes 90+ day past due (NPL) loans have averaged 10.0% of gross loans, high but largely stable, while net write-offs have averaged 6 .0%. Caja Los Andes’ core business benefits from the government’s promotion of a legal and regulatory framework for private employee benefits that allows Caja Los Andes to deduct payments from salaries of employees with seniority over to other financial entities.
The ratings also recognize Caja Los Andes’ strong risk management practices, benefiting from the sponsorship of its corporate governance by Cámara Chilena de la Construcción (CChC), which has led the company since its inception. CChC is a reputable trade association that owns one of the most important financial groups in Chile, Inversiones La Construcción SA have no governance issues. Nonetheless, corporate governance remains a key consideration in credit and requires ongoing monitoring.
In terms of profitability, the company reported a net earnings to average assets under management ratio of 0.9% during the first quarter of 2022, which benefited from a net interest margin (NIM) of 13% resulting from a relatively low cost of financing and a relatively high return on its loan book. The company’s sufficient NIM allows it to absorb high loan loss provisions at 76% of pre-provision revenue in March 2022, and high operating costs at 60% of revenue due to its costly collection and collection of loans, as well as its large branch network. Over the next four years, Caja Los Andes’ profitability is expected to improve to over 2.0% as the business benefits from improved efficiencies related to investments in digitalization, sustained lower credit costs by economic recovery and improving labor markets, and growth in commission income. insurance and mutual fund brokerage.
Conversely, one of the main challenges for the financial profiles of Caja Los Andes is its mainly short-term funding structure composed of bank credit lines which represented 48% of liabilities in March 2022. Low holding of liquid assets , to just 18% of current assets. forward maturities expose the company’s financial profile in times of market volatility. Nevertheless, Caja Los Andes plans to reduce its short-term debt and improve its liquidity profile over the next few months, through long-term issues, which will improve its asset-liability management (ALM) and strengthen its coverage of debt maturities (liquid assets at short-term debt maturities).
FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS
An improvement in Caja Los Andes’ ratings could be associated with lower asset risk and a more diversified earnings structure, as well as a more diversified and longer-term funding mix.
Caja Los Andes’ ratings depend on the expectation that the company will be able to reduce its short-term debt and improve its liquidity profile over the coming months, failing which the company’s ratings could be downgraded. In addition, a deterioration in asset quality which could lead to lower repayments for Caja Los Andes and increased provisioning needs could affect profitability and put downward pressure on ratings.
The main methodology used in these ratings is the Financial Companies Methodology published in November 2019 and available on https://ratings.moodys.com/api/rmc-documents/65543. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.
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