S&P Revises Banco Sud Americano Outlk to Neg;Cuts Rtgs

Business Wire, Sept 1, 1998

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 9/1/98-- Standard & Poor's today lowered its long-term counterparty credit and certificate of deposit ratings on Banco Sud Americano to triple-'B'-minus from triple-'B'. Standard & Poor's also lowered its rating on the bank's $100 million subordinated notes due 2007 to double-'B'-plus from triple-'B'-minus.

At the same time, Standard & Poor's affirmed its 'A-3' short-term counterparty credit and certificate of deposit ratings on the bank and revised its outlook to negative from stable.

The downgrade reflects the sharp deterioration of the bank's asset quality during 1997 and the first six months of 1998. The downgrade also reflects decreasing core profitability, with increasing provisions and higher expenses related to the recently carried out restructuring process.

The rating continues to incorporate:

-- Relatively low, although improving, capitalization levels (equity to loans was only 6.2% at Dec. 31, 1997);

-- The competitive dynamics of the Chilean marketplace, in which Banco Sud Americano must compete with three private-sector banks with significantly greater market share and more available resources;

-- The bank's stable funding base; and

-- The benefits of having Bank of Nova Scotia

(double-'A'-minus/Stable/'A-1'-plus) as a substantial minority shareholder and strategic partner.

As of June 30, 1998, Banco Sud Americano reported 2.36% of its gross loans as past due, an increase of almost 50% when compared with the end of 1997 despite the sale of loans from its consumer finance division in March 1998. Reserve coverage of problem loans had decreased to only 79% of past-due loans as of June 30, 1998 from more than 100% at year-end 1997. The increase in problem loans partially derives from the slow down in the economy during the first six months of 1998 and the impact of some relatively large loans in the bank portfolio.

As of March 1998, the bank sold its consumer finance division, Corfinsa, generating an extraordinary gain of US$15.6 million. The increase in provisioning requirements for this type of loan at the end of 1997, combined with decreasing spreads, high-selling expenses, and increasing risks made this segment less interesting on a risk-adjusted basis for the bank.

Banco Sud Americano reported a 1.57% return on assets for the first six months of 1998, a substantial increase from the previous full year, with a reported return on assets of only 0.24%. However, the main reason for this increase is the sale of the bank's consumer finance division, with nonoperating income representing Ch$16 billion, or roughly the same amount as gross operating revenues. Overall, there has been a general decrease in revenues and an increase in operating expenses, the latter derived from one-time severance payments and other restructuring costs. Traditionally, Banco Sud Americano's efficiency, measured by expenses to average assets, has been weaker than that of other Chilean banks rated by Standard & Poor's, averaging 3.6% of average assets over the past three periods.

Banco Sud Americano was the seventh largest bank in Chile at year-end 1997, with Ch$1.5 trillion in assets (approximately US$3.3 billion). Through its 78 branches and 33 ATMs, the bank offers universal banking in Chile, with a growing emphasis in recent years on the middle market and, until March 1998, on consumer finance.

OUTLOOK NEGATIVE

In coming years, an improvement in Banco Sud Americano's rating will depend largely on the bank's ability to strengthen its position in the Chilean banking system and successfully pursue its current strategy. Nevertheless, the bank's profitability will continue to be tested by its larger rivals, who will enjoy better economies of scale. Standard & Poor's believes that the bank's asset quality problems have somehow reached a peak and does not expect substantial deterioration in coming months. Nonetheless, a material increase in the bank's past-due loans as a result of adverse economic conditions in Chile could cause a further downgrade in the future, Standard & Poor's said. -- CreditWire

CONTACT: Jose R Tora, New York 212/208-8222

Roger B Taillon, New York 212/208-1570

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