Fitch Affirms Banco Safra S.A.'s and Safra Leasing - Arrendamento Mercantil's Ratings
KEY RATING DRIVERS - IDRS, NATIONAL RATINGS, SUPPORT RATINGS (SRs), SUPPORT RATING FLOORS (SRFs), DEBT RATINGS, VIABILITY RATINGS (VRs)
Safra's long-term foreign and local currency IDR are driven by the bank's Viability Rating (VR) of 'bbb' which reflects the bank's solid franchise and consistent performance through challenging economic cycles. The bank's conservative risk policies have proven Safra's ability to manage risks and preserve strong asset quality ratios while improving its liquidity and asset liability management. The ratings also reflect the preservation of its strong efficiency ratios and controlled margins resulting in a profitability level that adequately generates internal capital.
The Negative Outlook on Safra's IDRs reflects the Negative Outlook of the sovereign rating which was revised earlier this month, (see Sovereign RAC dated April 9, 2015). Per Fitch's methodology, in light of the bank's wholesale funding structure, Safra's rating cannot exceed that of the sovereign at the current scenario, despite the bank's resilient performance along economic cycles. Thus, if the sovereign rating is downgraded, Safra's rating would follow.
Fitch currently has a Sovereign-based Support Rating of '4' and Support Rating Floor of 'B+' which factored Safra's size and importance within the Brazilian banking universe, which is relatively concentrated in nature; where Safra is currently the sixth largest private sector bank in the system. This support rating remains unchanged despite the Negative Outlook on the sovereign rating.
Safra's long-term senior unsecured debt ratings were affirmed as they remain driven by Safra's IDR, given its unsecured nature and ranks equally to all other senior unsecured debt. Given that the majority of the notes are issued in Brazilian Real (BRL) while the settlement will be in U.S. Dollar (USD) a subscript 'emr' was added to the ratings of these issuances to reflect the embedded market risk of the exchange rate fluctuation between the BRL and the USD.
Safra's strong efficiency and relatively low cost funding have aided the bank to consistently post satisfactory profitability ratios, below the average of Brazilian large banks, but less volatile with an average ROAA of 1.33% over the last four years. The recent downward trend in interest rates, combined with a shift to a lower risk lending mix and relatively higher, but controlled, credit costs have slightly weakened this ratio in recent years. As of Dec. 31, 2014, the ROAA was 1.14%. Fitch expects that, in the medium term, Safra's ROAA will remain above 1%. This ratio is likely to be below the average of the larger Brazilian banks and other Latin American bank peers rated at the same rating level. In a lower net interest rate environment, prudent loan growth and further income diversification will be needed to enhance profitability ratios and compensate for lower margins.
The focus on a market that Safra knows well, along with a well-articulated business plan that takes advantage of times of economic flourish and recovery when the environment deteriorates, allows Safra to post above average asset quality ratios. Safra's good credit quality is evidenced by its Dec.r 31, 2014, 90 days past due loans to total loans ratio of only 0.7%, one of the lowest in the banking system whose average was 2.9%. Safra's impaired loans (classified under Bacen 'D' to 'H') to total loans ratio was 2.3% (vs. banking system's 6.9%). Safra's Loan Loss Reserve coverage of loans past due over 90 days was a very comfortable 481%. In addition, the levels of charge-offs continue being low at slightly below 1.6%, partly due to the strength of its collections unit and its enhanced underwriting policies. Recent developments in the corporate world in Brazil, where specific sectors related to the national oil company Petroleos Brasileiros, and the delicate situation of the sugar and ethanol business do not represent a material credit exposure to the bank, hence, asset quality ratios may not be pressured by such event risk, although, it may deteriorate slightly due the challenging operating environment.
The bank continues to focus on ensuring a stable liquidity position through conservative asset liability management policies to mitigate gaps through hedging and funding diversification. Strategies include the sourcing of longer term funding which include the use of longer term instruments such as Letras Financeiras which saw a significant growth during the past three years ending with BRL15.1 billion at Dec. 31, 2014. Also in 2014, the bank placed two senior note issuances totaling CHF450 million and one perpetual issuance for USD300 million. Fitch expects that Safra will be able to maintain the improvements achieved in asset and liability maturity management in the medium term; helping to mitigate the challenges of its mostly wholesale funding business model.
Safra continues to maintain satisfactory capital ratios. Fitch Core Capital ratio (FCC) has been stable at around 10%. Fitch expects that it will remain around that level in the future. At Dec. 31, 2014, the Fitch core ratio was 10.1%. The bank already meets the Central Bank regulatory minimum total capital requirement solely by means of its Tier I regulatory capital ratio of 11.5%. Fitch does not expect Safra to have any difficulty adjusting the upcoming implementation of Basel III according to the Brazilian Central Bank's timetable. Safra currently has a total regulatory ratio of 14%.
Safra Leasing's national ratings are equalized to those of its parent bank. According to Fitch criteria, this subsidiary is 'Core' to Safra by the means of its significant participation as a funding source of the consolidated activities. The leasing subsidiary is operationally aligned with the bank and shares in the reputational risk. Also, the ratings of its subordinated debt incorporate the support to be provided by Safra and are notched down once in view of the lower expected recovery of the securities due its contractual subordination in the event of a liquidation.
RATING SENSITIVITIES - IDRS, NATIONAL RATINGS, SUPPORT RATINGS, SRFs, DEBT RATINGS, VIABILITY RATINGS
Safra's IDRs are sensitive to a change in the sovereign rating as described above with regard to the Negative Outlook. An unlikely deterioration of its profitability that would weaken its FCC capital ratio to below 9% or an operating return on average assets below 1% for a sustained period of time could also trigger a rating review. Further upgrades to Safra's ratings are limited considering the current business model of Safra, which, despite increased diversification and strong asset quality, still weighs mostly on a wholesale funding structure and the maintenance of sufficient, although tight, capital ratios. If those structural characteristics are significantly altered, a rating review may occur.
Fitch affirms the following ratings:
Banco Safra:
--Long-term foreign and local currency IDRs at 'BBB'; Outlook Negative;
--Short-term foreign and local currency IDRs at 'F2';
--Viability rating at 'bbb';
--Support Rating at '4'
--Support rating floor at 'B+';
--National Long-term rating at 'AAA(bra)'; Outlook Stable;
--National short-term rating at 'F1+(bra)'.
Market Linked BRL Securities due 2016 and 2017:
--Long-term foreign currency at 'BBBemr'.
Senior CHF notes due 2017 and 2019:
--Long-term foreign currency rating at 'BBB'.
Safra Leasing S.A. Arrendamento Mercantil:
--National long-term rating at 'AAA(bra)'; Outlook Stable;
--National short-term rating at 'F1+(bra)'.
Subordinated Debenture Issues due 2017, 2035, 2036 and 2037:
--National long-term rating at 'AA+(bra)' .
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