Fitch Affirms Banco Daycoval's Ratings; Outlook Stable
A full list of the rating actions on Daycoval is provided at the end of this release.
KEY RATING DRIVERS
Daycoval's ratings reflect the bank's consistent track record of performance, maintained through different cycles of the local economy, higher business diversification when compared to other medium-sized banks in the region, and comfortable liquidity and capitalization positions. Its funding remains concentrated on wholesale investors. However, conservative management of its assets and liabilities, and a strong cash position considerably mitigate liquidity risk.
Daycoval has been successful in expanding its credit operations and maintaining adequate profitability over the last few years. In view of the high delinquency rate in credits to small and medium-sized enterprises (SMEs) in 2012, the bank addressed its growth to consumer credit, mainly to the lower-risk payroll discount loans. The expansion into this segment helps to better dilute debtor concentrations and also its income sources.
Since 2014, the bank resumed the growth of its SME loan portfolio in addition to another year of expansion for its payroll loans. This resulted in overall loan growth higher than its peers and the average of private banks. In Fitch's view the diversification and short-term nature of its loan portfolio and adequate management of collaterals, as well as Daycoval's expertise in the sector allows it to rapidly adjust pricing of its portfolio and reduce its risk appetite for the segment. Inasmuch as the SME loan portfolio is more volatile and vulnerable to economic cycles, Fitch does not expect the bank to suffer asset quality pressures above those expected for the system as a whole due to the challenging operating environment, as the bank's risk appetite and pricing of new transactions already incorporate the negative economic cycle and factor in the increased risks such a scenario brings.
Historically, Daycoval has taken a conservative stance towards balance-sheet leverage vs. other medium-size players, but profitability remains resilient as the bank has been competent in maintaining disciplined cost control and proved to be agile on credit re-pricing if a more adverse macro environment is perceived. Fitch expects a more challenging scenario for asset quality for 2015, but any increase in credit costs should be managed and mitigated by improved margins on its higher-yield midsized companies' portfolio, and is not expected to impair Daycoval's ability to post good profitability ratios in line with similarly rated banks.
Asset-quality risks stem from potential pressures arising from the bank's exposure to the middle-market segment (clients with sales up to R\$300 million/year), which tend to be more at risk to macroeconomic vulnerabilities. During 2013, deterioration in the credit portfolio was more intense than in other mid-size banks, when impaired loan ratios (local regulatory definition) peaked at 8.7% of the total in June 2013, while its 90-days past due loan ratio grew to 2.8%. Still, Fitch considers asset quality metrics in line with Daycoval's business profile as higher delinquency ratios are being offset by higher margins and the bank's focus on the lower-risk sectors such as payroll-loans, which also helps to dilute concentration in single exposure. Also, given Daycoval's ability to manage and execute collateral and the effective workout of troubled loans, credit losses should be limited while its ample capital base and good profitability levels bodes well to help create additional loan loss provisions if required.
Daycoval has also been relatively successful in increasing and lengthening its funding base, with longer instruments to better match with its long-term payroll-portfolio, including local notes (Letra Financeira) which already accounted for 28% of total funding in December 2014. Nevertheless, its funding remains concentrated per client. However, liquidity is robust as management has historically adopted a much more conservative stance towards leverage when compared to peers. Cash plus securities (excluding Repurchase agreements) over total deposits remained above 220% during the last eight quarters and plays a critical role in mitigating the risks of wholesale funding vs long-term retail loans.
Daycoval has a very comfortable capital position (17.6% Fitch core Capital (FCC) and capital regulatory ratio of 17.8% in December 2014). Most important, the bank has been standing out among its peers because of its historical high liquidity and capitalization levels, which have been enabling Daycoval to sustaining the growth of its loan portfolio. Equity totaled BRL 2,522 million in December 2014 and is composed only of Level 1 capital (tier 1)
RATING SENSITIVITIES
Given its current business model, with asset and liability concentrations inherent to its size, including its wholesale funding nature, the potential for an upgrade to Daycoval's ratings is limited.
The ratings could be negatively affected by continued asset quality deterioration which leads to pressure on the bank's results (operating income-to-average asset ratio below 2%) and on capital (FCC ratio lower than 11%), which could be triggered by larger than expected asset quality deterioration and/or aggressive asset growth or cash dividend policy.
Fitch has affirmed the following ratings:
--Long-term foreign and local currency IDRs at 'BBB-', Outlook Stable;
--Short-term foreign and local currency IDRs at 'F3';
--Viability rating at 'bbb-';
--Long-term national rating at 'AA(bra)', Outlook Stable;
--Short-term national rating at 'F1+(bra)';
--Support rating at '5';
--Support rating floor at 'NF';
--Senior unsecured USD notes due 2016 and 2019, foreign currency rating at 'BBB-';
--Senior unsecured BRL letras financeiras due 2015, 2016 and 2017 at 'AA(bra)'.
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