Fitch Affirms Banco ABC Brasil S.A.'s Ratings
KEY RATING DRIVERS - IDRS, NATIONAL RATINGS, SUPPORT RATINGS (SRs), SUPPORT RATING FLOORS (SRFs), DEBT RATINGS, VIABILITY RATINGS (VRs)
ABCBr's IDRs are driven by its VR which continues to be based on the bank's low risk profile, consistent profitability, satisfactory capitalization and sound risk and liquidity management. Despite the weak operating environment, the bank's profitability remained satisfactory - in part due to ABCBr's relatively low funding costs, strategic focus and the reduced appetite of some of its other competitors. The bank has continued its efforts to further diversify its funding profile, leading to stronger asset and liability management as it continues to expand its corporate and middle market operations. As a result, the bank's credit portfolios continue to be conservatively matched to its funding, allowing for comfortable levels of liquidity. ABCBr's ratings also reflect the well-positioned franchise and its overall sound financial profile as a wholesale-funded bank.
The bank operates under a well-defined strategy of providing credit and other banking services mainly to the corporate segment (annual revenues over BRL500 million) and also mid-sized companies (annual revenues above BRL 50 million). ABCBr's rating remains constrained by its company profile, as its franchise does not compare as well to the large and dominant banks in Brazil in terms of size and diversification. This results in, among other things, a lower level of low-cost, diversified deposit funding.
The bank has performed consistently during the last four years despite the weak economic scenario. While continuing to focus on the markets it knows well, the bank grew its loan portfolio by 15% during 2014, following 16.9% growth in 2013. ABCBr benefitted from the reduced levels of competition while maintaining its conservative underwriting, which is reflected in its low level of impairments. ABCBr's relatively larger than proportional loan growth compared to private sector lenders may impose some seasoning pressures, but Fitch expects asset quality ratios will remain within its historical trends given the bank's disciplined lending approach.
As of Dec. 2014 ABCBr reported a very low level of non-performing loans (NPLs) over 90 days of 0.7% (banking system average was approximately 2.8%), which is a reflection of the focus on lower risk companies and its conservative underwriting. The bank's loan loss reserves as a percentage of the loan portfolio was a comfortable 2% representing a coverage ratio of 286%.
The recent well-publicized negative developments that affected a significant number of companies in the corporate world in Brazil (such as companies in sectors related that provided services to the national oil company, Petroleos Brasileiros and the delicate situation of certain companies in the sugar and ethanol business) have not had a material impact on ABCBr's asset quality as the bank did not have a relevant credit exposure to those segments. While Fitch expects to see some weakening of the bank's asset quality in 2015 it will be mostly due to the continued weak environment. This expected deterioration should be easily absorbed by the comfortable level of ABCBr's loan loss reserves.
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 significant growth during the past three years.
Despite the loan growth of the last two years, ABCBr continues to maintain satisfactory capital ratios. At Dec. 31, 2014, the Fitch core capital ratio was 10.80%. The bank almost meets the Central Bank regulatory minimum total capital requirement solely by means of its Tier I regulatory capital ratio of 10.86%. Fitch expects ABCBr will not have any difficulty adjusting to the upcoming implementation of Basel III according to the Brazilian Central Bank's timetable. ABCBr currently has a total Regulatory Capital ratio of 14.39%.
ABCBr has a SR of '3' in view of the expected support from its parent, Arab Banking Corporation ('BBB-', Outlook Stable) which is based in Bahrain. Given the subsidiary's significant contribution to the parent's revenues and the brand, Fitch believes that in the unlikely event that it is needed, it is likely that the Brazilian subsidiary would receive support from its majority shareholder (33.3% of the shareholding is free-float).
RATING SENSITIVITIES - IDRS, NATIONAL RATINGS, SRs, SRFs, DEBT RATINGS, VRs
Given its funding profile and narrow business niche, an upgrade of ABCBr's ratings is limited under its current business model. Although unlikely in Fitch's view, a significant deterioration of ABCBr's asset quality that results in credit costs that severely limit its profitability and ability to grow its capital, combined with a reduction on its liquidity or capitalization position could lead to a downgrade of the bank's ratings. A decline in the Fitch core capital to risk-weighted assets ratio below 9% along with a reduction in operating income to an average asset ratio below 1.5% could result in a ratings review.
Fitch has affirmed the following ratings:
ABC Brasil:
--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 '3';
-- Senior unsecured BRL notes due 2016 foreign currency rating at 'BBB-'.
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