Fitch Affirms Banco do Brasil at 'BBB'; Outlook Negative
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
BdB's IDRs, National and senior debt ratings are driven by sovereign support and equal to Brazil's sovereign ratings. They reflect the majority ownership of the federal government, the bank's domestic systemic importance and the policy role it plays in the implementation of anticyclical measures and in agricultural lending. Fitch believes that, as a state-owned entity, BdB could be subject to political interference. The Negative Outlook on BdB's IDRs mirrors that on Brazil's sovereign ratings.
The Central Bank of Brazil identified BdB as a domestic systemically important financial institution in 2015. It is Brazil's largest bank in terms of assets and loans, with a market share of 21% in each, as of December 2014. Likewise, it is the country's largest deposit taker, with a market share of 25% in deposits.
VR
BdB's VR reflects its leading franchise in multiple business segments, including lending, insurance, asset management and debit/credit cards, and broadly stable asset quality indicators and funding. It also reflects the bank's profitability which is slightly weaker than large private banks, and relatively lower internal capital generation and capitalization ratios.
BdB's asset quality indicators have broadly been stable through the cycles, in part benefitting from the rapid loan growth since 2011. They reflect the bank's prudent underwriting standards and its exposure to relatively lower risk segments, a number of which are favored by solid guarantee structures. At March 2015, BdB's non-performing loans (NPLs) over 90 days were 2.1% of total loans, compared with its three large private competitors' average of 3.2%. However, BdB's reserve coverage of impaired loans (loans classified in the 'D-H' scale of the central bank) is slightly lower than the average of its peers. At March 2015, this coverage fell to 71%, from an average of 76% in 2014 and 2013. Similar to other banks, BdB's loan quality may be adversely affected by the current sluggish economic activity, higher unemployment levels and the reduction in Brazilian households' disposable income. Fitch notes that BdB's aforementioned credit expansion was mostly concentrated on existing clients, and expansion into new segments or clients was lower than in other state-owned banks.
BdB's recurring profitability has historically been lower than its large private peers. This is mainly a result of its policy role, as reflected in its lower net interest margins (NIM) and relatively bigger cost base. It is likely that profitability remains under pressure as a result of a possible increase in impairment charges and meagre economic activity. At March 2015, BdB's NIM fell further, and the bank posted a relatively large increase in loan impairment charges (net of recoveries) that totalled almost BRL5 billion or almost 78% of pre-impairment profit, up from an average of 50% in 2014 and 2013. As a result, BdB's operating profit fell to 0.39% of average assets, compared to an average of 1.10% in 2014 and 2013. At March 2015, bottom-line earnings of BRL6.2 billion were boosted by pretax income of BRL5.8 billion from the creation of a new card management company with Cielo S.A.
BdB has a diversified and mainly retail based funding structure. In first quarter 2015 (1Q15), there was a system-wide net outflow from savings deposits, and BdB's outstanding savings deposits declined by BRL5 billion to BRL144 billion, making up 12% of total funding. The decline was more than offset by the increase in financial bills linked to agricultural loans (letras de credito do agronegocio, LCAs), which rose to BRL119 billion from BRL102 billion during the same period, comprising 10% of total funding. Continued pressure on savings deposits could negatively affect loan growth, particularly in the agricultural loans segment. BdB is evaluating alternative sources of funding and implementing measures to minimize further outflows and to mitigate a potential unfavourable court decision allowing public entities to use their judicial deposits. At March 2015, judicial deposits' share in total liabilities was 8%.
BdB's capital adequacy ratios remain slightly lower than those of its peers, despite an improvement following the conversion of legacy hybrids held by the National Treasury to Common Equity Tier 1 (CET1) capital in 2014, as has been the case for other large state-owned banks. At March 2015, the bank's Fitch Core Capital (FCC) ratio was 8.06%, compared to 7.87% at end-2014 and 6.57% at end-2013 (three large private competitors' average was 10.52% and 9.59%, respectively, at end-2014 and end-2013). Fitch views BdB's current capitalization levels as adequate for the short term, considering expectations of relatively modest growth. In the medium- to long-term, when the bank resumes growth, capitalization may become a constraint, unless internal capital generation strengthens further.
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's SR of '2' reflects the high probability of support, should it be needed. Its SRF of 'BBB' is equivalent to Brazil's sovereign IDRs.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The bank's IDRs, National and senior debt ratings are sensitive to a change in Brazil's sovereign ratings and/or to any changes in its willingness to support BdB.
VR
The bank's VRs are sensitive to a change in Fitch's assumptions regarding its asset quality, profitability and capitalization indicators. It would be negatively affected if asset quality deteriorates and profitability weakens on a sustained basis, leading its FCC ratio to fall below 7%. BdB's VR would be positively affected if there was a sustained improvement in profitability, internal capital generation and capital adequacy ratios.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are potentially sensitive to any change in assumptions around the propensity or ability of the Brazilian sovereign to provide timely support to the bank. Fitch does not expect a change in these assumptions over the rating horizon.
Fitch has affirmed the following ratings:
--Long-term foreign and local currency IDRs at 'BBB', Outlook Negative;
--Short-term foreign and local currency IDRs at 'F2';
--Viability Rating at 'bb+';
--Long-term national rating at 'AAA(bra)', Outlook Stable;
--Short-term national rating at 'F1+(bra)';
--Support Rating at '2';
--Support Rating Floor at 'BBB';
--Senior unsecured CLF and EUR notes due 2018 and 2019, long-term foreign currency rating at 'BBB'.
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