Fitch Affirms BTG Pactual Group's Ratings; Outlook Revised to Stable
KEY RATING DRIVERS
IDRS, VR, NATIONAL RATINGS AND SENIOR DEBT - BTG Pactual
The affirmation of BTG Pactual's ratings reflects its strong company profile as a leading investment bank in Latin America, strong track record in terms of profitability, adequate funding and capital and also the challenges imposed by its business model (investment banking). Per Fitch's criteria, this type of business model is typically constrained to the 'bbb' rating category and normally cannot be rated above the sovereign rating of its home country. BTG Pactual's ratings also consider the inherent volatility of some of the bank's revenue sources, higher market risk exposure and wholesale funding nature.
The revision of the Outlook to Stable from Positive reflects a change in Fitch's view on the acquisition of BSI S.A. (BSI), a private bank headquartered in Switzerland, due to the significant deterioration in Brazil's operating environment, which is not expected to recover until late 2016. While Fitch expects this transaction to bring sizable and stable fee revenue to the bank, enhancing recurring income and providing less volatile revenue streams to BTG Pactual, the current operating environment hinders the expected benefits that the integration of the BSI acquisition could provide. As such, Fitch acknowledges that such benefits and the preservation of the bank's profitability and leverage may take longer than the normal timeframe implied by a Positive Outlook.
In 2014 and the first quarter of 2015 (1Q15), loan impairment charges increased significantly due to the deterioration of a few names on the bank's loan book. While the loan book is relatively small as a proportion of assets (11.7%), the credit costs from increased loan deterioration could consume a significant portion of the bank's net income. Exposures to sensitive issuers and industries are aligned with that of its closest peers and the bank has a good track record in this segment. Given the concentrated nature of its loan portfolio and the current operating environment challenges, Fitch doesn't rule out additional pressures on asset quality metrics, even though the agency recognizes management's hands on approach to identifying potential problems and its more conservative approach toward lending since late 2014.
The decision to scale back the group's own holdings in both its proprietary trading funds and private equity investments should bode well for the bank in the future. These investments largely carried under BTG are prone to more volatility in spite of the strong accumulated performance of proprietary trading funds and that the bulk of the group's private equity investment are still in the investment phase.
So while on one hand, the group's proprietary trading business (Global Markets) had a weak performance in 2014, which was attributed to a combination of losses in specific exposures, the bank's private equity business (Merchant Banking) announced the sale of part of its stake in the hospital chain Rede D'Or in the 1H15, which should offset the negative performance of its proprietary trading funds. Historically, these investments have yielded significant gains to the bank and contributed to overall results, although, given its nature such profits may be volatile and also with long periods of maturation.
The bank's search for more stable revenue sources explains the importance of the expansion of its asset and wealth management business, which will directly benefit from the conclusion of the BSI acquisition. The acquisition is expected to add a higher degree of stability to the bank's performance even though cost synergies will likely be limited as BSI's structure and team should be maintained.
The continuity of a strong internal capital generation and maintenance of a contained risk appetite should help the bank to maintain its leverage and its capitalization should remain within adequate levels. Additionally, Fitch views the diversification brought by BSI, which should account for roughly 35% of BTG's total assets, will be another positive reducing the bank's heavy concentration in Brazilian assets and also expanding their lower risk segments of operations.
Fitch considers a successful execution of BTG Pactual's capital plan and budget goals as fundamental to maintain its Fitch Core Capital and Regulatory Capital Ratios as well as its leverage metrics within comfortable ranges, one of the sensitivities for upgrading its ratings. In addition to the recent issuance of tier 1 securities, management expects to preserve a good level of earnings retention and expand its equity through the issuance of shares equivalent to 20% of the acquisition price of BSI (to be generated at the group level); while also reducing the size of its proprietary trading and private equity own investments.
BTG Pactual's sound management execution should allow it to absorb BSI operation and increase its earnings generation given BTG Pactual's strong asset origination from its Latin American investment banking platform. Over the last years, the bank has been able perform well with sound profitability along the economic cycles. The successful acquisition and integration of subsidiaries in Latin America, though much smaller than BSI, are also indicators of the bank's ability to augment its franchise value and business scope. As with any other acquisition, integrations risks are present and Fitch will monitor the developments related to the culmination of the transaction. Fitch expects an uneventful transition under BTG Pactual management, though this will be a challenge considering the size of the acquisition and the changing nature of the private banking business in Switzerland.
Measured on a consolidated basis, BTG Pactual's capital and leverage ratios may temporarily deteriorate after the acquisition is completed. However, if management's plans are achieved, the bank should be able to reverse such trend and achieve a leverage ratio not significantly higher than its current one. The bank's net adjusted leverage ratio should move from the current 9.7x level to around 11.0x once the acquisition is completed; but it should decline to around 10.0x during the first year.
Regulatory capital ratios remain ample and well above the minimum required, albeit, these are benefited by the low risk weight of its large portfolio of government securities.
SUPPORT RATING AND SUPPORT RATING FLOOR
BTG Pactual's Issuer Default Ratings (IDRs) are driven by its VR. Given its nature of merchant/investment bank and relative small deposit base; Fitch believes that the probability of support from the government is unlikely; hence its Support Rating is a '5' and its Support Rating Floor remains at 'NF'.
SUBORDINATED DEBT AND OTHER SECURITIES
BTG Pactual's subordinated debt issuances are all notched down twice from the banks' VRs, including one notch lower for loss severity features and its subordinated status, and a one-notch deduction due to moderate non-performance risk.
Perpetual non-cumulative junior subordinated notes (T1 Securities) are four notches below BTG Pactual's VR. The notching comprises two notches for loss severity and two notches for nonperformance risk, which are Fitch's typical notching for loss severity and nonperformance risk of AT1 securities.
These T1 securities receive 50% equity credit for the purposes of assessing capital adequacy.
The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VR of the bank.
SUBSIDIARIES AND AFFILIATED COMPANIES IDRs and National Scale Ratings- BTGI, BTGH, PAN, BFRE, BM, BS
The IDRs and National Scale ratings of its related parties: BTGI PAN, BFRE, BM and BS are driven by the expected support from BTG. Under Fitch's rating criteria, these companies are considered 'strategically important' to the parent, and its ratings are notched once from BTG's IDR.
PAN is a midsize bank owned by BTG (51%) and Caixa (49%), which share its control through a shareholders agreement.. Pan acts on the auto loans, payroll deductible loans and real estate. The bank also counts on a growing SME platform that focuses on companies with annual revenues ranging from BRL100 million to BRL1 billion and offers basic financial products, such as working capital loans, overdrafts, guarantees and trade finance loans.
Brazilian Finance & Real Estate S.A. (BFRE) was acquired by Pan during 2012 and has since been consolidated in PAN's financial Statements. Brazilian Securities (BS), a subsidiary acquired as part of the Brazilian finance deal, is also active in the securitization of real estate operations, while Brazilian Mortgages (BM) is focused on home equity loans, a segment still largely unexplored in the Brazilian market.
BTGI's long-term IDR rating reflects its role as an integral BTG Pactual group and the implicit support BTGI receives from BTGH. According to Fitch's criteria, BTGI is deemed as a core part of BTG Pactual Group. Despite its evident links with the group (franchise, common management, relevance of its revenue stream and completely aligned business model); BTGI is not a direct subsidiary of BTGH; hence, its rating its notched once from the rating of BTGH, the primary source of support to the entity.
BTGH's long- and short-term IDRs and National Scale Ratings are equalized to those of its sole operating subsidiary, Banco BTG Pactual S.A.'s (BTG Pactual, IDR 'BBB-'/Outlook Stable). BTGH is a pure holding company and its long- and short-term IDR's and National Scale Ratings are equalized to those of BTG thanks to its moderate leverage levels and favorable regulatory framework towards financial groups in Brazil. BTGH is a pure holding company and directly controls 73.5% of BTG Pactual. The equalization of the ratings is based on the high correlation between the probability of default for BTGH and the bank. Both are incorporated in the same jurisdiction, being overseen by Brazilian authorities.
PAN Viability Rating (VR)
PAN's VR remains limited by its still weak operating performance, even though some improvements in asset quality have been observed. Counterbalancing these aspects, the bank enjoys a stable funding base, explained by committed funding and liquidity lines from both its shareholders and an improved business model, derived from the experience of the new management appointed by BTG since 2011.
Weaker economic prospects may limit credit expansion in the short-term, and might cause the bank to revise its growth plans and adjust its structure to a more challenging operational environment.
RATING SENSITIVITIES
BTG Pactual - VR AND IDR
BTG Pactual VR and IDRs may be upgraded if the bank is able to maintain its consolidated net adjusted leverage within an acceptable range (net adjusted leverage below 10.0x); maintain its operating ROAA above 2%, reflecting continued revenue growth in line with the expansion of its asset base and an uneventful integration of BSI which will become an important contributor of stable revenue sources. A possible upgrade may be tempered by a potential downgrade of Brazil's sovereign ratings ('BBB'/Negative Outlook). In turn, sudden deterioration of the operating environment, an increase of net leverage above 12x, a sustained deterioration of profitability below the average of large Brazilian banks or a troublesome performance of one or some of its subsidiaries may negatively affect BTG Pactual's ratings.
SUBORDINATED DEBT AND OTHER SECURITIES
The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VR of the bank.
BTGI
Changes to the rating of BTG Pactual or BTGH may lead to changes to BTGI's ratings. A material deterioration of BTGI's financial profile where sustained losses and/or a significant increase of its leverage may hinder the overall financial profile of BTG Group, may trigger a rating downgrade.
BTGH
Changes to the rating of BTG Pactual may lead to changes to BTGH's ratings. Also, an increase of its double leverage ratio above 120% or a deterioration of its debt service metrics may result in a downgrade of BTGH's ratings.
PAN, BFRE, BM and BS
PAN, BFRE, BM and BS are 'strategically important subsidiaries' for BTG Pactual and hence, notched once from the parent IDR. Fitch believes that despite its current relative small size and incipient earnings generation compared to the parent revenue source; these entities are part of the business plan of BTG Pactual and the tools to implement their diversification plans in the medium term towards consumer banking, real estate financing and other capital market related activities. The IDRs and National Scale Ratings of Banco Pactual subsidiaries may be affected if their strategic importance and ability to provide support from BTG Pactual changes; even though this scenario has a low probability of occurrence.
PAN'S VR
PAN's VR may be upgraded after a sustained improvement of its operational results (operating ROAA above 0.5%), that helps to maintain its Fitch Core Capital Ratio in levels superior to 7% and its funding profile remains aligned with the tenor and characteristics of its assets. A negative rating action may be triggered by a longer than expected breakeven point of its operations and a backdrop of capital ratios reducing to low levels.
Fitch has taken the following rating actions:
BTG Pactual
--Long-term foreign and local currency IDRs affirmed at 'BBB-', Outlook revised to Stable from Positive;
--Short-term foreign and local currency IDRs affirmed at 'F3';
--Viability Rating affirmed at 'bbb-';
--Support Rating affirmed at '5';
--Support Rating Floor affirmed at 'No Floor';
--Long-term National Rating affirmed at 'AA(bra)', Outlook revised to Stable from Positive;
--Short-term National Rating affirmed at 'F1+(bra)';
--Senior unsecured notes, due in March 2016, foreign currency rating affirmed at 'BBB-';
--Senior unsecured notes, due in July 2016, foreign currency rating affirmed at 'BBB-';
--Senior unsecured notes, due in September 2017, foreign currency rating affirmed at 'BBB-';
--Senior unsecured notes due in January 2020, foreign currency rating affirmed at 'BBB-';
--Senior unsecured notes due in January 2034, foreign currency rating affirmed at 'BBB-';
--Subordinated notes due in September 2022, foreign currency rating affirmed at 'BB'.
--Perpetual non-cumulative junior subordinated notes, foreign currency rating affirmed at 'B+'.
BTGI
--Long-term foreign and local currency IDRs affirmed at 'BB+'; Outlook revised to Stable from Positive;
--Support Rating affirmed at '2';
--Senior guaranteed notes affirmed at 'BBB-'.
BTGH
--Long-term foreign and local currency IDRs affirmed at 'BBB-'; Outlook revised to Stable from Positive;
--Short-term foreign and local currency IDRs affirmed at 'F3';
--Support Rating affirmed at '5';
--Support Rating Floor affirmed at 'NF';
--Long-term National Rating affirmed at 'AA(bra)'; Outlook Revised to Stable from Positive;
--Short-term National Rating affirmed at 'F1+(bra)'.
PAN
--Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook revised to Stable from Positive;
--Short-term foreign and local currency IDRs affirmed at 'B';
--Viability Rating affirmed at 'b';
--Support Rating affirmed at '3';
--Long-term National Rating affirmed at 'AA-(bra)', Outlook revised to Stable from Positive;
--Short-term National Rating affirmed at 'F1+(bra)'.
BFRE
--Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook revised to Stable from Positive;
--Short-term foreign and local currency IDRs affirmed at 'B';
--Long-term National Rating affirmed at 'AA-(bra)', Outlook revised to Stable from Positive;
--Short-term National Rating affirmed at 'F1+(bra)'.
BM
--Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook revised to Stable from Positive;
--Short-term foreign and local currency IDRs affirmed at 'B';
--Long-term National Rating affirmed at 'AA-(bra)', Outlook Revised to Stable from Positive;
--Short-term National Rating affirmed at 'F1+(bra)'.
BS
--Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook revised to Stable from Positive;
--Short-term foreign and local currency IDRs affirmed at 'B';
--Long-term National Rating affirmed at 'AA-(bra)', Outlook revised to Stable from Positive;
--Short-term National Rating affirmed at 'F1+(bra)'.
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