OREANDA-NEWS. Fitch Ratings has published a peer review of federal government owned Brazilian banks that covers Banco da Amazonia S.A. (BdA), Banco do Brasil S.A. (BdB), Banco Nacional de Desenvolvimento Economico e Social (BNDES), Banco do Nordeste do Brasil S.A. (BNB) and Caixa Economica Federal (Caixa).

The report includes a review of the Brazilian government's capacity and propensity to support these banks, as well as an assessment of the recent trends in the banks' risk appetite, asset quality, profitability, capitalization and funding. The report highlights that downside risks to their asset quality persist, and, consequently, their profitability will remain under pressure through 2016.

The ratings of BdA, BdB, BNDES, BNB and Caixa are driven by expected support from the Brazilian government. The banks' Issuer Default Ratings (IDRs) and Rating Outlooks are fully aligned with those of Brazil (long-term IDR 'BBB-'/Negative Outlook). Their Support Rating Floors are also set at the same level of Brazil's long-term IDR. BdB is the only bank that has a Viability Rating (VR) among the entities reviewed in this report. This is a result of its bigger commercial focus in comparison to the other four banks. Fitch affirmed BdB's VR at 'bb+' in October 2015.

The downgrade in October 2015 of all five banks' long-term IDRs with Negative Outlooks followed the downgrade of Brazil's sovereign ratings and reflects the reduced capacity of the sovereign for support, should the need arise. Fitch expects the probability of support would be high as reflected in the banks' Support Ratings of '2'.

The federal government would have a high propensity to support BdA, BdB, BNDES, BNB and Caixa. This is the result of the government's full (BNDES and Caixa) or majority (BdA, BdB and BNB) ownership; the banks' systemic importance either at the national level (BdB, BNDES and Caixa) or regional level (BdA and BNB); and their policy role, which would be difficult to reallocate to another entity.

In general, Brazilian state-owned banks have a higher risk appetite than their private counterparts. This is evident from growth trends, which, in turn, reflect their policy role and the political influence on their strategic objectives. Between 2011 and 2014, the average annual loan growth of state-owned banks was high (BdA: 12%; BdB: 18.1%; BNB: 6.1%; BNDES: 17.9%; Caixa: 37%.) At September 2015, their loan growth declined significantly to 14% year-on-year, as a result of the deterioration of the economic backdrop in Brazil, although it remained well above the 3% growth of private banks.

As of June 2015, BdA, BdB and Caixa's asset quality metrics deteriorated, and they remained broadly stable at BNDES and BNB. Fitch expects deterioration to continue through year-end 2016 as a result of loan seasoning, persistence of economic recession, higher inflation and unemployment, and the weak outlook for most corporate sectors. Meanwhile, the profitability of BdB, BNDES, BNB and Caixa came under pressure due to higher impairment charges, and to a lesser extent, lower loan growth and fee generations. In contrast, BdA's profitability remained broadly stable.

Fitch does not expect much pressure on the five banks' capitalization and funding in 2015 and 2016, as lower loan growth should partially offset the negative effect from lower profitability and the systemwide pressure on savings deposits that has affected BdB and Caixa. In the case of BNDES, the National Treasury's (Treasury) decision not to provide it with additional funding will force the bank to rely increasingly on issuances in domestic and international markets in the medium term.