Fitch Affirms Banco Bonsucesso S.A.'s Ratings
OREANDA-NEWS. Fitch Ratings has affirmed the following ratings of Banco Bonsucesso S.A. (Bonsucesso):
--Long-term Foreign Currency (FC) and Local Currency (LC) Issuer Default Rating (IDR) at 'B', Outlook Stable;
--Short-term LC and FC IDR at 'B'
--National ratings long-term ratings at 'BBB(bra)'; Outlook Stable;
--National short-term rating at 'F3(bra)';
--Viability Rating at 'b';
--Support Rating at '5';
--Support Rating Floor 'No Floor'.
KEY RATING DRIVERS
Bonsucesso's long-term foreign and local currency IDR are driven by the bank's Viability Rating (VR) of 'b', which reflects Bonsucesso's relatively modest size, its needs to establish and develop a new business model after the sale of its main business line to the joint venture (JV) created with Banco Santander Brasil S.A. (Santander; IDR 'BBB+'/Outlook Negative) and our expectation of a modest recurrent profitability on the short-term. The ratings also portray a more concentrated loan portfolio, after the exit of the retail business, and the challenges to maintain credit costs under control amid a more challenging economic scenario. The more adequate capital, funding and cost structure, as well as Bonsucesso's improved liquidity stance, partially counterbalance those negative aspects.
The JV, concluded in February 2015, operates only in the payroll loan business and received the entire payroll business and structure of Banco Bonsucesso (payroll loans and payroll cards). Santander has a 60% stake in the JV, named Banco Bonsucesso Consignado S.A. (BBC), while Bonsucesso has 40%. The payroll business became extremely competitive in recent years, with an intense presence of retail banks, with competitive advantages in terms of funding and distribution. While the agreement brought substantial improvements to Bonsucesso's capital structure and operational costs, Fitch understands that the challenges to achieve more resilient and recurring levels of profitability will remain, and an improvement on Bonsucesso earnings profile will depend on its capacity and ability to successfully establish a new franchise and a stable business model - which is still lacking.
Meanwhile, revenues from payroll loans should continue to be the main source of income for Bonsucesso (via equity income). Earnings in 2015 have largely benefited from the one-off capital gain on sale of its payroll platform, besides the high volume of credit assignments to the JV (without co-obligation), where the result is appropriated in advance, thus overestimating, to a certain extent, the profitability indicators. Fitch's expectations, in terms of profitability for 2016 remains low, to the extent that its remaining operations (middle-market) should not grow, while the other businesses are either not substantial contributors itself, are still under development or had no time to mature.
The main asset quality indicators now basically reflect its credit operations to small and medium-sized companies, with higher risk when compared to payroll deductible operations. Considering the drastic reduction of its credit portfolio, the increment in non-performing loans was natural, given that the bank sold most of its payroll portfolio to the JV. Operations classified between D-H represented 19.3% of Bosucesso's total credit portfolio in June 2015, higher than the 10.1% recorded in December 2014. The higher delinquency ratios on this bank still reflect the problems faced in the past in the SME portfolio, which reveals a certain concentration in Fitch's opinion. This has led to higher provisions costs for overdue loans since 2011. The credit quality of this portfolio will also be key in order to deliver better operating results excluding the equity participation on the expected results from its JV.
On the other hand, it is clear that the bank's overall structure is expected to benefit from the new model. The agreement consisted in the total transfer of its payroll loans portfolio (including its by-products, such as payroll-linked credit card) to the JV, the consequent reduction in its funding (and its costs) and the decrease of circa 65% of its staff, which should reflect in reduced administrative expenses. Those were the main drivers for the Outlook revision to Stable in March 2015 (please see: 'Fitch Affirms Banco Bonsucesso S.A.'s Ratings; Outlook Revised to Stable'). As of June 2015, the bank already shows a lighter liability structure, following the transfer of its assets, with reduced reliance on expensive funding sources, like DPGE I and II. These decreased from 58% of total deposits in December 2013 to 19% in June 2015. Overall, the bank remains selective on its new funding operations, since there is no expectation to grow its balance sheet in the short term, and liquidity is sound after it received the proceeds from the sale of the payroll portfolio. Cash plus securities of BRL1.2 billion represented 50% of total assets and were sufficient to cover 120% of both short- and long-term deposits.
Fitch Core Capital (FCC) ratio to 18.4% improved from 13% in December 2014 as higher risk assets were replaced by cash and other lower risk net assets. The bank has an additional BRL334 million of payroll portfolios which should be sold throughout year-end and further benefit its capital indicators.
Controlled by the family Pentagna Guimaraes, Bonsucesso originated in 1992 with the creation of Bonsucesso Financeira, transformed into a multiple bank in 1997.
RATING SENSITIVITIES
Positive rating actions could result if Bonsucesso is able to develop and well-implement a new business model and, in the medium term, demonstrate adequate and recurrent levels of profitability (operational ROA above 1%), superior levels of asset quality and maintain an adequate capital position. On the other hand, if the bank cannot develop other businesses lines in the medium term, suggesting that profitability remains dependent on BBC's operating profits, the ratings could be downgraded. Operational ROA and Fitch Core Capital below 0.5% and 10%, respectively, and / or major deterioration in credit quality could also trigger negative actions on the ratings.
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