Fitch Affirms Banco BMG S.A. at 'BB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the ratings of Banco BMG S.A.'s (BMG) long-term Issuer Default Rating (IDR) at 'BB-'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this rating action commentary.
KEY RATING DRIVERS
The IDRs and other ratings were affirmed as these were driven by the bank's Viability Rating, also affirmed, which - in turn - reflects Fitch's view on the improved funding and capitalization derived from BMG's joint venture partnership (JV) with Itau Unibanco in the payroll deductible lending business. This partnership led to the transfer of the bulk of BMG's traditional payroll lending (consignado) portfolio to Banco Itau BMG Consignado where BMG has a 40% ownership and benefits from its share of earnings. This strategy improved BMG's Fitch Core Capital (FCC) position, reduced its cost structure and increased its liquidity. With the transfer nearly complete, BMG is focusing on its other remaining products.
The ratings also consider BMG's challenge to maintain its asset quality and comfortable FCC ratio in the challenging macroeconomic scenario that will limit operational profitability. With a more comfortable liquidity position, the bank has reduced the amount of its more expensive liabilities and is likely to continue to do so during the remainder of 2015 and early 2016 as the remaining consignado portfolio is migrated to the JV or is run-off. The bank has diversified its funding and most of that funding is now in the form of stable deposits rather than depending on asset sales and overseas funding.
The transfer of consignado assets took place mostly over the past two years and only a small portion remains to be transferred. Management projects that by the end of 2015, only about BRL1.2 billion of the old portfolio will remain on the books and nearly half of that amount will be transferred to the JV during 2016. BMG was also able to transfer other operating expenses and staff to the JV along with the bulk of the assets. BMG's profitability of the last several quarters was impacted by the lower revenues and higher credit costs due to the operating environment and the strategic reduction of the balance sheet.
While still benefiting from its 40% equity in earnings in the growing and profitable JV, BMG will be able to focus on its other business segments where it has experience but were not previously a main product of the bank. Given the current operating environment, Fitch believes management will conservatively manage these credit portfolios. Growth is expected to take place in the payroll deductible credit card segment where BMG has considerable expertise and market share. The weak operating environment is expected to have a lower impact on this product than it has on its other credit products such as pre-owned vehicle finance and commercial lending. The bank has recently enhanced its risk management team and has maintained elaborate systems for risk mitigation. In view of the still weakening operating environment, management expects to be very selective with new operations under the commercial segment and may allow a reduction in its vehicle finance segment by restricting new origination.
The bank continues to amortize the goodwill expense from past purchases of other banks and this amount is now reduced to slightly less than BRL900 million. BMG continues to carefully monitor its cost controls - a recent example was the successful renegotiation of the lease of its headquarters where it was able to concentrate its staff at its headquarters on one floor instead of two. However, profitability was impacted by higher, non-recurring personnel expenses as not all the former consignado staff could be transferred to the JV and had to be released.
BMG's subordinated debt is rated three notches below its VR to reflect the subordination of the notes.
RATING SENSITIVITIES
A significant deterioration in asset quality that results in a longer term operating profit to average assets ratio below 0.5%, or a decrease in the FCC below 13% could trigger negative rating actions. Positive rating actions could result if BMG is able to improve its profitability, while lowering its impaired loan ratio (D-H) to below 6% of total loans, and maintaining its FCC ratios above those of its peers. Operating profit to average assets ratio above 2% would trigger a positive rating review.
Fitch affirms the following ratings:
Banco BMG:
--Long-term foreign currency IDR at 'BB-'; Outlook Stable;
--Short-term foreign currency IDR at 'B';
--Long-term local currency IDR at 'BB-'; Outlook Stable;
--Short-term local currency IDR at 'B';
--Viability Rating at 'bb-';
--Support Rating at '5';
--Support Rating Floor 'No Floor';
--National long-term rating at 'A(bra)'; Outlook Stable;
--National short-term rating at 'F2(bra)';
--Subordinated notes due 2019
Long-term foreign currency rating at 'B-';
--Subordinated notes due 2020
Long-term foreign currency rating at 'B-'.
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