TEXT - S&P affirms Banco do Brasil

Mon Nov 19, 2012 3:48pm EST

Related Topics

(The following statement was released by the rating agency)
    
Overview
     -- Banco do Brasil S.A. (BdB) has maintained its stand-alone
credit profile of 'bbb+' and the "very high" likelihood that the government of
Brazil would provide timely and sufficient extraordinary support in the event of
financial distress.
     -- We are affirming our 'BBB/A-2' issuer credit ratings on Banco do 
Brasil S.A. (BdB) and our 'brAAA' national scale rating on the bank's 
operating subsidiary, Ativos S.A. Securitizadora de Creditos Financeiros. The 
outlook on the long-term ratings remains stable. 
     -- We believe that the bank will likely retain its "very strong" business 
position, despite losing exclusivity in payroll contracts. 

Rating Action
On Nov. 19, 2012, Standard & Poor's Ratings Services affirmed its 'BBB/A-2' 
ratings on Banco do Brasil S.A. (BdB). At the same time, we affirmed the 
'brAAA' national scale rating on the bank's operating subsidiary Ativos S.A. 
Securitizadora de Creditos Financeiros. The outlook on the long-term ratings 
remains stable. The bank's stand-alone credit profile (SACP) is 'bbb+'. 

Rationale
The ratings on BdB reflects the bank's "very strong" (as our criteria define 
the term) business position, "moderate" capital and earnings, "adequate" risk 
position, and "adequate" funding and liquidity, compared with other banks in 
Brazil's financial system. We consider BdB as a government-related entities 
(GRE), based on our criteria, since the Federative Republic of Brazil (foreign 
currency rating BBB/Stable/A-2, local currency rating A-/Stable/A-2) is the 
majority owner. We believe there is a "very high" likelihood that the 
government would provide timely and sufficient extraordinary support to BdB if 
the bank experiences financial distress. 

In accordance with our criteria for GREs, we base our rating approach on our 
view of the following: 
     -- The bank's "very important" role for the government of Brazil. BdB has 
a key role, in our view, in promoting the agricultural sector. And given the 
bank's strong share in terms of deposits and assets in Brazil's financial 
system, we believe that a default or credit stress of the bank could have a 
significant systemic impact on the local economy; and 
     -- The bank's "very strong" link with the government. A considerable 
deterioration in BdB's creditworthiness would significantly affect the 
government's reputation, since the government is publicly associated with the 
bank through a high degree of control. In addition, as BdB's major 
shareholder, the government has strong influence on the bank's strategic and 
business plans.

The 'bbb' anchor draws on our Banking Industry Country Risk Assessment (BICRA) 
methodology and our view of the economic and industry risk in Brazil, where 
BdB operates. The indicative BICRA for Brazil is group '4', according to our 
criteria. One of the factors we base the BICRA group on is our evaluation of 
economic risk. In our opinion, economic improvements and cautious fiscal and 
monetary policies have added to the flexibility the Brazilian economic 
authorities have to manage significant external shocks and potential 
distortions from the current expansionary phase in Brazil. We believe that 
these potential risks remain manageable, and a proactive stance from the 
central bank has contained them. With regard to industry risk, sound 
regulation, the regulators' good track record, and a high and stable share of 
core deposits support the Brazilian banking industry. At the same time, we 
consider the banking sector's moderate risk appetite as a positive in our 
assessment.

We consider BdB's business position to be "very strong." BdB is the largest 
financial institution in Latin America, with reported consolidated assets of 
Brazilian real (R$) 1.1 trillion as of September 2012. The bank had 19.6% of 
total loans as of September 2012 in Brazil's financial system and 28% of total 
deposits as of June 2012. BdB has the largest distribution network in Brazil, 
with presence even in small towns with remote locations. Moreover, the bank's 
business activities are widely diversified: it operates as a universal 
(multipurpose) bank that provides a full range of banking products and 
services to the public and private sectors either directly or indirectly 
through its subsidiaries. These products and services include rural, 
industrial, commercial, and consumer lending, as well as trade financing, 
leasing, credit cards, investment banking, asset management, insurance, 
pension fund management, and capital market services. 

Our assessment of the bank's "very strong" business stability is based on its 
strong franchise in Brazil, its wide distribution network, and its diverse 
product offering. As a public bank, BdB has a very important role as an agent 
of public policies. And as the largest financier of Brazil's agribusiness 
(which is one of the main sectors of the country's economy), the bank 
represents a link between the government and the rural sector, and it acts in 
all segments and stages of the industry's productive chain. BdB has limited 
competition in this segment because it offers highly competitive rates and 
long-term funding in order to promote the sector.

The bank's strong competitive position in payroll deductible loans, 
particularly for civil servants, also provides sound stability for the 
business. However, at the beginning of October 2012, BdB agreed to end 
exclusivity contracts that prohibited some of its clients from acquiring 
payroll-deductible loans from other banks. Although civil servants will now 
have the option to move their payroll loans to other banks, we consider BdB's 
wide distribution network and presence in the government's main offices as a 
strong competitive advantage that will somewhat mitigate the negative impact 
of this change. In addition, we believe that BdB's competitive rates and 
strong customer focus should help the bank maintain its very strong position 
in this segment. 

BdB's management has proven execution capabilities and is a stable team. In 
addition, the team has adequate tools to manage risks. However, as a GRE, the 
bank could be exposed to influence from the government that diminishes its 
ability to manage its strategy in a purely business-orientated manner. This 
said, we don't expect the government's influence to result in a significant 
deterioration of BdB's credit quality.

We assess BdB's capitalization as "moderate." Our projected risk-adjusted 
capital (RAC) ratio before diversification ranges from 5.5% to 6.5% for the 
next 18 months. This reflects a base case scenario that incorporates lending 
growth of about 19% for 2012 and 17% in 2013, a decrease in net interest 
margin that results in a return on assets (ROA) of 1.1% in 2012 and 1.2% in 
2013, maintenance of asset quality, and a 40% dividend payout for both 2012 
and 2013. 

BdB has adequate quality of capital, in our view, with common equity 
representing 100% of capital used for the RAC calculation. Although BdB's ROA 
has been lower than its local peers', it partly reflects the higher proportion 
of payroll loans in the bank's loan portfolio and, to a lesser extent, the 
agribusiness loans, which provide lower spreads. However, BdB's earnings have 
been sustainable, given the good diversification. Net interest income 
represents 53.3% of earnings as of September 2012, providing additional 
flexibility in the context of decreasing interest rates. The three-year 
average earnings buffer (average including 2011 and our forecast for 2012 and 
2013) reached 3.06%, providing adequate earnings capacity to support continue 
growth while maintaining the capitalization levels.

We assess BdB's risk position as "adequate," primarily based on our view that 
the RAC ratio properly captures the risks of the bank's assets. We consider 
the diversification of the loan portfolio to be sound in terms of both single 
customer concentration, given the bank's lower focus on large corporates, and 
geographic diversification, based on the large distribution network. 

BdB has a highly pulverized lending portfolio, with its largest 10 exposures 
representing less than 10% of total exposures. Although BdB is concentrated in 
payroll loans, we consider these loans to have sound asset quality 
characteristics. The bank is also concentrated in the agribusiness segment, 
which exposes it to risks related to weather conditions and commodity prices, 
but its good diversification across agricultural subsectors and the fact 
insurance covers 60% of crop exposures provide adequate mitigation for these 
risks. As a result, BdB's asset quality metrics compare strongly with Brazil's 
banking industry average and with those of the bank's immediate peers in 
Brazil. 

We consider BdB's funding to be "above average" and its liquidity as 
"adequate." The bank's nationwide distribution network and strong market 
position allow it to have the largest deposit bases in Brazil, which 
represents a competitive advantage, given the deposits' stability and 
relatively low cost, compared with other funding sources. The bank held 28% of 
the system's total deposits as of June 2012. In addition, BdB sources a high 
percentage of its total deposits from the government, either as payment of 
government employee salaries, judicial deposits, or payment to government 
service providers. As of September 2012, total deposits represented 60% of the 
bank's total funding base (including repurchase agreements), with the 
remainder comprising repurchase agreements (25%), and domestic lending, 
foreign borrowing, subordinated debt (15%). 

Similar to other banks operating in Brazil, BdB uses government securities as 
its main instrument for managing liquidity. As of September 2012, highly 
liquid assets (excluding third party repurchase agreements and private bonds) 
represented 10% of total assets and 21% of total deposit; and they represented 
12% of total assets and 25% of total deposit when including 50% of private 
bonds. 

Outlook
The stable outlook on BdB reflects the outlook on the long-term foreign 
currency sovereign credit rating on Brazil. We expect that the ratings on BdB 
will move in tandem with the foreign currency ratings on Brazil. Given the 
bank's SACP of 'bbb+' and our assessment of a "very high" likelihood of 
extraordinary sovereign support, any upgrade or downgrade of the sovereign 
should be followed by a similar rating action on BdB. 

Ratings Score Snapshot
Issuer Credit Rating          BBB/Stable/A-2

SACP                          bbb+
 Anchor                       bbb
 Business Position            Very Strong (+2)
 Capital and Earnings         Moderate (-1)
 Risk Position                Adequate (0)
 Funding and Liquidity        Adequate (0)

Support                       1
 GRE Support                  1
 Group Support                0
 Sovereign Support            0

Additional Factors            -2

Related Criteria And Research
     -- Banking Industry Country Risk Assessment Methodology And Assumptions, 
Nov. 9, 2011
     -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
     -- Group Rating Methodology For Banks, Nov. 9, 2011
     -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
     -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 
9, 2010


Ratings List
Ratings Affirmed

Banco do Brasil S.A
 Counterparty Credit Rating
  Foreign Currency                      BBB/Stable/A-2     
  Local Currency                        BBB/Stable/--      
  Senior Unsecured                      BBB                
  Subordinated                          BB+                
  Junior Subordinated                   BB                 


Ativos S.A. Securitizadora de Creditos Financeiros
 Counterparty Credit Rating
 National Scale Rating                  brAAA/Stable/--    
  Senior Secured                        brAAA              
 

 (Caryn Trokie, New York Ratings Unit)
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.