TEXT-S&P rates Banco de Desenvolvimento de Minas Gerais 'BBB-'

Fri Nov 23, 2012 12:36pm EST

Overview
     -- We believe that BDMG plays a key role as the main long-term financing 
instrument for strategic sectors in the state, and it is therefore a highly 
important economic policy tool for the state government. 
     -- We are assigning our 'BBB-' long-term credit rating and 'brAAA' 
long-term national scale rating to BDMG. The outlook is stable. 
     -- The stable outlook on BDMG reflects that on the State of Minas Gerais, 
as we expect the ratings on the bank to move in tandem with those on the state.


Rating Action
On Nov. 23, 2012, Standard & Poor's Ratings Services assigned its 'BBB-' 
foreign and local currency long-term credit rating to Brazilian bank Banco de 
Desenvolvimento de Minas Gerais S.A. - BDMG (BDMG). At the same time, we 
assigned our 'brAAA' long-term national scale rating to BDMG. The outlook is 
stable. The bank's stand-alone credit profile (SACP) is 'bb+'.

Rationale
The ratings on BDMG reflect our view of its "weak" business position, "very 
strong" capital and earnings, "moderate" risk position and "moderate" funding 
and liquidity, as our criteria define the terms. We also view BDMG as a 
government-related entity (GRE) and consider that there is a "very high" 
likelihood that the bank would receive timely and sufficient extraordinary 
support in the event of financial distress.

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) 
economic risk and industry risk scores to determine a bank's anchor, the 
starting point in assigning an issuer credit rating. Our anchor for a 
commercial bank operating only in Brazil is 'bbb'. Our economic risk 
assessment reflects our opinion that economic improvements and cautious fiscal 
and monetary policies have added to the Brazilian economic authorities' 
flexibility to manage significant external shocks and potential distortions 
arising from the current economic expansion in Brazil. We believe these 
potential risks remain manageable, and the central bank's proactive stance has 
contained them. We assess industry risk based on our view of Brazil's sound 
regulation, good regulatory track record, and high and stable share of core 
deposits. We consider the banking sector's moderate risk appetite as a 
positive factor.

The bank is fully owned by the State of Minas Gerais (BBB-/Stable/--), 92.73% 
directly and 7.27% indirectly through Companhia de Desenvolvimento de Minas 
Gerais (CODEMIG). The rating on BDMG reflects our opinion that there is a 
"very high" likelihood that the State of Minas Gerais would provide timely and 
sufficient extraordinary support to the bank in the event of financial 
distress. 

In accordance with our criteria for GREs, we base our rating approach on our 
view of the following:
     -- BDMG's has a "very important" role in the State of Minas Gerais as the 
bank covers some of the market failures in the distribution of financing in 
the state, putting special emphasis on sectors the government consider 
critical for the state development as well as medium and small enterprises 
that would not have access to credit if it were not by the BDMG. The bank is 
key to the local economic strategy and important for long-term investments and 
infrastructure financing that the state requires. 
     -- The bank's "very strong" link to the state's government, reflected by 
the long track record of support through capital injections. 

We assess BDMG's business position as "weak." This stems from BDMG's 
geographic concentration in the south east region of Brazil (mainly in Minas 
Gerais). This also reflects the bank's position as the eighth-largest public 
financial institution in the country, with its R$3 billion in assets 
accounting for less than 1% of the banking system's total assets.

The bank operates with its own resources and also with domestic public 
onlendings (funding received from the government through Banco Nacional de 
Desenvolvimento Economico e Social [BNDES; foreign currency BBB/Stable/--; 
local currency A-/Stable/--]). BDMG has benefitted from its long-term 
relationship with BNDES as both banks seek to foster development in the state. 
In addition, it administrates the development funds set up by the Minas Gerais 
state government to finance programs and projects that foster development in 
Minas Gerais. The bank has recently obtained a license to strengthen the 
capital structures of strategic companies based in Minas Gerais by acquiring 
minority equity holdings through its subsidiary BDMGTEC Participacoes (not 
rated). We expect that these types of transactions will become more frequent 
in the coming years. The bank lends to large companies (52%), small and 
midsize enterprises (21%), micro companies (1%), municipalities (19%), and 
individuals (8%).

In our view, BDMG's capital and earnings' position is "very strong," based on 
our forecast of an average risk-adjusted capital (RAC) ratio of about 28% for 
the next couple of years. This reflects our base-case scenario, which 
forecasts an approximate 30% increase in the bank's lending for 2012 and 35% 
in 2013. We also anticipate that its net interest margin will remain at the 
current level, resulting in return on assets (ROA) of 2.2% for 2012 and 2.3% 
in 2013, with no asset quality deterioration. As of June 2012, BDMG's Basel II 
ratio was 33.5% and its Tier 1 ratio was 33.3%. Additionally, the State of 
Minas Gerais has continuously injected capital into the bank in the past 
despite its high capital ratios, and has allowed the bank to retain its 
dividends in 2012. The bank is an important instrument for long-term financing 
in the region, and therefore we think that the state government will continue 
to provide any capital support needed for growth. 

We assess BDMG's risk position as "moderate," based on its above-average 
growth and its highly concentrated loan portfolio. The bank's loans portfolio 
has increased above the market average in the past few years, and has posted a 
high growth rate even during recent downturns. This reflects its role as a 
government instrument to promote growth when investment is low. 

The bank has a highly concentrated loan portfolio with its exposure to 
companies that the State of Minas Gerais considers to have strategic 
importance. The bank's largest 20 exposures represent 35% of its customer 
loans. Partially offsetting this concentration is the bank's continued strong 
asset quality. We believe the bank will remain focused on servicing its core 
customers with traditional expertise and maintaining very good underwriting 
standards, adequately managing funding mismatches. Additionally, BDMG is 
looking to diversify--focusing particularly on micro and small companies. The 
bank has improved customer access to its products through new platforms that 
will allow it to expand further into the interior of the State of Minas 
Gerais. 

We assess BDMG's funding and liquidity as "moderate," based on our view that 
its funding is below average and its adequate liquidity. BDMG's main challenge 
in the future will be to diversify its funding base. The bank has recently 
acquired the license to obtain funds in capital markets through issuing 
financial bills, and has announced the planned issuance of R$350 million of 
these bills in 2012. 

BDMG's funding base is stable and long term; 75% of the bank's liabilities are 
classified as long term on the balance sheet. However, the bank's funding 
sources are deeply concentrated in domestic onlendings by official 
institutions, which accounted for 89% of its funding base as of June 2012. 

We assess BDMG's liquidity as "adequate," as the bank operates a cash with 
security margin sufficient to meet the minimum liquidity level required by its 
policy of 35% of total equity. We consider that BDMG's funding sources are 
unlikely to be withdrawn, even during periods of market stress.

Outlook
The stable outlook on BDMG reflects that on the State of Minas Gerais as we 
expect the ratings on the bank to move in tandem with those on the state. 
Given the bank's SACP of 'bb+' and our assessment of a "very high" likelihood 
of extraordinary sovereign support, any upgrade or downgrade of the state 
should be followed by a similar rating action on BDMG. Additionally, if the 
bank's expansion significant reduces asset quality, we could take a negative 
rating action on the bank.

Ratings Score Snapshot

Issuer Credit Rating              BBB-/Stable/--

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

Support                           1
 GRE Support                      1
 Group Support                    0
 Sovereign Support                0

Additional Factors                0


Related Criteria And Research
     -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
     -- Banking Industry Country Risk Assessment Methodology And Assumptions, 
Nov. 9, 2011
     -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 
9, 2010
     -- Banks: Bank Capital Methodology And Assumptions, Dec. 6, 2010

Ratings List
Ratings Assigned 

Banco de Desenvolvimento de Minas Gerais S.A. - BDMG

Counterparty Credit Rating
  Global scale                          BBB-/Stable/--     
  National scale                        brAAA/Stable/--    

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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