Fitch Affirms BTG Pactual Group's Ratings; Outlook Revised to Positive

Mon Jan 27, 2014 1:43pm EST

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(The following statement was released by the rating agency) SAO PAULO/RIO DE JANEIRO, January 27 (Fitch) Fitch Ratings has affirmed the ratings of Banco BTG Pactual S.A. (BTG Pactual) and its related parties: BTG Investments LP (BTGI) Banco Panamericano S.A. (PAN), Brazilian Finance & Real Estate (BFRE), Brazilian Mortgages Cia Hipotecaria (BM) and Brazilian Securities Cia de Securitizacao (BS) and of its holding company BTG Pactual Holding S.A. (BTGH). The Rating Outlook has been revised to Positive from Stable. A full list of the actions taken is detailed at the end of this release. RATING ACTION AND RATIONALE The revision of the Rating Outlook to Positive from Stable reflects Fitch's expectation that BTG Pactual will continue to benefit from the increasing diversification of its business franchise carried out over the last three years, expand its leadership in the Latin American region and preserve adequate leverage metrics and profitability. Fitch acknowledges the bank’s ability to perform well with sound profitability along the economic cycles; which compares well with other similarly rated entities with special focus on treasury and investment banking activities and a growing and steady asset management business. Management experience has fostered fast growth in the last several years, and risk controls are considered strong. Liquidity policies and metrics have improved as well as the maintenance of its leverage levels within acceptable levels. The bank’s strong repo position and its large investment portfolio are largely composed of liquid assets, with a small portion of securities being comprised of non-investment grade sovereign or private debt. The bank is also one the largest Central Bank dealers, providing liquidity to market players through overnight and short term repo transactions backed by Brazilian Government debt. Over the last years, with a stronger capital base due to hefty capital injections and the 2012 IPO; BTG Pactual has expanded its activities into consumer financing (through PAN), financial services to the real estate sector (including real estate financing and securitizations through BFRE, BM and BS), into the brokerage business and investment banking in several countries of Latin America (Chile, Colombia and Peru), rapidly consolidating its position as a market leader in the region. All these acquisitions have been fully funded with the aforementioned capital injections and have increased income diversification, even though, the bulk of the bank’s profit still stems from the Brazilian operation. The creation of a commodities platform may be another move into further diversification and bodes well to future business expansion. Measured on a consolidated basis, BTG Pactual’s capital and leverage ratios tangible equity to tangible assets has averaged 7% since 2010; while gross leverage measured as total assets over FCC was 15.8x as of September 2013 (net leverage of 8.1x). These ratios are enhanced by BTG’s long history of stable and strong profitability; but certainly demands a conservative approach by the bank and may be reduced by concentrating all of its Principal Investment business under BTG I, a sister company. Debt service and interest expenses coverage ratios (4.0x and 4.6x, respectively) stands slightly weaker than its peer group. Regulatory capital ratios are ample and well above the minimum required, albeit, are benefited by the low risk weight of its large portfolio of government securities. The Issuer Default Ratings (IDRs) and National Scale ratings of its related parties: BTGI PAN, BFRE, BM and BS are driven by the expected support from BTG. Under Fitch Rating criteria, these companies are considered ‘strategically important’ to the parent, and its ratings are notched once from BTG’s IDR. BTGH is a pure holding company and its long- and short-term IDR's and National Scale Ratings are equalized to those of BTG thanks to its moderate leverage levels and favorable regulatory framework towards financial groups in Brazil. PAN’s Viability Rating (VR) remains limited by its still weak operating performance, even though some improvements in asset quality have been observed. Counterbalancing these aspects, the bank enjoys a stable funding base, explained by committed funding and liquidity lines from its other controlling shareholder: Caixa Economica Federal (Caixa, Foreign Currency LT IDR of ‘BBB’/Outlook Stable) and an improved business model, derived from the experience of the new management appointed by BTG since 2011. The unfavorable market scenario has not allowed the bank to grow as fast as it would expect and this has delayed some profitability improvements. Some cost controls measures taken recently should benefit the bank’s results in the coming periods as well. RATING SENSITIVITY/KEY RATING DRIVERS – VRs and IDRs BTG Pactual VR and IDRs may be upgraded if the bank is able to maintain its consolidated leverage within acceptable range (net adjusted leverage below 8.0x); maintain its operating ROAA above 2%, reflecting continued revenue growth in line with the expansion of its asset base. In turn, sudden deterioration of the operating environment, leverage, profitability or a troublesome performance of one or some of its subsidiaries may negatively affect BTG Pactual’s ratings. PAN’s VR may be upgraded after a sustained improvement of its operational results (operating ROAA above 0.5%), that helps to enhance its Fitch Core Capital Ratio to more than 7% and its funding profile remains aligned with the tenor and characteristics of its assets. A negative rating action may be triggered by a longer than expected breakeven point of its operations and a backdrop of its already low capital ratios. RATING SENSITIVITY/KEY RATING DRIVERS - Support and Support Rating Floors BTG Pactual IDRs are driven by its VR. Given its nature of merchant/investment bank and relative small deposit base; Fitch believes that the probability of support from the government is unlikely; hence its Support Rating is a ‘5’ and its Support Rating Floor remains in ‘NF’. RATING SENSITIVITY/KEY RATING DRIVERS – Subordinated Debt and Other Hybrids Securities Subordinated debt and other hybrid capital issued by BTG Pactual are all notched down from the banks' VRs; as such these securities are notched twice from BTG Pactual VR: one notch lower due to Loss Severity features and its subordinated status, and a one-notch deduction due to moderate risk of non-performance. The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VR of the bank. RATING SENSITIVITY/KEY RATING DRIVERS – PAN, BFRE, BM and BS PAN, BFRE, BM and BS are ‘strategically important subsidiaries’ for BTG Pactual and hence, notched once from the parent IDR. Fitch believes that despite its current relative small size and incipient earnings generation compared to the parent revenue source; these entities are part of the business plan of BTG Pactual and the tools to implement their diversification plans in the medium term towards consumer banking, real estate financing and other capital market related activities. The IDRs and National Scale Ratings of Banco Pactual subsidiaries may be affected if their strategic importance and ability to provide support from BTG Pactual changes; even though this scenario has a low probability of occurrence. RATING SENSITIVITY/KEY RATING DRIVERS – BTGI BTGI's long-term IDR rating reflects its role as an integral BTG Pactual group and the implicit support BTGI receives from BTGH. According to Fitch's criteria, BTGI is deemed as a core part of BTG Pactual Group. Despite its evident links with the group (franchise, common management, relevance of its revenue stream and completely aligned business model); BTGI is not a direct subsidiary of BTGH; hence, its rating its notched once from the rating of BTGH, the primary source of support to the entity. Changes to the rating of BTG Pactual or BTGH may lead to changes to BTGI's ratings. A material deterioration of BTGI's financial profile where sustained losses and/or a significant increase of its leverage may hinder the overall financial profile of BTG Group, may trigger a rating downgrade. RATING SENSITIVITY/KEY RATING DRIVERS – BTGH BTGH's long- and short-term IDRs and National Scale Ratings are equalized to those of its sole operating subsidiary, Banco BTG Pactual S.A.'s (BTG Pactual, IDR 'BBB-'/Outlook Stable). BTGH is a pure holding company and directly controls 71.9% of BTG Pactual. The equalization of the ratings is based on the high correlation between the probability of default for BTGH and the bank. Both are incorporated in the same jurisdiction, being overseen by Brazilian authorities. Changes to the rating of BTG Pactual may lead to changes to BTGH's ratings. Also, an increase of its double leverage ratio above 120% or a deterioration of its debt service metrics may result in a downgrade of BTGH's ratings. Fitch has taken the following rating actions: BTG Pactual --Long-term foreign and local currency IDRs affirmed at ‘BBB-’, Outlook revised to Positive from Stable; - Short-term foreign and local currency IDRs affirmed at ‘F3’; - Viability Rating affirmed at ‘bbb-’; - Support Rating affirmed at ‘5’; - Support Rating Floor affirmed at ‘No Floor’; - Long-term National Rating affirmed at ‘AA(bra)’, Outlook revised to Positive from Stable; - Short-term National Rating affirmed at ‘F1+(bra)’; - Senior unsecured notes, due in March 2016, foreign currency rating affirmed at ‘BBB-’; - Senior unsecured notes, due in July 2016, foreign currency rating affirmed at ‘BBB-’; - Senior unsecured notes, due in September 2017, foreign currency rating affirmed at ‘BBB-’; - Senior unsecured notes due in January 2020, foreign currency rating affirmed at ‘BBB-’. - Subordinated notes due in September 2022, foreign currency rating affirmed at ‘BB’; BTGI --Long-term foreign and local currency IDRs affirmed at 'BB+'; Outlook revised to Positive from Stable; --Support Rating affirmed at '2'; --Senior guaranteed notes affirmed at 'BBB-'. BTG Holding --Long-term foreign and local currency IDRs affirmed at 'BBB-'; Outlook revised to Positive from Stable; --Short-term foreign and local currency IDRs affirmed at 'F3'; --Support Rating affirmed at '5'; --Support Rating Floor affirmed at 'NF'; --Long-term National Rating affirmed at 'AA(bra)'; Outlook revised to Positive from Stable; --Short-term National Rating affirmed at 'F1+(bra)'. PAN - Long-term foreign and local currency IDRs affirmed at ‘BB+’, Outlook revised to Positive from Stable; - Short-term foreign and local currency IDRs affirmed at ‘B’; - Viability Rating affirmed at ‘b’; - Support Rating affirmed at ‘3’; - Long-term National Rating affirmed at ‘AA-(bra)’, Outlook revised to Positive from Stable; - Short-term National Rating affirmed at ‘F1+(bra)’. BFRE - Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook revised to Positive from Stable; - Short-term foreign and local currency IDRs affirmed at 'B'; - Long-term National Rating affirmed at 'AA-(bra)', Outlook revised to Positive from Stable; - Short-term National Rating affirmed at 'F1+(bra)'. Brazilian Mortgages Cia. Hipotecaria (BM) - Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook revised to Positive from Stable; - Short-term foreign and local currency IDRs affirmed at 'B'; - Long-term National Rating affirmed at 'AA-(bra)', Outlook revised to Positive from Stable; - Short-term National Rating affirmed at 'F1+(bra)'. Brazilian Securities Cia. de Securitizacao (BS) - Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook revised to Positive from Stable; - Short-term foreign and local currency IDRs affirmed at 'B'; - Long-term National Rating affirmed at 'AA-(bra)', Outlook revised to Positive from Stable; - Short-term National Rating affirmed at 'F1+(bra)'; - First debenture issuance due in October 2014, long-term National Rating affirmed at ‘AA-(bra)’. Contact: Primary Analyst Eduardo Ribas Associate Director +55-11-4504-2213 Fitch Ratings Brasil Ltda. Alameda Santos, 700 – 7th floor – Sao Paulo – SP – CEP: 01418-100 Secondary Analyst Claudio Gallina Director +55-11-4504-2216 Committee Chairperson Franklin Santarelli Managing Director +1-212–908-0739 Media Relations: Jaqueline Carvalho, Rio de Janeiro, Tel: +55 21 4503 2623, Email: jaqueline.carvalho@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information available at ‘www.fitchratings.com’ or ‘www.fitchratings.com.br’. Applicable Criteria and Related Research: -- ‘Global Financial Institutions Rating Criteria’ (Aug. 15, 2012); -- ‘National Ratings Methodology’ (Jan. 19, 2011); -- ‘Securities Firms Criteria’ (Aug. 15, 2012); -- ‘Assessing and Rating Bank Subordinated and Hybrid Securities’ (Dec. 05, 2012); -- ‘Rating FI Subsidiaries and Holding Companies’ (Aug. 10, 2012). Applicable Criteria and Related Research: Assessing and Rating Bank Subordinated and Hybrid Securities here Rating FI Subsidiaries and Holding Companies here Global Financial Institutions Rating Criteria here Securities Firms Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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