Fitch Reviews the Ratings of Five Brazilian Mid-Sized Banks

Wed Apr 30, 2014 1:59pm EDT

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(The following statement was released by the rating agency) NEW YORK/SAO PAULO, April 30 (Fitch) Fitch Ratings has completed a peer review of the following five Brazilian mid-sized banks: Banco ABC Brasil S.A. (ABC Brasil), Banco Daycoval S.A. (Daycoval), Banco Pine S.A. (Pine), Banco Alfa de Investimentos S.A. (Alfa) and Banco Industrial e Comercial S.A. (Bicbanco). The ratings of the first four banks were affirmed, while Bicbanco's ratings remains on Rating Watch Positive; see the full list of rating actions at the end of this release. The mid-sized Brazilian banks reviewed today are banks with total assets ranging from R$10 billion to R$17 billion. The five banks reviewed count on well-defined strategic objectives and business models adjusted to their size, and largely rely on wholesale funding to support their retail, SME and low-ticket corporates portfolios. These banks continued to face challenges stemming from a sluggish economic cycle in the Brazilian economy and have relied on disciplined credit risk appetite and good asset and liability management to counterbalance the impact on margins of subdued loan growth and stronger competition. Despite the current volatility of the operating environment, Fitch views the banks included in this peer review as well positioned to cope with the lackluster economic performance and the challenges arising from a prolonged period of subdued loan growth. Since 2008, these banks have shown improvements in their risk profile, which is evidenced by more comfortable liquidity positions, better asset and liability management, overall lower average funding costs combined with longer average tenor and a slightly more diversified funding composition. The investment grade ratings of ABC Brasil and Daycoval reflect the solid franchises and overall sound financial profiles of these banks, which also can be said about Alfa, which has the same long-term National ratings. Pine also has consistently enhanced its franchise based on a focused business model and a consistent performance track, which resulted in upgrades to its Issuer Default Rating (IDR) in 2012 and 2013. Bicbanco's credit profile is expected to benefit from its new controlling shareholder after periods of meager profits as a result of asset quality deterioration that led the bank to reshuffle its commercial strategy and credit risk management function over the last couple of years. The current rating levels of these banks recognize that at some level, all of them have withstood the cycles while fortifying both balance sheets and their respective franchises. A common characteristic of these banks is their well-defined strategies to focus on lending to SMEs and small corporate clients. More recently, there has been increased focus on the upper-end of the SME segment / lower-end of the corporate segment (annual sales above BRL250 million). Among the banks reviewed, Daycoval and Alfa are exceptions, as both count on growing retail operations (auto and payroll deductible loans); the former also focuses on smaller SME clients while the latter's corporate lending is concentrated on large corporates. Asset quality of these banks has slightly improved in 2013 when compared to 2012, mostly as a result of their selective origination and constrained risk appetite. Alfa has low delinquency ratios, despite the relatively higher and still growing share of the retail loans (non-performing loans 90 days were 0.1% at December 2013). ABC Brasil and Pine report a low level of NPLs over 90 days (0.2 and 0.1%, respectively), which is a reflection of their focus on lower risk and larger companies. Benefiting from the strict regulatory provisioning rules, all banks reviewed in this peer boast solid reserve coverage ratios, with average reserve coverage of 5.0x over NPL 90 days. Daycoval, due to the relevance of its SME portfolio which is composed of clients of a smaller size, continued to show the highest delinquency ratios (NPL 90 days of 2.2%). Counting on good collateral coverage, Daycoval has a good track record of credit recoveries and that should somewhat counterbalance the effects of the deterioration presented in 2012 and 2013. Also, the change in Daycoval's loan mix, with the expansion of its payroll deductible loans, should also offset the SME portfolio deterioration. Also focused on the SME segment, Bicbanco's asset quality showed improvement after three periods of adjustments and a full reshuffle of its credit function and, while the acquisition is not completed, risk appetite should continue to be limited. These banks' main revenue source continues to be their lending activity. All of them continue developing new strategies and products aiming to increase fee income and foster cross selling initiatives. Fitch continues to consider this a positive trend though it recognizes that the contribution of non-interest income is still modest (roughly 10% of total revenues on average for this peer group) when compared to the large retail banks, which have more than a third of their revenues stemming from non-interest income. Fitch expects that these banks, like most in the Brazilian financial system, will continue to face margin pressures due to the lackluster economic scenario and the continued subdued loan growth. In 2013, the average Operating ROAA for these five banks fell to 1.58%, which still compares favorably with the average of the market and is still slightly above similarly rated banks around the world. Profitability of four out of the five banks included in this peer review has proven to be resilient to market volatility. Daycoval's performance suffered from the deterioration of its SME portfolio and conservative provisioning but its performance record of recovering bad credits due to its strong collateral coverage is expected to compensate at least partially for 2013's higher credit costs. Bicbanco's asset quality problems seem to be under control and the bank's performance continued to be the weakest in this peer group. In 2014, Bicbanco's performance is expected to remain flat as the acquisition process should be concluded after final approval by regulators. The evolution of these banks' liquidity controls and asset and liability management practices continue to be a positive factor. All of them count on good liquidity profiles; reasonably diversified funding bases with midterm tenors and controlled refinancing risk. The increase of the share of letras financeiras and the continued reduction of the portion of deposits with daily withdrawal clauses has been a characteristic of all these banks, except for Bicbanco, which relied heavily on DPGE I as its funding costs escalated prior to the announcement of its acquisition by China Construction Bank Corporation (CCB; LT IDR 'A'; Outlook Stable; Viability Rating (VR) 'bb') . The reviewed banks, including those with more leveraged balance sheets, have comfortable capital ratios (Fitch core capital ratio average for the group was 14.19% and 13.30% in 2013 and 2012, respectively). Fitch does not expect capitalization to be a constraint for growth or earnings generation for any of these banks. ABC continues to present the more tight capital ratios while Daycoval and Alfa continue to stand out as the best capitalized bank in the group (Fitch core capital ratio of 17.90% and 19.45% in 2013, respectively). KEY RATING DRIVERS ABC Brasil: ABC Brasil's IDRs are driven by its VR and are based on the bank's low risk profile, which is underpinned by its low funding cost, sound risk management, and consistent profitability over the years even while facing a fierce and volatile competitive environment. Over the last few years, improvements included a further diversification of its funding profile leading to stronger asset and liability management as it continues to expand its corporate and middle-market operations. Its credit portfolios are conservatively matched and continue to show strong liquidity. Its continued high-quality assets and liquidity combined with its satisfactory profitability and capital adequacy are evidence of the bank's overall solid financial strength. Alfa: Alfa's ratings reflect its very conservative lending strategy and risk management, excellent asset quality, good liquidity, relatively low leverage, comfortable capital ratios and its adequate performance track record. On the other hand, they also reflect the concentrated funding base, appropriate for its activities. The growth of its retail lending business, particularly since 2010, has provided additional business diversification and further enhanced the bank's sound financial profile. A focused strategy on the retail lending side that targets high income individuals, and the long-term relationship of the bank with its large and upper-middle market corporate clients underpin the asset quality and performance. The bank has consistently maintained a very comfortable liquidity position and has prolonged the average funding maturity in recent years at an attractive cost, somehow offsetting the concentration of its funding base. Bicbanco: Bicbanco was placed on Rating Watch Positive in November 2013, following the announcement of the acquisition of a 72% stake in Bicbanco by CCB from its current controlling shareholders. The transaction is still subject to necessary regulatory approvals in Brazil and China. The Positive Watch reflects Fitch's belief that once the acquisition is complete, Bicbanco's ratings will benefit from support from CCB, should this be required. CCB's IDR reflects Fitch's opinion that there is an extremely high probability that the Chinese authorities will support CCB if needed. CCB is 57% owned by the Chinese government, and is an important player in the Chinese banking system in addition to being the eighth largest bank in the world. Should the proposed acquisition be concluded, Bicbanco's National Scale ratings would be driven by the expected support from CCB, while the inclusion of a highly rated institutional parent may also result in synergies and other benefits that may enhance Bicbanco's business model. After the transaction is completed, Fitch will assess the importance of Bicbanco to CCB and decide the appropriate level of support to be applied to Bicbanco's ratings. Daycoval: Daycoval's IDRs reflect the bank's consistent track record of performance, maintained through different cycles of the local economy, along with higher business diversification and comfortable liquidity and capitalization positions. The bank has recorded consistent profitability, even under stress scenarios, sustained by adequate asset pricing, strong cost control and low funding cost. It continues to adopt prudent liquidity management and adequate asset and liability management strategies that help to mitigate the burden of a less diversified funding base compared to larger peers. Business diversification to payroll deductible loans have allowed the bank to compensate the impact on margins of its more limited risk appetite for SME loans over the last two periods. Pine: Pine's IDR reflects the bank's overall good credit profile and good performance in the last several years in the midst of a deteriorating and relatively volatile operating environment. Also, the ratings reflect Pine's consistent performance, higher funding diversification, and sound asset quality and liquidity. Concentrations on the asset and funding sides have been maintained at acceptable levels and ALM continues to be good. Pine has managed its growth in the low corporate segment carefully with a strategy of revenue diversification and cross-selling aimed at reducing the dependence of revenues on lending and increase the participation of its derivatives desk and advisory services in the revenues composition. RATING SENSITIVITIES ABC Brasil Given its funding profile and narrow business niche, an upgrade of ABC's ratings is limited under its current business model. Although unlikely in Fitch's view, significant deterioration of ABCBr's asset quality that results in credit costs that severely limit its profitability and ability to grow its capital, combined with a reduction on its liquidity or capitalization position could lead towards a reduction of the bank's ratings. A decline in the Fitch core capital to risk-weighted assets ratio below 9% along with a reduction in the operating income to average asset ratio below 2% could result in a ratings review. Alfa The concentration of Alfa's funding base is higher compared to the other mid-sized banks reviewed. Improvements in funding concentration and a more robust performance could affect ratings positively, although this scenario may be unlikely considering the business model of the bank. Conversely, in the unlikely scenario of significant deterioration in asset quality and performance, its ratings would be negatively affected. Rapid loan growth not followed by proper capital generation that could result in a drop in the Fitch core capital to risk-weighted assets ratio below 12%, along with a deterioration in its operating income to an average asset ratio below 1.0%, could result in a negative rating action. Bicbanco The Positive Watch will be resolved once regulatory approval for the acquisition is received and the transaction is completed. Upon completion of the necessary approvals, Bicbanco's long-term National Rating could be upgraded reflecting CCB's propensity to support Bicbanco. In the case the acquisition is not completed, Fitch will reassess the impact of such situation on Bicbanco's ratings, which may result in a downgrade of the bank if its franchise and funding position were to be affected by such event. Daycoval Given its current business model, with asset and liability concentrations inherent to its size, including its wholesale funding nature, the potential for an upgrade to Daycoval's ratings is limited. The ratings could be negatively affected by continued asset quality deterioration which result in pressure on the bank's results (operating income to average asset ratio below 2%) and on capital (Fitch core capital ratio lower than 11%), which could be triggered by larger than expected asset quality deterioration and/or aggressive asset growth or cash dividend policy. Pine The potential for a rating upgrade is limited in the short term as the bank needs to improve its income, asset and liability diversification. Ratings may be negatively affected by continued asset quality deterioration which could undermine its earnings and capital base. A deterioration of the asset quality ratios to levels below its peers' average or a decline in Fitch core capital to risk-weighted assets ratio below 10%, along with a reduction in operating income to average asset ratio below 1.5% could result in a negative rating review. Fitch's rating actions are as follows: ABC Brasil: -- Long-term foreign and local currency IDRs affirmed at 'BBB-', Outlook Stable; -- Short-term foreign and local currency IDRs affirmed at 'F3'; --Viability rating affirmed at 'bbb-'; -- Long-term national rating affirmed at 'AA(bra)', Outlook Stable; -- Short-term national rating affirmed at 'F1+(bra)'; --Support rating affirmed at '3'. --Senior unsecured BRL notes due 2016 foreign currency rating affirmed at 'BBB-' Alfa: --National Long-term Rating affirmed at 'AA(bra)', Outlook Stable; --National Short-term Rating affirmed at 'F1+(bra)'. Bicbanco: --National Long-term Rating at 'A+(bra)', Rating Watch Positive Maintained; --National Short-term Rating at 'F1(bra)'; Rating Watch Positive Maintained. Daycoval: --Long-term foreign and local currency IDRs affirmed at 'BBB-', Outlook Stable; --Short-term foreign and local currency IDRs affirmed at 'F3'; --Viability rating affirmed at 'bbb-'; --Long-term national rating affirmed at 'AA(bra)', Outlook Stable; --Short-term national rating affirmed at 'F1+(bra)'; --Support rating affirmed at '5'; --Support rating floor affirmed at 'NF'; --Senior unsecured USD notes due March 2015, foreign currency rating affirmed at 'BBB-'; --Senior unsecured USD notes due January 2016, foreign currency rating affirmed at 'BBB-'. --Senior unsecured USD notes due March 2019, foreign currency rating affirmed at 'BBB-' --Senior unsecured BRL letras financeiras due 2015 and 2016 affirmed at 'AA(bra);. Pine: -- Long-term foreign and local currency IDRs affirmed at ' BB+', Outlook Stable; -- Short-term foreign and local currency IDRs affirmed at 'B'; -- Viability rating affirmed at 'bb+'; -- Long-term national rating affirmed at 'AA-(bra)', Outlook Stable; -- Short-term national rating affirmed at 'F1+(bra)'; -- Support rating affirmed at '5'; -- Support rating floor affirmed at 'NF'; -- Subordinated USD notes due 2017 affirmed at 'BB-'; -- Senior unsecured BRL letras financeiras due 2014 and 2015 affirmed at 'AA-(bra)'; --Huaso bonds program expiring in 2022 affirmed at 'A(cl)'; -- Huaso bonds due 2017 affirmed at 'A(cl) '. Contact: Primary Analyst (ABC Brasil, Daycoval, Pine and Bicbanco) and Secondary Analyst (Alfa) Eduardo Ribas Director +55-11-4504-2213 Fitch Rating Brasil Ltda. Alameda Santos 700 Sao Paulo, Brazil Primary Analyst (Alfa) Pedro Gomes Director +55 11 4504-2606 Secondary Analyst (Daycoval) Claudio Gallina Director + 55 11 4504-2216 Secondary Analyst (ABC Brasil and Pine) Robert Stoll Director +1 212-908-9155 Secondary Analyst (Bicbanco) Luiz Claudio Vieira Associate Director +55 11 4503-2617 Secondary Analyst (Pine Issuance in Chile) Eduardo Santibanez Senior Director +5-62-499-3307 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 is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Jan. 31, 2014); --'National Scale Ratings Criteria (Oct. 30, 2013); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012); --'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 15, 2012). Applicable Criteria and Related Research: Rating FI Subsidiaries and Holding Companies here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here National Scale Ratings Criteria here Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828338 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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