July 22, 2013 / 3:12 PM / 4 years ago

Fitch Affirms Banco Bradesco and Itau Unibanco Group's Ratings

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(The following statement was released by the rating agency) NEW YORK/SAO PAULO, July 22 (Fitch) Fitch Ratings has affirmed the ratings of Banco Bradesco S.A. (Bradesco), Itau Unibanco Holding S.A. (IUH), Itau Unibanco S.A., and Banco Itau BBA S.A. A full list of rating actions follows at the end of this release. The aforementioned groups of banks are the largest financial groups in Brazil, which have been able to operate in the midst of a relative volatile operating environment and sudden changes of the economic cycle, preserving their profitability in levels that rank above the median of similarly rated banks and the group of largest bank around the world. Such performance is tested again since 2012, when the conjunction of lower economic activity levels, a significant drop on the average interest rates, and the seasoning of the credit expansion of the last 10 years have resulted in higher credit costs and narrower margins. Fitch does not expect profitability to remain at past levels, does believes it will still be comparable to its global peers. Bradesco and IUH are present in a wide range of lending segments from commercial lending to SMEs and corporates, to lending to individuals for personal loans, credit cards, vehicles, mortgages, consumer finance, payroll deductible loans. In most of these segments, they each are first or second in terms of market share. The equity securities of both banks are listed in Brazil and USA. In mid-2011 and early 2012,Bradesco's and IUH's asset quality had seen some deterioration especially in the loan to individuals - vehicle finance segments of both banks due in part to the weakening of the economy. While both banks had to significantly raise the level of loan loss provisions, IUH was more significantly impacted. Recent quarters have shown clear improvement trends for both banks and at the end of 1Q'13 the levels of past due loans (PDLs)over 90 days to total loans for Bradesco and IUH was 4% and 4.5% respectively. Providing further comfort, both banks maintain high levels of loan loss reserves beyond the required Central Bank minimum levels, thus the coverage level of these 90 day PDLs were at a comfortable level of 179% for Bradesco and 161% for IUH. Bradesco currently has excess provisions of approximately BRL4 billion and IUH has approximately BRL5billion. Both Bradesco and IUH have had satisfactory Fitch core capital ratios when considering their excess reserve position in both the banks and in the sustained strong performance of their insurance business which brings income diversification, but also results in significant adjustments on reported equity under Fitch's Global Financial Institutions Rating Criteria in order to arrive at their FCC Ratios. Both banks are not expected to have difficulties in meeting upcoming BIS III minimum capital levels. These levels will be phased in over the next six years in view of their earning capacities, current capital levels and significant excess loan loss reserves that could be redirected, if needed, and available for that purpose. Today, both banks face the challenge of enhancing their capital base in order to align their position with other large banks around the world. Their ability to preserve current loss absorption capacity, measured by their capital base, loan loss reserves and above average profitability, would be tested in an environment of lower expected profits for the global banking industry. KEY RATING DRIVERS: BRADESCO Bradesco's Issuer Default Ratings (IDRs) are driven by its Viability Rating (VR). Its foreign currency IDR is constrained by Brazil's Country Ceiling (rated 'BBB+' by Fitch); while its local currency IDR is two notches above the sovereign currency rating of Brazil, thanks to its very strong credit profile, funding franchise and its deposit stability. Under Fitch's rating criteria, this is the maximum uplift an exceptionally strong entity can have compared to the rating of the sovereign where it is incorporated. The affirmation of both ratings was based on the proved resilience of Bradesco's results during a challenging operating environment. The bank has maintained asset quality ratios well aligned with banks of similar ratings and ample loan loss reserves that cover almost 2 times its past due portfolio. In addition, the bank has posted strong profits as shown by an ROAA above 1.5% for the last 10 years, and is expected to maintain a similar level in the medium term, through the good diversification of its income sources. Also considered was the bank's conservative risk culture, stable and diversified funding, and proven management skills in an environment of constant change. The ratings also consider Bradesco's current capital base, which is trending slightly below that of similarly rated banks (Fitch Core Capital average of 6.9% over the last 3 years), but compensated by ample loan loss reserves that are nearly 180% of its 90-day past due loans) and a proven history of adequate results along the economic cycle. It is also important to note that Bradesco maintains its capital ratios well-above the conservative local requirements. Bradesco is the third largest bank in Brazil with a deposit market share of 14% in 2013. Fitch believes that given Bradesco's size and its nationwide presence, the Brazilian government would provide Support the support required, which explains its current Support Rating (SR) of '2', while its Support Rating Floor is 'BBB-'. The rating of its subordinated notes, two notches below its VR, reflects the regular notching applied by Fitch to hybrid securities with coupon deferral mechanisms. More specifically, the securities are notched once due the higher loss severity derived from its subordinated nature and another notch due to incremental non-performance risk imposed by the ability to defer coupon payments when the minimum regulatory capital ratios is breached. Bradesco's national scale rating reflects the same financial strength of its VR's and remains at the highest national scale rating in Brazil. KEY RATING DRIVERS: IUH, ITAU UNIBANCO AND ITAU BBA IUH, Itau Unibanco and Banco Itau BBA IDR's are driven by their (VR). Their foreign currency IDR's are constrained by Brazil's Country Ceiling ('BBB+'); while their local currency IDR are two notches above the sovereign currency rating of Brazil, thanks to their very strong credit profile, funding franchise and deposit stability. Under Fitch's rating criteria, this is the maximum uplift an exceptionally strong entity can have compared to the rating of the sovereign where it is incorporated. IUH, Itau Unibanco and Banco Itau BBA have 'Common' VR's and hence IDR's as IUH, as explained in Fitch's criteria for Rating FI Subsidiaries (quoted at the end of this Rating Action Commentary). Both subsidiaries are very large compared to the overall size of IUH, while both subsidiaries are highly integrated in terms of management, balance sheet and systems, meaning that the subsidiaries and parent credit profile are highly correlated. The entities are clearly managed on a consolidated manner. The affirmation of IUH's VR's is driven by the group's ability to maintain performance, asset quality and capital levels in healthy levels along the economic cycle; which is all enhanced by a very stable and diversified funding base and conservative risk management techniques. Despite the volatility of the operating environment, and the current lower than average economic activity levels, IUH has been able to preserve its profitability ratio (ROAA minimum of 1.5%); based on controlled credit costs, good efficiency levels and strong margins, despite the average lower interest rate environment in Brazil since late 2010. Despite some temporary increases on past due loans, particularly in the vehicle finance and SME portfolio, IUH has been able to preserve its ratio of past due loans (more than 90 days) around 4.5% in the last two years, while loan charge offs remain within its historic median and loan loss reserves cover 161% such past due portfolio; well above similarly rated banks around the world. The above average growth of IUH in the last five years has limited the expansion of its Fitch Core Capital Ratio (8.1% as of March 2013); and range below the average of other similarly rated banks; although, its above average profitability, conservative loan loss coverage and a history of strong results despite the changes in the economic cycle compensate such difference. It is also important to note that IUH maintains its capital ratios well-above the conservative local requirements. IUH is the second largest banking group in Brazil with a deposit market share of approximately 15% in 2013. Fitch believes that given IUH's size and its nationwide presence, the Brazilian government would provide the bank the support it requires, which explains its current Support Rating (SR) of '2'; while its Support Rating Floor is 'BBB-'. IUH, Itau Unibanco and Banco Itau BBA national scale rating reflects the same financial strength of its VR's and remains at the highest national scale rating in Brazil. The rating of IUH's subordinated notes, two notches below its VR, reflects the regular notching applied by Fitch to hybrid securities with coupon deferral mechanism. More specifically, the securities are notched once due to the higher loss severity derived of its subordinated nature and another notch due to incremental non-performance risk imposed by the ability to defer coupon payments when the minimum regulatory capital ratios is breached. RATING SENSITIVITIES: BRADESCO Bradesco IDRs could be affected by changes in the sovereign ratings of Brazil although an upgrade in the sovereign rating may not necessary lead to an upgrade in the ratings of this bank as Fitch views the upside as limited in the near-term horizon. Its VR could be negatively affected, if Bradesco's loss absorption capacity is diminished as evidenced by a decrease in their FCC and Loan Loss Reserve ratios from current levels which result in an unfavorable comparison to the ratios of its global peers. Also, sustained periods of ROAA below 1.5% and PDL's ratios above 6% may trigger a downgrade on its ratings. Currently, the upside potential for the Long Term Foreign Currency IDR is limited by the country ceiling. The sensitivity of the ratings of the subordinated debt is subject to any change in the VR rating of Bradesco. RATING SENSITIVITIES: IUH, Itau Unibanco and Banco Itau BBA IUH IDRs could be affected by changes in the sovereign ratings of Brazil although an upgrade in the sovereign rating may not necessary lead to an upgrade in the ratings of this bank as Fitch views the upside as limited in the near-term horizon. Its VR could be negatively affected, if IUH's loss absorption capacity is diminished as evidenced by a decrease in their FCC and Loan Loss Reserve ratios from current levels which result in an unfavorable comparison to the ratios of its global peers. Also, sustained periods of ROAA below 1.25% and 90 day PDL ratios above 6% may trigger a downgrade on its ratings. Currently, the upside potential for the Long Term Foreign Currency IDR is limited by the country ceiling. The ratings of the subordinated debt are subject to any change in the VR rating of IUH. As the ratings of Itau Unibanco S.A. and Banco Itau BBA S.A. are currently equalized to those of its parent, any change to the rating of IUH is likely to affect the rating of these subsidiaries. Fitch affirms Banco Bradesco S.A.as follows: --Long-term Foreign Currency Issuer Default Rating (IDR) at 'BBB+'; Outlook Stable; --Short-term Foreign Currency IDR at 'F2'; --Local Currency long-term IDR at A-; Outlook Stable; --Local Currency short-term IDR at 'F1'; --Viability Rating at 'a-'; --Support Rating at '2'; --Support Rating Floor at 'BBB-'; --Long-term National Rating at 'AAA(bra)'; Outlook Stable; --Short-term National Rating at 'F1+(bra)'; --Subordinated notes due September 2019 at 'BBB'; --Subordinated notes due January 2021 at 'BBB'; --Subordinated notes due March 2022 at 'BBB'. Fitch affirms Itau Unibanco Holding S.A. as follows: --Long-term Foreign Currency IDR at 'BBB+'; Outlook Stable; --Short-Term Foreign Currency IDRs at 'F2'; --Local Currency long-term IDR at A-; Outlook Stable; --Local Currency short-term IDR at 'F1'; --Viability Rating at 'a-'; --Support Rating at '2'; --Support Rating Floor at 'BBB-'; --Long-term National Rating at 'AAA(bra)'; Outlook Stable; --Short-term National Rating at 'F1+(bra)'; --Market-linked notes due November 2015 at 'BBB+emr'; --Subordinated notes due April 2020 at 'BBB'; --Subordinated notes due January 2021 at 'BBB'; --Subordinated notes due December 2021 at 'BBB'; --Subordinated notes due March 2022 at 'BBB'; --Subordinated notes due August 2022 at 'BBB'; --Subordinated notes due May 2023 at 'BBB'. Itau Unibanco S.A. --Long--term Foreign currency IDR at 'BBB+'; Stable Outlook; --Foreign currency short-term IDR at 'F2'; --Local currency long-term IDR at 'A-'; Stable Outlook; --Local currency short-term IDR at 'F1'; --Viability rating at 'a-'; --Support rating at '2'; --Support rating floor 'BBB-'; --National long-term rating at 'AAA(bra)'; Stable Outlook; --National short-term rating at 'F1+(bra)'. Banco Itau BBA S.A. --Long--term Foreign long-term IDR at 'BBB+'; Stable Outlook; --Foreign currency short--term IDR at 'F2'; --Local currency long-term IDR at 'A-'; Stable Outlook; --Local currency short-term IDR at 'F1'; --Viability rating at 'a-' --Support rating at '2'; --Support rating floor 'BBB-'; --National long-term rating at 'AAA(bra)'; Stable Outlook; --National short-term rating at 'F1+(bra)'. Contact: Primary Analyst Robert Stoll Director +1-212-908-9155 Fitch Ratings, Inc. New York, NY 10004 Secondary Analyst Pedro Gomes Director +55 21 4504-2604 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' (Aug. 15, 2012); --'National Ratings Criteria' (Jan. 19, 2011); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10 2012) --'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 15, 2012) --'Rating Financial Institutions above the Sovereign' (Dec. 11 2012) Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here National Ratings Criteria here Rating FI Subsidiaries and Holding Companies here Assessing and Rating Bank Subordinated and Hybrid Securities here Rating Financial Institutions Above the Sovereign 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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