August 21, 2017 / 7:06 PM / in 4 months

Fitch Affirms BRB's IDR at 'BB-' and VR at 'b+'

(The following statement was released by the rating agency) RIO DE JANEIRO, August 21 (Fitch) Fitch Ratings has affirmed the long-term Foreign and Local Currency Issuer Default Ratings (IDRs) of BRB - Banco de Brasilia S.A. (BRB) at 'BB-' and its long-term National Rating at 'A+(bra)'. Rating Outlooks on the long-term IDRs remain Negative, while the Rating Outlook on the long-term National Rating is Stable. Fitch also affirmed BRB's Viability Rating (VR) at 'b+' and Support Rating (SR) at '3'. A full list of rating actions can be found at the end of this release. KEY RATING DRIVERS - IDRS, NATIONAL RATINGS The affirmation of BRB's IDRs reflect Fitch's view that the bank would receive support from its majority shareholder, the Government of the Federal District (GDF), should the need arise. The Negative Outlook on BRB's Long-Term IDRs ultimately mirrors the Negative Outlook on Brazil's sovereign ratings and reflects the pressures on GDF's ability to provide support. Fitch believes BRB is strategically important for GDF, as it is the local government's main financial agent, and it has a meaningful market share in the state's loans and deposits. At May 2017, BRB ranked fourth in lending and term deposits within the Federal District with 6% and 10% market shares, respectively. In addition to its commercial operations, BRB performs a policy role for the region through lending operations that aim to promote development and growth. KEY RATING DRIVERS - VIABILITY RATING The affirmation of BRB's VR mainly reflects its capitalization ratios that are slightly lower than its peer averages, and it also incorporates the volatility in its earnings over the past few years and potential asset quality pressures on its loans to companies. The VR also considers BRB's solid franchise in GDF and stable and diversified retail-based funding structure. BRB's Fitch core capital (FCC) and regulatory capital ratios are slightly lower than the average of its three Fitch-rated peers. In 2016, the bank's recognition of an actuarial deficit for its employees' pension fund (both for 2016 and retrospectively for 2015) and an increase in deductible deferred tax assets affected its FCC ratio negatively, but the non-recurring gain and lower RWAs offset this effect. Positively, as of March 2017, the FCC ratio rose to 12.66% from 11.95% in 2016 and 11.11% in 2015. BRB's asset quality indicators have deteriorated since 2015, in line with sector and peer trends. Fitch expects BRB's asset quality to remain under pressure in the short term, in line with the sector outlook. BRB's payroll deductible portfolio, which made up 43% of the total at March 2017, has continued to perform well. Unlike a number of subnational governments, GDF has not reported significant delays in salary payments to its employees. The main pressure has been on the unsecured consumer loans and SME loans, which, made up 38% and 12% of the total, respectively, at March 2017. This drove the increase in BRB's NPLs over 90 days to 4.3% in 2015 and 4.4% in 2016, before going down to 4.1% at March 2017. BRB's loan loss reserve coverage of impaired loans remains adequate (148% and 122% of NPLs, at March 2017 and 2016, respectively). BRB's profitability was negatively impacted in 2015, due to a large increase in loan impairment charges, but in 2016, as impairment charges fell to 61% of pre-impairment earnings, operating profit recovered to a 2.02% of RWAs (0.41% in 2015). In 2016, the bank's overall net income was boosted by a non-recurring gain of BRL118 million from the reversal of tax provisions. In the first quarter of 2017, operating earnings increased slightly to 2.18% of RWAs. This was mainly due to a drop in non-interest expenses that offset slightly higher loan impairment charges that reached 69% of pre-impairment charges. Possible needs of additional loan loss reserves for its loans to companies could pressure 2017 earnings. Funding and liquidity are positive drivers for BRB's VR. The bank has a retail funding base, which is highly stable, diversified and low cost. Deposits and deposit-like financial bills made up 83% of total funding at March 2017. In the same period, gross loans corresponded to a comfortable 105% of deposit and deposit-like financial bills. The bank also has local subordinated financial bills that are eligible as Tier 2 capital. KEY RATING DRIVERS - SUPPORT RATING The affirmation of BRB's SRs at '3' reflects the moderate probability of support from GDF. Fitch believes GDF would have a high willingness to support BRB in case of need; however, its capacity to do so has fallen along with the deterioration in Brazil's sovereign ratings. RATING SENSITIVITIES - IDRS, NATIONAL RATINGS, SUPPORT RATING Any changes in Fitch's assessment of GDF's ability and willingness to provide support to BRB would affect the IDRs and SR of the bank. The National Ratings of BRB would only be affected by changes in local relativities among Brazilian banks. RATING SENSITIVITIES - VIABILITY RATING Negative triggers: BRB's VR could be downgraded if its FCC ratio falls to less than 7% and if its operating ROAA remains below 0.5% for a sustained period. Positive triggers: An upgrade of BRB's VR would be conditional on the maintenance of its operating profit/RWA above 1.25% and FCC ratio above 12%, both for sustained periods. Fitch has affirmed the following ratings: --Long-term Foreign and Local Currency IDRs at 'BB-', Outlook Negative; --Short-term Foreign and Local Currency IDRs at 'B'; --Long-term National Rating at 'A+(bra)', Outlook Stable; --Short-term National Rating at 'F1(bra)'; --Support Rating at '3'; --Viability Rating at 'b+'. Contact: Primary Analyst Esin Celasun Director +55 21 4503-2626 Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20-401 B, Rio de Janeiro, RJ, Brazil Secondary Analyst Paulo Fugulin Director +55 11 4504-2206 Committee Chairperson Veronica Chau Senior Director +52 81 8399-9169 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy 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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