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Fitch Downgrades Banco BMG's IDR to 'B+'/National Rating to 'A-(bra)'; Outlook Negative
November 30, 2017 / 8:57 PM / in 14 days

Fitch Downgrades Banco BMG's IDR to 'B+'/National Rating to 'A-(bra)'; Outlook Negative

(The following statement was released by the rating agency) NEW YORK, November 30 (Fitch) Fitch Ratings has downgraded Banco BMG S.A.'s Viability Rating (VR) to 'b+' from 'bb-', which in turn drives the downgrade of its Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'B+' from 'BB-'; the Rating Outlook remains Negative. At the same time, the National Long-Term Rating was downgraded to 'A-(bra)' from 'A(bra)', Outlook Negative. See the full list of rating actions at the end of this release. KEY RATING DRIVERS IDRS, VR AND NATIONAL RATINGS The downgrade of BMG reflects Fitch's assessment of the bank's relatively weaker company profile and concentrated credit portfolio along with its continued poor profitability and weak but improving asset quality; all factors that are affected by the still challenging operating environment. The downgrade partially reflects BMG's weaker competitive position of its commercial lending segment when compared to its local competitors, which may have been more conservative in the management of their credit portfolios. The uncertain political and operating environment had reduced the bank's risk appetite for growing its commercial lending segment. That segment saw a 29% reduction in earning assets during the LTM (ended Sept. 30, 2017), which depressed revenue generation and offset the favorable growth of BMG's payroll-backed credit card portfolio. BMG's total credit portfolio also became more concentrated during the LTM as the bank sold off its legacy payroll lending (Consignado) and its vehicle-finance portfolios. BMG's other businesses are still in the early stages of growth and thus are not yet relevant revenue generators. BMG's VR and IDR take into account the bank's good liquidity and funding strengths and also the recent growth of its principal line of business, the payroll-backed credit card segment, which now accounts for over 72% of the total credit portfolio. Fitch also notes the recent improvement in BMG's capitalization ratios. However, improvement in the Fitch Core Capital ratio to 13.5% at the end of the third quarter 2017 (3Q17) from 12% at year-end (YE) 2016 was mostly the result of a reduction of risk assets rather than through an increase in internal capital generation via sustainable operating profits. While BMG's asset quality metrics improved in the last nine months in terms of the impaired loan and coverage ratios, BMG still has the challenge of improving the asset quality of its wholesale segment, especially in view of the still challenging macroeconomic scenario that limits operational profitability. We expect increased GDP growth of 2.5% in 2018, which may enable a return to growth in BMG's wholesale portfolio. BMG's NPL over 90 days ratio reached 4.2% at Sept. 30, 2017. BMG has been operating with a more comfortable liquidity position, which was enhanced in part by the sale of its vehicle-finance business and the downsizing of its commercial credit portfolio. Using its excess liquidity, the bank continues to reduce the amount of its more expensive liabilities, and to diversify its sources of funding. Stable deposits now represent 63% of total funding and funding gaps are positive. The Negative Outlook on the IDR was maintained, as it reflects Fitch's view that many of the key credit metrics of this mid-sized wholesale bank are highly influenced by the still difficult operating environment. BMG's National ratings are an assessment of BMG's credit quality relative only to local peers. The Outlook for the National rating remains Negative, reflecting Fitch's view that BMG's profitability and asset quality metrics relative to its peers need to improve further, and that both still show downside risk. Fitch believes management will conservatively manage the continued expansion of its payroll-backed credit card segment, where BMG has a competitive advantage given its considerable expertise and relevant market share, estimated to be over 50%. The payroll-backed credit card portfolio already saw solid growth of 22% over the LTM. Management is aware that increased competition in the segment will impact its market share but is confident that there will be sufficient demand - especially with the expected improvement in the economy and the relevant number of unbanked retirees and federal employees. However, the bank's goal to resume loan growth highlights the need to substantially improve internally generated capital. BMG's profitability continues to remain weak, due in part to lower revenue from its wholesale and discontinued business segments and due to specific impairments and one-off provisions taken during the 9M17. BMG continues to carefully monitor its cost controls and expects to see a positive trend in profits for 2018 aided by the growth of its earning assets, especially in its core retail segments. Fitch believes that improved profitability will take a few quarters to become relevant; however, this partially depends on continued improvements in the operating environment, aided by improvements in the asset quality of both the wholesale and retail portfolios. SUPPORT RATING AND SUPPORT RATING FLOOR BMG's Support Rating and Support Rating Floor are based on Fitch's view that BMG is not considered to be a domestically important financial institution, due to the size of its deposit and loan market share. As such it is unlikely to receive external support from the Brazilian sovereign. SUBORDINATED DEBT BMG's subordinated debt is rated two notches below its VR to reflect its subordinated status. As the VR rating of the issuer is now 'B+' Fitch has newly-assigned a Recovery Rating of 'RR6' as per the agency's rating criteria. RATING SENSITIVITIES IDRS, VR, AND NATIONAL RATINGS BMG's ratings could be downgraded in the case of further sustained deterioration in its asset quality (non-performing loans over 90 days remaining above 4%) and weak performance (such as continued negative operating profit-to-risk-weighted assets, and/or a deterioration in capitalization (Fitch Core Capital falling below 12%). A revision in the Outlook to Stable is unlikely in the short to medium term, as it is contingent on significant improvements in operational profitability and a sustained improvement in the impaired loan ratio (D-H) to below 6% of total loans along with BMG's FCC ratio remaining above 13%. An operating profit-to-risk-weighted assets ratio above 2% could trigger a positive rating review by Fitch. SUBORDINATED DEBT Subordinated Tier II debt ratings would generally move together with the bank's IDR. However, Fitch's criteria factor in the compression issue where the VR is 'bb+' or lower, providing some room for a narrower notching. Therefore, the overall notching for these securities is -2, given that BMG's VR rating is non-investment grade. The rating actions are as follows: --Long-Term Foreign Currency IDR downgraded to 'B+' from 'BB-'; Outlook Negative; --Short-Term Foreign Currency IDR affirmed at 'B'; --Long-Term Local Currency IDR downgraded to 'B+' from 'BB-'; Outlook Negative; --Short-Term Local Currency IDR affirmed at 'B'; --Viability Rating downgraded to 'b+' from 'bb-'; --Support Rating at '5'; --Support Rating Floor 'No Floor'; --National long-term rating downgraded to 'A-(bra)' from 'A(bra)'; Outlook Negative; --National short-term rating affirmed at 'F2(bra)'; --Subordinated notes due 2019 & 2020 long-term foreign currency rating affirmed at 'B-'/RR6. Contact: Primary Analyst Robert Stoll Director +1-212-908-9155 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Pedro Gomes Director +55 11 4504 2604 Committee Chairperson Alejandro Garcia, CFA Managing Director +1-212-908-9137 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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