SAO PAULO & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has completed a peer review of the following five Brazilian mid-sized banks: Banco ABC Brasil S.A. (ABC), Banco Daycoval S.A. (Daycoval), Banco Pine S.A. (Pine), Banco Alfa de Investimento S.A. (Alfa) and Banco Industrial e Comercial S.A. (Bicbanco). A full list of rating actions is at the end of this release.
Fitch upgraded Pine's international and national ratings, revised the Rating Outlook on Bicbanco's long-term national rating from Stable to Negative and affirmed Alfa's ratings. Fitch upgraded ABC Brasil and Daycoval's ratings in March 2013 and affirmed them today. Fitch upgraded Alfa's ratings in October 2012.
The mid-sized Brazilian banks reviewed today are banks with total assets ranging from R$10 billion to R$18 billion. The business model of these and other similar banks in Brazil is reliant on wholesale funding to fund retail and/or SME loan portfolios. In Fitch's view, this model poses significant challenges and historically had relegated most of these banks to sub-investment grade ratings. The current sluggish economic environment has tested these banks, as have past cycles. Some banks have fared better than others, and some bank failures and consolidation in the sector have occurred. Recent rating actions and those taken in today's peer review have recognized this differentiation, with select upgrades for banks that have withstood the cycles well, 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 BRL 250 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 and the latter's corporate lending is concentrated on large and upper-middle corporates, with little exposure to SMEs and small corporates.
Asset quality of these banks has evolved in tandem with the market and deteriorated slightly in 2012. Alfa has the lowest delinquency ratios, despite the relatively higher and still growing share of the retail loans (90 day past due loans of 0.4% versus an average of 1.5% for the remaining four banks, at year-end 2012). ABC Brasil and Pine also have slightly lower levels of 90 days past due loans (0.4% and 0.6%, respectively), which is a reflection of their focus on lower risk and larger companies. Daycoval's higher delinquency (90 days past due loans of 2.34%) reflects its focus on smaller corporate clients, however is offset by strong collateral coverage, adequate pricing and limited loan charge offs. Bicbanco has the poorest asset quality 2.8% 90 days past due, which continues to negatively affect its bottom line earnings. All boast solid reserve coverage of their 90 day past due loans well above 1.5x (average of 2.6x).
The main revenue source of these banks is lending, although all of the banks have been working to increase fee income and cross selling initiatives. Fitch believes that it will take time for such income to become relevant but considers the trend positive, given the relatively lower interest rate environment. On average, non-interest income represents 10% of total revenues for this peer group, while Fitch's large bank universe generates 38% of revenue from non-interest income.
Fitch expects that these banks, like most in the Brazilian financial system, will continue to face greater earnings headwinds in 2013 compared to larger institutions with greater revenue diversification, considering the current environment of low interest rates and limited potential to improve fee income in the near term. In 2012, the average Operating ROAA for these five banks was 2.43% (2.34% in 2011), which still compares favorably with the average of the market and other similarly rated banks around the world. Profitability of four out of the five banks included on this peer review has proven to be resilient to market volatilities. Bicbanco is the only bank in this group that has underperformed due to asset quality deterioration.
After facing increased scrutiny following the revelation of fraud cases in banks of similar size, the banks included in this peer group developed and implemented solid liquidity controls and asset and liability management practices, which led to a clear improvement in their liquidity profiles; diversifying their funding sources and putting emphasis in midterm tenors, with controlled refinancing risk. They have been putting more effort to diversify funding and to reduce the portion of deposits with daily withdrawal clauses, which have also helped to prolong average funding maturity and build a good cushion of liquid assets, mainly comprising government securities.
The reviewed banks, including those with more leveraged balance sheets, have comfortable capital ratios (Fitch core capital ratio average for the group was 13.30% and 14.27% in 2012 and 2011, respectively). Fitch does not expect capitalization to be a constraint for growth or earnings generation for any of these banks. Bicbanco has the most unfavorable capitalization trend (Fitch core capital ratio 9.64%% and 10.97% in 2012 and 2011, respectively), which is explained by its meager profits in the recent years. Daycoval stands out as the best capitalized bank in the group (Fitch core capital ratio 17.20% and 16.16% in 2012 and 2011, respectively). The Brazilian Central Bank has recently reviewed the capitalization guidelines under a Basel III approach, which in the medium term will help to improve the capital base of Brazilian banks, specially through the replacement of old Tier II securities into new issuances with larger equity content. This will positively affect both the Fitch core capital and regulatory capital ratios of all banks reviewed today, except Alfa, which does not have any Tier II securities eligible as capital.
The recent upgrades of ABC Brasil, Daycoval and the upgrade of Pine reflect these banks's overall good asset quality, improved liquidity and a consistent overall improvement in ALM, despite the volatility of the operating environment. The better risk profile of these banks has been evidenced by an overall lower average funding cost combined with longer average tenor and a slightly more diversified funding composition.
KEY RATING DRIVERS
ABC Brasil:
Fitch upgraded ABC Brasil's IDRs to 'BBB-' from 'BB+' and the long-term national rating to 'AA(bra)' from 'AA-(bra)' on March 15, 2013. The upgrades were 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 facing a fierce and volatile competitive environment. Over the last years, improvements included a further diversification of its funding profile leading to a stronger asset and liabilities management as it continues to expand its corporate and middle market operations. ABC Brasil's credit portfolios are conservatively matched and continue to show strong liquidity. Its continued high quality asset and liquidity combined with its satisfactory profitability and capital adequacy evidences the bank's overall solid financial strength.
Alfa:
Fitch has affirmed Alfa's long-term national rating at 'AA(bra)'. Alfa's ratings reflect its highly conservative lending strategy and risk management, excellent asset quality, very good liquidity, relatively low leverage, comfortable capital ratios and its consistent performance track record. On the other hand, they also reflect the concentrated funding base. The growth of its retail lending business, particularly since 2010, has provided additional business diversification and further enhanced the bank's sound financial profile. Its asset quality and performance are underpinned by a focused strategy on the retail lending side that targets high income individuals and by the long-term relationship of the bank with its large and upper-middle corporate clients. The bank has consistently maintained a very comfortable liquidity position and has prolonged the average funding maturity in recent years at an attractive cost. This partially offsets the risks stemming from its relatively more concentrated funding base, where top 20 investors represent 58% of total funding (excluding repos and funding for on-lending) at year-end 2012.
Bicbanco:
Fitch has affirmed Bicbanco's long-term national rating at 'A+(bra)' and revised the Outlook for Bicbanco to Negative from Stable. The Outlook revision reflects Fitch's assessment that the asset quality problems experienced during 2011 and 2012 are pressuring its profits and also its leverage, which have forced the bank to restructure its credit policies and practices and its commercial strategy, and to make adjustments to its structure as to overcome the problems generated by a too aggressive loan expansion during 2010. Given the aforementioned change in strategy, Bicbanco's asset quality indicators may come closer to the peer average and with that regain part of its lost profitability, a primary source of capital recovery.
Daycoval:
Fitch upgraded Daycoval's IDRs to 'BBB-' from 'BB+' and the long-term national rating to 'AA(bra)' from 'AA-(bra)' on March 26, 2013. The upgrades reflected the bank's consistent track record of performance, maintained in different cycles of local economy, higher business diversification and comfortable liquidity and capitalization positions. The bank has recorded consistent profitability, even during stress scenarios, sustained by an adequate asset pricing, strong cost control and low funding cost. It is also worth its prudent liquidity management and adequate assets and liabilities management that help to mitigate the burden of a less diversified funding base compared to larger peers.
Pine:
Fitch has upgraded Pine's Issuer Default Rating (IDR) to 'BB+' from 'BB' and the long-term national rating to 'AA-(bra)' from 'A+(bra)'. The Outlook is Stable. This rating action reflects the ability of the bank to preserve and enhance its credit profile 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, liquidity and capitalization. Concentrations on the asset and funding sides have been maintained at acceptable levels and ALM continues to be good. Pine has managed carefully its growth in the low corporate segment with a strategy of revenue diversification and cross-selling aiming to reduce the dependence of revenues from 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, further upgrades of ABC's ratings may be limited under its current business model. Although unlikely in Fitch's view, a significant deterioration of ABC'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 on the bank's ratings. A decline in Fitch core capital to risk-weighted assets ratio below 9% along with a reduction in 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 could affect ratings positively, although this scenario may be of low probability 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. A drop in Fitch core capital to risk-weighted assets ratio below 12% along with deterioration in its operating income to average asset ratio below 1.5% could result in a negative rating action.
Bicbanco
Fitch believes that the adjustments made will result in an improvement in the asset quality during 2013, but it is yet to be seen how Bicbanco's results will be under the restructured commercial strategy and more conservative credit risk management. Asset quality and profitability trends need to be monitored. If the unfavorable trend persists, and no improvement on asset quality and profitability bring both up and closer to historic averages, the Negative Outlook may turn into a downgrade. Similarly, a sustained FCC below 9% could also trigger a downgrade.
A revision of the Outlook to Stable will depend on the bank's ability to overcome the challenges of presenting better asset quality ratios and reducing credit costs as well as successfully accessing new clients with a lower risk credit profile, which could lead to more robust operating results. Credit costs would need to come down and stabilize in a level around 35% of pre-impairment operating profits, while its Fitch Core Capital Ratio would need to rise to around 11%. These improvements would need to be complemented with the maintenance of its adequate loan loss coverage similar to the average of previous years and asset quality levels similar to those of its peers. Should this trend materialize Bicbanco's ROAA could increase to more than 1.5% in a sustained manner.
Daycoval
Given its current business model, with asset and liability concentrations inherent to its size, including its wholesale funding nature, further upgrades to Daycoval ratings may be limited. Such positive changes will be contingent on significant reduction of the concentration in its funding and a successful diversification of its lending activities.
The ratings could be negatively impacted by a continued asset quality deterioration which result in pressures on the bank's results (ROA below 2%) and on capital (Fitch core capital lower than 11%), which may be triggered by larger than expected asset quality deterioration and/or aggressive asset growth or cash dividend policy.
Pine
Further rating upgrades may not be expected 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 that may undermine its earnings and capital base.
A deterioration in 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 ratings review.
The 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 affirmed at 'A+(bra)'; Outlook revised to Negative from Stable;
--National Short-term Rating affirmed at 'F1(bra)'.
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 'No Floor';
--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-'.
Pine:
--Long-term foreign and local currency IDRs upgraded to 'BB+' from 'BB'; Outlook Stable;
--Short-term foreign and local currency IDRs affirmed at 'B';
--Viability rating upgraded to 'bb+' from 'bb';
--Long-term national rating upgraded to 'AA-(bra)' from 'A+(bra)'; Outlook Stable;
--Short-term national rating upgraded to 'F1+(bra)' from 'F1(bra)';
--Support rating affirmed at '5';
--Support rating floor affirmed at 'No Floor';
--Subordinated USD notes due 2017 upgraded to 'BB-' from' B+';
--Senior unsecured BRL letras financeiras due 2014 and 2015 upgraded to 'AA-(bra)' from 'A+(bra)';
--Huaso bonds program expiring in 2022 upgraded to 'A(cl)' from 'A-(cl)';
--Huaso bonds due 2017 upgraded to 'A(cl)' from 'A-(cl)'.
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).
Applicable Criteria and Related Research
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Assessing and Rating Bank Subordinated and Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790863
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