NEW YORK & SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on Banco BMG S.A. (BMG):
--Long-term foreign and local currency Issuer Default Ratings (IDRs) affirmed at 'B'; Outlook Stable;
--Short-term foreign and local currency IDRs affirmed at 'B';
--Viability rating (VR) affirmed at 'b-';
--Support rating affirmed at '4';
--Support rating floor affirmed at 'B';
--Long-term national rating affirmed at 'BBB(bra)'; Outlook Stable;
--Short-term national rating affirmed at 'F3(bra)';
--Subordinated Debt rating affirmed at 'CCC/RR6'.
KEY RATING DRIVERS:
CAPITAL ADEQUACY, FUNDING AND PROFITABILITY
The affirmation of BMG's ratings are based on the bank's improved funding position following last year's funding agreement with Itau Unibanco S.A. (Itau; IDR 'BBB+') and the recent activation of its 30% owned joint venture with Itau.
The VR reflects the still heavy pressure on its capital base after the 2011 acquisition of Banco Schahin S.A. (Schahin), and the challenges to its profitability that limit BMG's ability to replenish its deteriorated capital ratios; the IDR above the VR reflects the support BMG has received from the FGC. The ratings also recognize BMG's strong position as a market leader in its main product niche - payroll deduction lending, known locally as 'Consignado' - its improved liquidity position and its satisfactory asset quality.
In July 2012, BMG announced a joint venture agreement with Itau that resulted in the creation of Banco Itau BMG Consignado S.A. in which Itau will have a 70% stake and BMG a 30% stake. The joint venture's revenues and expenses will be divided according to the shareholding. This will result in lower operating expenses for BMG which will continue to operate separately but at a reduced level. In addition, Itau will be providing to BMG funding of up to BRL300 million per month for a period of at least five years. The joint venture has begun operating earlier this year, and management expects that it will begin significantly contributing to BMG's earnings in 2014.
In late November 2012, BMG announced that Mr. Alcides Tapias would assume the position of president of BMG's board of directors (replacing Mr. Flavio Guimaraes) and that Mr. Antonio Hermann would become the executive president of the bank (replacing Mr. Ricardo Guimaraes). These moves and additional recent senior management hires further professionalize BMG's senior management and bring multiple synergies given their extensive past experience in the largest banks in Brazil.
Due primarily to the secured nature of BMG's main lines of business, asset quality remains very high, with credits classified in the weaker categories between D and H, representing only 4.2% of the total credit portfolio (which includes loans sold with recourse) as of Sept. 30, 2012. BMG continues to maintain satisfactory levels of concentration. A significant portion of the bank's funding is secured, largely by Consignado loans; while the funding it receives under its agreement with Itau will gradually lower the secured portion of its funding, secured funding will continue to dominate its funding over at least the near term. The bank continues to have concentrations in funding due to its nature as a wholesale bank, however Fitch is beginning to see improvements toward further diversification and the bank continues to show its ability to maintain positive gaps in its liquidity levels.
BMG's profitability was greatly affected by the accounting change that took effect in January 2012, eliminating the use of accounting rules that allowed for the anticipation of revenues arising from portfolio sales. BMG's profitability also was strongly affected by higher credit costs, expenses of goodwill amortization related to the Schahin acquisition, and other operating expenses. The bank has seen improvements in origination during the last few months and has reduced certain funding costs. Management expects to release its fourth quarter results in the near future and based on those, and the improved origination levels expects to see further improvements during 2013 as it returns to stronger levels of profitability. Fitch Ratings believes that more significantly robust results should occur only in 2014.
As of Sept. 30, 2012, the Fitch core capital ratio (FCC) was only 3.2% despite the regulatory capital ratio being 12.8% and Tier I regulatory capital being 8.9% (both ratios deteriorated from those at FYE 2011; Fitch expects the rebuilding of FCC to be gradual, given the current heavy weight of goodwill and modest near term outlook for profitability . Following Fitch's methodology, BMG's capital is adjusted downward primarily to offset the significant goodwill resulting in a Fitch Core Capital Ratio that allow the agency to compare the quality of a financial institution's capital to those of its local and international peers.
RATING SENSITIVITIES:
An upgrade of the bank's IDR is limited in the short term. To consider an upgrade of the VR, Fitch would expect to see a relevant improvement in Fitch's FFC ratio to closer to 6%, while maintaining good asset quality and the improving trends in funding. Although unlikely in Fitch's view, any further deterioration of BMG's Fitch Core Capital ratio or negative change in the funding agreement with its joint venture partner that impairs its funding mix could lead towards a reduction on the bank's ratings.
Headquartered in Belo Horizonte, Banco BMG S.A. is a midsized wholesale bank, which is a market leader paycheck deductible loans. The bank is privately owned by Mr. Flavio Pentagna Guimaraes and his family.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012).
--'National Ratings Criteria' (Jan. 19, 2011).
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
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