Fitch Downgrades Banrisul's Long-Term National Rating to 'A+(bra)'; Affirms IDRs at 'BB-'
A complete list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
The downgrade of Banrisul's national ratings reflects the deterioration in its capitalization and profitability ratios, as a result of its purchase of the exclusive rights to be provide banking services to Estado do Rio Grande do Sul's (ERS) active and retired employee base for a period of 10 years, for BRL1.3 billion, in June 2016. From 2007 until May 2016, Banrisul had an exclusivity agreement with ERS free of charge to the bank. Intangible assets resulting from this transaction has negatively affected Banrisul's capitalization ratios, whereby its Fitch Core Capital (FCC) declined to 13% in June 2016, from 14.8% in December 2015.
Fitch expects Banrisul's profitability ratios to remain under pressure, although the bank has been posting higher net interest margins since 2014. Similar to other public banks, Banrisul's strategies and goals could be influenced by the economic-financial situation and by the political guidelines of its main shareholder, the government of ERS.
Banrisul's Viability Rating (VR) and its IDRs reflect the regional importance of the bank, its stable retail funding base, and adequate profitability and liquidity ratios. A potential deterioration of the bank's asset quality could result in higher provisioning expenses and undermine its profitability and internal capital generation. The Negative Outlook for Banrisul's ratings reflects Fitch's expectation of deterioration in the bank's asset quality and capitalization, as a result of the ongoing challenges to the financial profile of ERS. The bank's ratings are influenced by Fitch's internal evaluation on ERS's credit standing.
The Support Rating '4' and the Support Rating Floor 'B' reflect the limited possibility of support from the federal government in a stress scenario, due to the relative systemic importance of Banrisul. The bank ranked as the 11th largest financial institution in the country, in terms of assets and the 8th in terms of deposits, in March 2016. However, there are no explicit guarantees of such support from the federal government.
During 2015 and in the first half of 2016, NPLs showed deterioration, mainly in corporate credit and amounted to 4.8% of the portfolio, in June 2016 (4.3% in 2015 and 3.4% in 2014). Although in Fitch's view, the quality of Banrisul's loan portfolio is still acceptable, the agency expects additional deterioration along 2016.
Banrisul operates as a commercial bank, targeting both companies and to individuals. It has a solid franchise in ERS, with 17% of market share in credits and 47% in deposits. Credits to ERS employees account for approximately 15% of the bank's credit portfolio.
Financial Bills: The issuances of national unsecured debts rank pari passu with the bank's other senior unsecured debts and their ratings are in line with the bank's Long-Term National Rating.
Subordinated Tier 2 USD Notes: Banrisul's subordinated notes due in January 2022 are rated 'B' by Fitch, two notches below the bank's VR of 'bb-'. The notching includes one notch for loss severity and the notes' subordinate position, and another notch for the moderate risk of performance failure.
These notes rank pari passu with the other subordinated debts of the bank and rely on a cumulative coupon deferral mechanism which can be exercised in case the minimum regulatory capital requirements are not met. These notes are being phased out, since they are not Basel III compliant.
Negative Rating Action: Banrisul ratings could be downgraded in case of further weakening of asset quality ratios, with NPL increase above 5%, or even, if FCC declines to less than 12%. Furthermore, the bank's ratings could be impacted by changes to the agency's view of ERS's credit standing, given the strong operation of the bank in that state.
Positive Rating Action: Banrisul's Outlook could be revised to Stable if the bank maintains adequate profitability, even in an adverse economic environment, expressed by the Operating Profit/Average Gross Assets ratio above 2%, together with good asset quality ratios, NPLs around 3% and FCC of 14%.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
--Long-Term Foreign and Local Currency IDRs affirmed at 'BB-'; Outlook Negative;
--Short-Term Foreign and Local Currency IDRs affirmed at 'B';
--Viability Rating affirmed at 'bb-';
--Support Rating affirmed at '4';
--Support Rating Floor affirmed at 'B';
--Long-Term National Rating downgraded to 'A+(bra)' from 'AA-(bra)'; Outlook Negative;
--Short-Term National Rating downgraded to 'F1(bra)' from 'F1+ (bra)';
--First issuance of senior unsecured credit facility financial bills downgraded to 'A+(bra)' from 'AA-(bra)';
--Tier II Capital subordinate notes, to be due in February 2022, affirmed at 'B'.