Fitch Affirms Omni S. A.'s IDRs at 'B'; Outlook Remains Stable
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS AND NATIONAL RATINGS
Fitch's affirmation of Omni's National Long-Term rating is driven by the company's stable funding structure, its satisfactory level of capitalization, adequate liquidity and its pricing and collection expertise which resulted in a consistent performance within the challenging operating environment of the past three and a half years. The ratings also consider Omni's expertise in its main business niche - financing autos (cars, trucks and utility vehicles, mostly pre-owned, over 10 years old, as well as new and used motorcycles) for the lower purchasing-power classes ('C' and 'D'), a segment that is less targeted by the competition, due in part, to Omni's strategic choice of business locations.
The ratings also consider Omni's business model that is supported by solid management information systems and risk controls. Such controls are essential in the used-vehicle financing niche where significant levels of impairments are expected and must be adequately managed to ensure a satisfactory level of profitability.
The ratings also consider Omni's small size compared with its peers, its higher leverage, business segment which is subject to greater susceptibility to fluctuations in the economy that could greatly impact its borrowers. While the company's business model and niche enables high revenue, the resulting concentrations, and higher level of impairments can result in a muted net income.
During the first half of 2016 (1H16), Omni's loan portfolio was allowed to shrink by nearly 11% and assets fell by 5.7% due to the company's reduced risk appetite, the maturing of a portion of the loan portfolio and chargeoffs. Omni reported a small gain of BRL6.3 million for the first half of 2016 as the company benefitted from a lower need for loan loss provisions. The purchases of third party vehicle finance portfolios mostly from Banco Pecunia and Caixa Economica during 2015 and 1H16 generated an additional revenue stream on top of that generated by the existing portfolio. Going forward, the company will use its collection efficiency skills on purchased portfolios as a source of revenue.
Given the nature of consumer credit to the lower-income classes, Omni's delinquency ratios are usually higher than those reported in traditional financing activities. The quality of the gross loan portfolio appeared to significantly deteriorate by year-end 2015 as the impaired loan portfolio to total loan portfolio ratio deteriorated to 49.6% from 21.1% a year earlier. However, the reserves also rose to 83.7% from 54.1% during the same period. The reason for the significant increases was the purchase of impaired loan portfolios from third parties that came with significant discounts but required provisioning as these impaired assets are required to be carried on the books until they are repaid or charged off. By June of 2016, some of these loans did come off but there were also additional purchases during the 1H16. As a result, the impaired loans ratio remained relatively unchanged at 50.2% as was the case with the coverage ratio at 84.2%. When excluding the fully provisioned impaired loans of the purchased loan portfolio, the level of impairments falls to a level that is higher than historical averages (from a 21.2% average during 2012 through 2014 to nearly 28% as of June 2016) but still in line with the assigned rating.
Management's expertise in pricing is crucial for the successful financing of very used vehicles as the residual value of the underlying asset is very limited. Omni's asset quality metrics are frequently monitored. The high costs of the credit impairments are usually offset by the charging of higher interest rates. Credit risks are also mitigated by the small size of the individual transactions and spread over a large number of borrowers.
During the past few semesters, Omni's continued to diversify its sources of funding. The highlights were the completion of three securitizations of assets for receivables-backed investment funds (FIDCs), and a relevant increase in the placement of its certificate of deposits (CDs) known as "Letras de Cambio" which lowered the company's dependence on more expensive sources of funding. Omni also has close to BRL166 million of funding from its principal shareholder in the form of time deposits and notes. Omni's comfortable liquidity levels have allowed the finance company to replace higher cost funding with cheaper options.
The increased level of funding combined with the conservative organic growth strategy during the 1H16 that was in part driven by their expectation that the weak operating environment will continue during the coming semesters. This conservative strategy is expected to enable Omni to continue working with a comfortable liquidity level during the remainder of 2016 and early 2017. Even though Omni faces a low level of competition, management continues to restrict organic growth while taking advantage of opportunities involving the purchase of third part portfolios at sharp discounts which provide a greater share of earnings. This strategy will enable the company to remain selective with its underwriting, as the majority shareholder wishes to prioritize asset quality and liquidity over profitability.
Fitch's calculation of core capital-to-total weighted risk assets (FCC) decreased to 10% at 1H16 from 10.4% at December 2015, mostly due to a payment of dividends in the amount of BRL13 million which offset the gains reported in the 1H16. Fitch expects Omni's FCC to grow during the remainder of 2016 as no significant asset purchase is expected during the second half and profitability is expected to improve. The company comfortably meets the Central Bank regulatory minimum total capital requirement solely by means of its Tier I regulatory capital ratio of 13.8% at the end of June 2016.
IDRS AND NATIONAL RATINGS
Omni's ratings could benefit from a stronger growth in its operational income ratios, continued funding diversification, and a sustained improvement in its asset quality ratios. Charge offs were much higher during the 1H16 mainly due to the inclusion of the purchased portfolios. Charge offs at June 2016 were nearly 66%. Specifically, Omni's ratings may be upgraded if the company manages to increase its operational ROAA to around 2% within the economic cycle and improving its FCC capitalization levels to above 12%; and maintaining an adequate asset and liability management and loan loss reserves aligned with its asset quality trends.
On the other hand, negative pressures on the rating may come from: a decrease in operating earnings and operational ROAA remaining below 1% combined with a Fitch core capital ratio below 9%; a relevant increase in the level of encumbered assets; and/or a significant deterioration of its asset quality ratios.
Fitch has taken the following rating actions:
Omni S. A.:
--Long-Term Foreign and Local Currency IDRs affirmed at 'B'; Outlook Stable;
--Short-Term Foreign and Local Currency IDRs affirmed at 'B';
--National Long-term rating affirmed at 'BBB-(bra)'; Outlook Stable;
--National short-term rating affirmed at 'F3(bra)';
--Support rating of '5' withdrawn;
--Support rating floor of 'NF' withdrawn.