Fitch Upgrades Banco BMG's IDR to 'BB-'
Fitch upgrade of BMG's IDRs is based on the VR upgrade, which reflects Fitch's view of the positive effects derived from the multiple actions that BMG has implemented over the past 18 months. BMG will continue this implementation while completing the transfer of the bulk of its traditional payroll lending (consignado) portfolio to Banco Itau BMG Consignado. This strategy has resulted in a relevant improvement in BMG's Fitch Core Capital (FCC) position, and resulted in reductions of its cost structure while increasing its liquidity. It also will allow the bank to focus further on its other remaining business segments. Fitch expects the bank to conservatively increase its existing credit portfolio of other products while being fully aware of the challenges of both a highly competitive environment within those segments and the current weak operating environment.
KEY RATING DRIVERS
BMG's IDRs, VR, and National Ratings have been upgraded because of the bank's significantly improved capital position (Fitch Core Capital ratio rose significantly from 5.1% in December 2013 to 15.7% as of December 2014, and it enhanced its funding position. These improvements were mainly the result of its initial decision in 2012 to enter into a joint venture with Itau Unibanco S.A. (IU) to jointly grow the payroll deductible loan (consignado) business, and the subsequent decision in 2014 to enhance its partnership by increasing its portion to 40% of the JV's total shares.
The transfer of most of BMG's consignado assets to Banco Itau BMG Consignado (JV) took place in 2013, 2014 and early 2015 and now only a small portion remains to be transferred mostly during the rest of 2015. As BMG was also able to transfer other operating expenses and a portion of the staff to the JV, 2014 profitability was impacted as were the traditional asset quality metrics of the consignado portfolio. However, these metrics are expected to improve in the medium term but will be challenged by the current operating environment in Brazil.
While benefiting from its 40% equity in earnings in the JV, BMG will be able to increase its focus on its other business segments where it already has expertise but was not previously a main driver of the bank. Its recently enhanced management team is keenly aware of the challenges of those businesses in the weak operating environment and plans on growing its payroll-backed credit card product at a greater speed than that of its mid-sized company and low corporate lending business or its used vehicle finance segment.
The rating also considers BMG's challenge to grow its profitability while maintaining a satisfactory asset quality ratios and comfortable FCC ratios in the challenging macroeconomic scenario. The bank has reduced a significant amount of its higher cost liabilities and is expected to continue to doing so during 2015 as the remaining consignado portfolio is migrated to the JV. The bank has expanded its funding base by the number of funding providers and reducing the average ticket of those transactions thus preserving an adequate tenor on those liabilities. Asset sales continue to decrease its share on total funding, while unsecured funding has become the largest source of funds for the bank, different to their mostly secured profile few years ago. Other important sources of funding include the use of a longer term form of time deposit known in Brazil as Letras Financeiras.
The bank continues to amortize the goodwill expense which resulted from past purchases of other banks, which is still a relative burden on the recovery of their profitability. This amount has been reduced to slightly less than BRL1 billion. BMG continues to carefully monitor its cost controls; a recent example was the successful renegotiation of the lease of its headquarters where it was able to concentrate its staff at its headquarters on one floor instead of two. However, the bank has also seen certain costs rise such as those related to the portion of the staff that could not be transferred to the JV. The bank has set aside significant provisions to cover those costs.
Fitch has decided to downgrade BMG's support rating to 5 from 4 and revise the support floor to 'No Floor' as the previous support rating reflected Fitch's belief that the Brazilian government would provide support if needed given the relevance of BMG in the payroll-deductible loan market in Brazil. Now that the majority of those assets are no longer in BMG, Fitch does not expect the government to provide any unusual assistance if it were needed.
RATING SENSITIVITIES
Positive rating actions could result if BMG is able to improve its profitability while maintaining its asset quality and FCC ratios above those of its peers. Operating profit to average total asset ratio above 2% would trigger a rating review, while ample capital, good funding and conservative liquidity are preserved. On the other hand, a significant deterioration in asset quality, an operating profit ratio below 0.5% or a decrease in FCC below 13% could trigger negative actions on the ratings.
Fitch has taken the following rating actions:
BMG
--Long-term Foreign Currency IDR upgraded to 'BB-' from 'B', Outlook revised to Stable from Positive;
--Short-term Foreign Currency IDR affirmed at 'B';
--Long-term Local Currency IDR upgraded to 'BB-' from 'B', Outlook revised to Stable from Positive;
--Short-term Local Currency IDR affirmed at 'B';
--Viability Rating upgraded to 'bb-' from 'b';
--Support rating revised to '5' from '4';
--Support Rating Floor revised to 'No Floor' from 'B';
--National long-term rating upgraded to 'A(bra)' from 'BBB+(bra)', Outlook revised to Stable from Positive;
--National short-term rating affirmed at 'F2(bra)';
--Long-Term foreign currency rating on subordinated notes due 2019 upgraded to 'B-' from 'CCC/RR6';
--Long-term Foreign Currency rating on subordinated notes due 2020 upgraded to 'B-' from 'CCC/RR6'.
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