Fitch Takes Actions on Brazilian Banks with Support Driven Ratings following Sovereign Downgrade
--Banco da Amazonia S.A. (BdA)
--Banco do Nordeste do Brasil (BNB)
--Banco Nacional de Desenvolvimento Economico e Social (BNDES)
--Caixa Economica Federal (Caixa)
--Banco Societe Generale Brasil S.A. (BSGBr)
The ratings of these banks are driven either by sovereign support (Bda, BNB, BNDES and Caixa) or by institutional support (BSGBr, whose rating is based on expected support from its parent Societe Generale (SG, Long-term Issuer Default Rating (IDR) A/Outlook Stable)).
The rating actions follow Fitch's recent downgrade of Brazil's sovereign ratings to 'BBB-' with a Negative Rating Outlook and the revision of the country ceiling to 'BBB' (see 'Fitch Downgrades Brazil to 'BBB-'; Outlook Negative', dated Oct. 15 2015 at 'www.fitchratings.com').
Fitch has downgraded to 'BBB-' from 'BBB' the long-term foreign and local currency Issuer Default Ratings (IDRs), Support Rating Floors (SRFs), and senior debt ratings of BdA, BNB, BNDES and Caixa. The downgrades mirror the same action taken on the Brazilian sovereign, which is the banks' sole source of support. The Rating Outlook for all of the banks' long-term IDRs is Negative. Fitch has also downgraded the banks' short-term foreign and local currency IDRs to 'F3' from 'F2'.
In addition, Fitch has downgraded BSGBr's long-term foreign and local currency IDRs to 'BBB' and 'BBB+', respectively, from 'BBB+' and 'A-', and its short-term local currency IDR to 'F2' from 'F1'. Fitch affirmed the bank's short-term foreign currency IDR at 'F2'. The bank's long-term foreign currency IDR is capped by Brazil's country ceiling, while its long-term local currency IDR is two notches above the respective sovereign rating, despite the high probability of support expected from SG. At the same time, Fitch has withdrawn BSGBr's long and short-term foreign and local currency IDRs due to commercial reasons.
Fitch affirmed the Support Ratings (SRs) of all five banks at '2'. At the same time, Fitch has withdrawn BSGBr's SR due to commercial reasons.
Fitch does not assign Viability Ratings to any of the banks included in this press release. A link to a summary report that details all of the rating actions taken in this review is available above.
KEY RATING DRIVERS - IDRS
In the case of the federal government owned banks, BdA, BNB, BNDES and Caixa, the downgrade of their IDRs reflects the reduced capacity of the Federal Government to provide support should the need arise. The IDRs of these banks are equalized with the sovereign ratings, due to majority federal government ownership, their key policy role in the implementation of government economic policies and, in the case of BNDES and Caixa, their systemic importance. The Negative Outlook on their long-term IDRs mirrors that on the long-term sovereign ratings of Brazil.
The strategy of all four state owned banks is directly driven by government policies. BdA and BNB are development banks focused on the northern and northeastern regions of Brazil, respectively, while BNDES is the country's largest development bank with a country-wide mandate. Caixa is a commercial bank and Brazil's largest mortgage lender and saving deposit taker and also has a policy role in extending credit to lower income groups. All four banks depend on public sources for capitalization to sustain growth, as their internal capital generation capacity is generally lower than private sector banks. In the first half of 2015, loan growth in all four banks decelerated, and consequently their capital positions remained broadly adequate, with Fitch Core Capital ratios of 16.73% (BdA), 7.23% (BNB), 11.00% (BNDES) and 14.00% (Caixa), respectively, at June 2015.
The profitability trends of the four banks were mixed in the first half of 2015. At June 2015, BdA was the most profitable bank in this group and was the only bank that posted an improvement. BdA's average return on assets (ROA) rose to 1.74% (1.59% in 2014), backed by an improvement in net interest margin. During the same period, BNB's ROA fell to 0.81% in (2.09% in 2014), mainly due to a slight fall in net interest margin and a rise in loan loss charges. In the case of BNDES, the fall of ROA to 0.74% (1.05% in 2014) was mainly a result of a sharp drop in income from investments, while a significant increase in Caixa's loan loss charges resulted in the deterioration of ROA to 0.65% (0.74% in 2014).
In the case of BSGBr, the downgrade of its long-term and short-term IDRs reflects the constraints imposed by the sovereign ratings. Fitch has withdrawn BSGBr's long and short-term IDRs due to commercial reasons.
KEY RATING DRIVERS - DEBT RATINGS
The downgrade of BNDES and Caixa's senior debt ratings to 'BBB-' and Caixa's subordinate debt rating to 'BB' is a direct consequence of the downgrade of their long-term foreign currency IDRs to 'BBB-', which is the anchor rating for all the rated debt.
KEY RATING DRIVERS - SUPPORT RATINGS (SRs) & SUPPORT RATING FLOORS (SRFs)
The affirmation of all five banks' SRs at '2' reflects Fitch's belief that the probability of support to these banks by the respective shareholders, if needed, remains high. The downgrade of BdA, BNB, BNDES and Caixa's SRFs to 'BBB-' reflects the reduced capacity of support of their parent, the federal government of Brazil. Fitch has withdrawn BSGBr's SR due to commercial reasons.
The IDRs of BdA, BNB, BNDES and Caixa are sensitive to any further changes in Brazil's sovereign ratings. Their Outlook will also move in tandem with Brazil's IDRs. Further, BdA, BNB, BNDES and Caixa's IDRs would be affected if there is any change in the government's willingness to support them, which Fitch believes is unlikely over the rating horizon.
The senior debt ratings of BNDES and Caixa and the subordinate debt rating of Caixa are sensitive to any further changes in their respective IDRs and will move in tandem with the IDRs.
SRs and SRFs
The SRs and SRFs of BdA, BNB, BNDES and Caixa are sensitive to any further changes in Brazil's sovereign ratings.