Fitch Downgrades Brazilian Financial Institutions Following Sovereign Downgrade
- Banco do Brasil S.A. (BdB)
- Banco Votorantim S.A. (BV)
- Banco Bradesco S.A. (Bradesco)
- Itau Unibanco Holding (IUH)
- Itau Unibanco S.A. (Itau Unibanco)
- Banco Itau BBA S.A. (IBBA)
- Banco Santander (Brasil) S.A. (Santander Brasil)
- Banco Safra S.A. (Safra)
- Banco BTG Pactual S.A. (BTG)
- BTG Pactual Holding S.A. (BTGH)
- BTG Investments LP (BTGI)
- Banco Pan S.A. (Pan)
- Brazilian Finance & Real Estate S.A. (BFRE)
- Brazilian Mortgages Cia Hipotecaria (BM)
- Brazilian Securities Cia de Securitizacao (BS)
- Banco ABC (Brasil) S.A. (ABC Brasil)
- Banco Daycoval S.A. (Daycoval)
The rating actions follow Fitch's recent downgrade of Brazil's sovereign rating to 'BBB-' from 'BBB' with a Negative Outlook and the revision of the country ceiling to 'BBB' from 'BBB+' (see 'Fitch Downgrades Brazil to 'BBB-'; Outlook Negative', dated Oct. 15 2015, at 'www.fitchratings.com'). These actions also reflect factors considered in Fitch's negative outlook for the Brazilian banking industry (see '2015 Outlook: Brazilian Banks' dated Dec. 15, 2014).
In Fitch's view, despite the important buffers in terms of earnings generation capacity, healthy loan loss reserves coverage, good capital, comfortable liquidity and improved funding profile, Brazilian banks are facing strong headwinds from the deteriorated operating environment.
These challenges are reflected in rising unemployment levels, higher indebtedness of consumers and corporates, growing inflation, a depreciated currency and a scenario of economic recession that will be carried throughout 2016. Such pressures could result in lower profitability levels for most players that may take longer to reverse given the long tenure of this crisis when compared with previous economic recessions in Brazil.
The Long-term IDRs of eight financial institutions (BdB, BV, Bradesco, IUH, Itau Unibanco, IBBA, Santander Brasil and Safra) were downgraded, and their Negative Outlook maintained, while other nine entities (BTG, BTGH, BTGI, Pan, BFRE, BM, BS, ABC Brasil and Daycoval) had their LT IDR Outlooks revised to Negative from Stable. The Viability Ratings of six of these financial institutions (Bradesco, IUH, Itau Unibanco, IBBA, Santander Brasil and Safra) were also downgraded, while five had their Viability Ratings (VRs) affirmed (BdB, BV, Daycoval, ABC Brasil and Pan).
A link to a summary report that details all of the rating actions taken in this review is available above.
KEY RATING DRIVERS - IDRS, SUPPORT RATINGS (SRs), SUPPORT RATING FLOORS (SRFs), AND DEBT RATINGS
Issuers reviewed in the report can be categorized in three groups:
1) BdB, whose IDRs are driven by sovereign support and where the federal government is the majority shareholder and the source of expected support;
2) Issuers whose IDRs are driven by their VRs and that are rated above or equal to the sovereign rating (Bradesco, IUH, Itau Unibanco, IBBA, Safra, BTG, ABC Brasil and Daycoval);
3) Issuers whose IDRs are driven by institutional support by parents which are rated above or equal to the sovereign rating (BV, Santander Brasil, BTGI, BTGH, Pan, BFRE, BM and BS).
In the first group, Fitch downgraded BdB's LT FC, LC IDRs, and senior debt ratings to 'BBB-' from 'BBB', in line with the downgrade of Brazil's IDRs. BdB's ratings are aligned with Brazil's sovereign ratings, due to its majority federal government ownership, its key policy role in the implementation of government economic guidelines and in rural lending, and its systemic importance. The Negative Outlook on BdB's LT IDRs mirrors that on the LT IDRs of Brazil. BdB's ratings capture a high probability of support from the federal government in case of need, as reflected in the affirmation of its SR at '2'. The downgrade of the bank's SRF to 'BBB-' from 'BBB' reflects the reduced capacity of the government to support the bank.
The second group includes issuers with very strong credit profiles but that are closely linked with the operating environment. In the case of Bradesco, IUH, Itau Unibanco and IBBA, their ratings are driven by their VRs, which are one notch above the sovereign reflecting their very strong credit profile. As such, their VRs were downgraded to 'bbb' from 'bbb+' following the sovereign rating downgrade. Following this rating action, their LT FC, LC IDRs, and senior debt ratings were also downgraded to 'BBB' from 'BBB+'. The LT IDRs of these banks retain their Negative Outlook. Fitch downgraded Bradesco, IUH, Itau Unibanco and IBBA's SR from '2' to '3' and its SRFs were revised to 'BB+' from 'BBB-', given the reduced capacity of the sovereign to provide support should be required. Both Fitch and the local regulator see these banks (as well as Santander Brasil and BdB) as Domestic Systemically Important Banks (D-SIBs).
The LT FC/LC IDRs, as well as the ST and National Scale ratings of IBBA are being withdrawn for commercial reasons following IBBA's reorganization, completed earlier this year. At that time, the issuer decided not to continue participating in the rating process since IBBA would no longer carry debt and migrated from a wholesale bank role to an investment bank role.
Banks with solid credit profiles normally have their ratings constrained by the operating environment, according to Fitch's rating criteria. As such, Fitch downgraded Safra's LT IDRs and senior debt ratings to 'BBB-' from 'BBB' and maintained the Negative Outlooks on its LT IDRs. Fitch affirmed Safra's SR at '4' and its SRF at 'B+', given Fitch's view of the bank's relevant role in the system.
BTG, ABC Brasil and Daycoval's VRs, LT IDRs and senior debt ratings were affirmed at 'BBB-' but the Outlooks of these three banks' LT IDRs were revised to Negative from Stable. Fitch affirmed BTG and Daycoval's SRs at '5' and their SRFs at 'No Floor', given their limited systemic importance. ABC Brasil had its SR affirmed at '3' in view of the expected support from its parent, Arab Banking Corporation ('BBB-', Outlook Stable)
In the third group, Santander Brasil's LT LC IDR was affirmed at 'BBB+' and its Outlook was revised to Negative from Stable, reflecting the maximum two-notch uplift from the sovereign IDR for issuers with highly rated parents. Santander Brasil's LT FC IDR and senior debt ratings are constrained by Brazil's Country Ceiling of 'BBB', and therefore were downgraded to 'BBB' from 'BBB+', and the LT FC IDR retained its Negative Outlook.
Meanwhile, BV's LT FC and LC IDRs, which are driven by expected support from its minority shareholder BdB, were downgraded to 'BB+' from 'BBB-', following the downgrade of BdB's IDRs. Fitch views BV as a strategically important subsidiary for BdB, and therefore maintains a one-notch difference between its IDRs to those of BdB. BV's VR of 'bb-' was affirmed. The downgrade of BV's SR to '3' from '2' reflects BdB's reduced capacity to support BV should the need arise.
In the case of BTG's Subsidiaries (BTGI, Pan, BFRE, BM and BS) and Holding Company (BTGH), their IDRs were affirmed and their Outlooks revised to Negative from Stable, in line with the revision of BTG's IDRs' Outlook to Negative from Stable. Pan's VR of 'b' was affirmed.
KEY RATING DRIVERS - VIABILITY RATINGS (VRs)
The VRs of ABC Brasil, Daycoval and BTG Pactual were affirmed at 'bbb-' following the sovereign rating action. Since banks are usually constrained by their operating environment, these banks' VRs should from now on move in tandem with the sovereign rating of Brazil.
For this reason, Santander Brasil and Safra's VR were downgraded to 'bbb-' from 'bbb', reflecting Fitch's approach of usually limiting bank ratings to the sovereign rating level. This means that in spite of their overall good credit and financial profile, both banks' profitability and overall financial condition could be affected by a tougher operating environment.
Per Fitch's methodology, in light of the bank's wholesale funding structure, Safra's VR cannot be higher than the sovereign in the current scenario, despite the bank's resilient performance through economic cycles. Also, a difficult operating environment could limit its business origination given Safra's traditionally conservative risk appetite, thus impacting the bank's profitability.
In the case of Santander, its VR would also not be higher than the sovereign in spite of its large retail funding base and overall good franchise. The bank's ability to continue its trend of improved asset quality and improve its profitability may be limited given the very difficult operating environment in Brazil.
Over the last two years, Santander Brasil has been able to improve its asset quality ratios while maintaining an already very strong capitalization ratio, Fitch Core Capital ratio (FCC) of 14.7%. The annualized ROAA ratio was 1.55%
Bradesco and IUH's VRs remain one-notch above the sovereign rating due to their strong credit profile. Both banks count on diversified franchises, strong liquidity and capitalization, resilient profitability, satisfactory asset quality and are D-SIBs with impressive market share in several segments in the Brazilian financial services industry.
In the first half of 2015 (1H15), loan growth continued to be restrained for both banks, resulting in incremental improvements in their capital positions, which are broadly strong (FCC ratios of 8.9% and 10.7%, respectively). These banks have increased loan loss provisions conservatively since 2H14 and asset quality for both remains satisfactory. Despite the difficult operating environment, Bradesco and IUH reported strong ROAA ratios of 1.7% and 1.9%, respectively, in 1H15.
BdB's VR reflects its leading franchise in multiple business segments, including lending, insurance, asset management and debit/credit cards, and solid funding and liquidity. It also reflects the bank's profitability, which is slightly weaker than large private banks, and relatively lower internal capital generation and capitalization ratios. Fitch expects some deterioration in BdB's asset quality indicators, in line with our base-case scenario for the banking industry, and the deceleration of loan growth, which was above the private sector average between 2011 and 2014.
The affirmation of BV?s VR at 'bb-' reflects the relatively low, albeit consistent, profitability since 2013, the stable capital base and the challenging operating environment that could affect the quality of its auto and corporate loans in upcoming quarters.
The affirmation of PAN's VR at 'b' reflects the bank's still weak operating performance, even though some improvements in asset quality have been observed. Counterbalancing these aspects, the institution enjoys a stable funding base, with committed funding and liquidity lines from both its controlling shareholders and an improved business model, derived from the experience of the new management appointed by BTG in 2011.
IDRS, SUPPORT RATINGS (SRs), SUPPORT RATING FLOORS (SRFs), DEBT RATINGS, VIABILITY RATINGS (VRs)
The ratings of all banks included in this release are sensitive to any further changes in Brazil's sovereign ratings and their Outlook, and will move in tandem with Brazil's IDRs.
Bradesco's VR could be negatively affected if its loss absorption capacity is diminished as evidenced by a sustained decrease in its FCC below 7% and loan loss reserve ratios which may hinder the bank's loss absorption capacity. Also, sustained periods of ROAA below 1.25% and 90-day non-performing loan (NPL) ratios above 6% may trigger a downgrade of its ratings.
IUH's VR could be negatively affected if its loss absorption capacity is diminished as evidenced by a sustained decrease in Fitch Core Capital (FCC) ratio below 7% and a decrease in loan loss reserve ratios from current levels which may hinder the bank's loss absorption capacity. Also, sustained periods of ROAA below 1.25% and 90-day NPL ratios above 6% may trigger a downgrade. As the ratings of Itau Unibanco are currently equalized to those of its parent, any change to the rating of IUH is likely to affect the rating of Itau Unibanco. The ratings of the subordinated debt are subject to any change in the VR rating of IUH.
Changes in the willingness and capacity of Banco Santander S.A. (SAN) to provide support to Santander Brasil may result in changes in the IDRs of Santander Brasil. The Negative Outlook on the Foreign Currency IDR reflects Fitch's recent revision of the Outlook for Brazil's sovereign ratings to Negative from Stable, since Santander Brasil's Foreign Currency IDR is at the country ceiling (see 'Fitch Revises Brazil's Rating Outlook to Negative; Affirms IDRs at 'BBB'', dated April 9, 2015 at 'www.fitchratings.com'). The Outlook on its local currency IDR, in turn, remains Stable because of the expected support from its parent and the fact that such rating is not constrained by the local currency sovereign rating at this point.
If Santander Brasil's asset quality becomes relatively inferior to its peers and ROAA is consistently below 0.5%, negatively affecting its comfortable capital ratios, the result could be a negative action on the VR.
Safra's VR could be negatively affected if its FCC ratio falls below 9% or its operating return on assets ratio falls below 1% for a sustained period of time.
BTG Pactual's VR could be downgraded following a sudden deterioration of the operating environment, an increase of net leverage above 12x, a sustained deterioration of profitability below the average of large Brazilian banks, or a troublesome performance of one or some of its subsidiaries.
Pan's VR could be upgraded after sustained improvement of its operational results (operating ROAA above 0.5%), that helps to maintain its FCC ratio at levels above 7% and its funding profile remains aligned with the tenor and characteristics of its assets. A negative rating action may be triggered by a longer than expected breakeven point in operations and a backdrop of capital ratios falling to low levels.
A significant deterioration of ABC Brasil's asset quality that results in credit costs that severely limit its profitability and ability to grow capital, combined with a reduction in liquidity or capitalization position could lead to a downgrade of the bank's VR. A decline in FCC to risk-weighted assets below 9% along with a reduction in operating income to an average asset ratio below 1.5% could result in a ratings review.
Daycoval's VR could be negatively affected by continued asset quality deterioration which leads to pressure on the bank's results (operating income-to-average asset ratio below 2%) and on capital (FCC ratio lower than 11%), which could be triggered by larger than expected asset quality deterioration and/or an aggressive asset growth or cash dividend policy.
BdB's VRs are sensitive to a change in Fitch's assumptions regarding its asset quality, profitability and capitalization indicators. It would be negatively affected if asset quality deteriorates and profitability weakens on a sustained basis, leading its FCC ratio to fall below 7%.
Continued improvement in BV's profitability, characterized by an Operating ROAA around 1.0%, leading to an improvement in FCC ratio to above 10%, as well as the maintenance of moderate risk appetite, would lead to an upgrade of BV's VR. Conversely, the VR could be downgraded if deterioration in the credit portfolio reduces profitability and capitalization, as expressed by a negative Operating ROAA and an FCC lower than 7.0%.
Banks whose IDRs are driven by institutional support would be affected in case of changes in their respective parents' propensity to support or downgrades on their IDRs.
Debt ratings will move in tandem with any changes in the IDRs of the issuers.
SR and SRFs will move in a scenario of further changes to Brazil's sovereign rating and/or the propensity to provide support from the sovereign.