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Rating Action:

Moody's affirms Banco ABC Brasil's ratings; outlook stable

15 Feb 2019

New York, February 15, 2019 -- Moody's Investors Service ("Moody's") has today affirmed all ratings and assessments assigned to Banco ABC Brasil S.A. (BAB), including the long-term bank deposit ratings of Ba2 for local currency and Ba3 for foreign currency in global scale, the senior unsecured MTN rating of (P)Ba2, the subordinated debt rating of Ba3, the national scale deposit rating of Aa2.br, as well as the long term counterparty risk rating of Ba1, for local and foreign currencies. Moody's also affirmed BAB's short-term ratings, as well as the baseline credit assessment (BCA) of ba2, and counterparty risk assessments of Ba1(cr) for long-term and NP(cr) for short-term. The ratings have a stable outlook.

A full list of the affected ratings and assessments is provided at the end of this press release.

RATING RATIONALE

The affirmation of BAB's BCA at ba2 reflects Moody's expectation that the bank will continue to maintain superior asset quality, healthy capital ratios and good profitability over the next 12-18 months. BAB's growth strategy in 2019 will focus on lending to the corporate segment and boosting its fee-based businesses, in addition to future efforts to expand into smaller corporate clients as credit demand picks up amidst a recovering economy. The larger contribution of non-interest income to revenues in 2018 derived in part from growing investment banking activities, a trend we expect will continue in 2019, and that helped offset the decline in net interest margins.

BAB's consistent asset quality metrics reflect its disciplined credit risk standards and conservative reserve policy, which ensure a level of problem loan that was lower than 1% of total loans over the past two years, and well below the industry's 2.9% in 2018, a credit positive. A large portion of BAB's credit risk is in the form of off-balance sheet guarantees issued to its large corporate customers that increase concentration risk, despite its contingent nature and good performance in previous years. Notwithstanding the improvement in credit risk conditions since mid-2017 that supported a sharp decline in credit costs in 2018, BAB maintains high level of reserves, accounting for 3% of total loans, fully covering the higher-risk credits classified between E to H according to the local regulation.

The ratings affirmation incorporates Moody's expectation that BAB's loan exposures to the corporate segment, which have grown to account for 20% of total loans in 2018, from 13% in 2013, and the robust 11-15% loan growth targets overall for 2019, will maintain similar origination standards that have resulted in BAB's healthy asset quality.

In 2018, BAB reported lower net income to tangible assets of 1.3%, compared to previous years, affected by the lower-than-anticipated loan growth. While net interest margin declined by 88 basis points in the last twelve months ended in December 2018, despite the increased origination of higher yielding loans, BAB's performance also benefited from investment banking activities, which supported a 17.6% increment to fee income. Competition and lower interest rates will continue to pressure margins over the next quarters, but further expansion of the local capital markets will favor the investment banking pipeline, and BAB is well positioned to take advantage of these opportunities among its client base. As credit risk continues to improve, higher loan origination volumes and lower credit costs will help offset potential lower margins.

Despite the diversified funding mix, the ba2 BCA incorporates BAB's institutional and price-sensitive funding structure, an intrinsic vulnerability of medium sized banks, mitigated by the prudent liquidity management and high cash liquidity position maintained by the bank. BAB has been investing in the development of a digital platform that will allow it to reach a broader depositor base, and in turn, help to enhance its funding granularity. Nevertheless, results from this initiative will take time to materialize.

The affirmation of BAB's Ba2 deposit rating takes into account the bank's adjusted BCA of ba2, and does not incorporate any affiliate support from its majority shareholder, Arab Banking Corporation (unrated). However, we acknowledge the strong shareholder commitment demonstrated by a conservative dividend reinvestment policy in the Brazilian subsidiary. In 2018, Moody's preferred capital measure, tangible common equity to risk weighted assets, stood at 11.33%, while the regulatory CET1 reported by BAB was 13.43%, well above the minimum requirement.

WHAT COULD CHANGE THE RATINGS UP/DOWN

BAB's ratings are at the same level as Brazil' sovereign rating, and therefore, upward ratings movement is unlikely at this point, unless the sovereign rating of Brazil is upgraded and provided the bank's financial strength remains robust.

However, BAB's ratings could be downgraded if the sovereign rating is downgraded, because the banks' BCAs is constrained by the sovereign rating. Downward pressure on the BCA could also arise from a substantial deterioration in the bank's asset quality that hurts capital and reserves, and/or if the bank's profitability weakens materially.

METHODOLOGY

The principal methodology used in this rating was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.

Banco ABC Brasil S.A. is headquartered in São Paulo, Brazil. As of 30 December 2018, BAB reported consolidated assets of BRL32.7 billion and shareholders' equity of BRL3.7 billion.

LIST OF AFFECTED RATINGS AND ASSESSMENTS

The following ratings assigned to Banco ABC Brasil S.A. were affirmed:

Long-term local currency bank deposit rating affirmed at Ba2; stable outlook

Short-term local currency bank deposit ratings affirmed at Not Prime

Long-term foreign currency bank deposit rating affirmed at Ba3; stable outlook

Short-term foreign currency bank deposit ratings affirmed at Not Prime

Long-term foreign currency senior unsecured MTN rating affirmed at (P)Ba2

Short-term foreign currency senior unsecured MTN rating affirmed at (P)Not Prime

Long-term foreign currency subordinated debt rating affirmed at Ba3

Long-term Brazilian national scale bank deposit rating affirmed at Aa2.br

Short-term Brazilian national scale bank deposit rating affirmed at BR-1

Long-term local currency counterparty risk rating affirmed at Ba1

Short-term local currency counterparty risk rating affirmed at Not Prime

Long-term foreign currency counterparty risk rating affirmed at Ba1

Short-term foreign currency counterparty risk rating affirmed at Not Prime

Long-term Brazilian national scale counterparty risk rating affirmed at Aaa.br

Short-term Brazilian national scale counterparty risk rating affirmed at BR-1

Baseline credit assessment affirmed at ba2

Adjusted baseline credit assessment affirmed at ba2

Long-term counterparty risk assessment affirmed at Ba1(cr)

Short-term counterparty risk assessment affirmed at Not Prime(cr)

Outlook maintained at stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ceres Lisboa
Senior Vice President
Financial Institutions Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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