New York, October 09, 2019 -- Moody's Investors Service ("Moody's") has today
affirmed all of Banco do Brasil S.A.'s (BB) ratings,
following the affirmation of the bank's ba2 baseline credit assessment
(BCA). BB is rated Ba2 and Not Prime for long- and short-term
local currency deposits and Ba3 and Not Prime for long- and short-term
foreign currency deposits. Banco Do Brasil S.A. (Cayman)'s
long-term senior unsecured foreign currency debt rating is Ba2.
All ratings have a stable outlook.
A full list of the affected ratings and assessments is provided at the
end of this press release.
RATINGS RATIONALE
The affirmation of BB's ba2 BCA and all its ratings recognizes the
gradual improvement of the bank's profitability and capital metrics
over the past two years, despite Brazil's slow economic growth
and modest business activity. Additionally, the BCA affirmation
incorporates the bank's continued access to stable and low-cost
core funding, supported mostly by BB's nationwide branch footprint
and status as a government-owned bank.
Notwithstanding the sizable drop in Brazil's basic interest rate
(Selic), BB has reported consistent earnings generation and steady
net interest margins. Bottom-line results have benefited
from the change in BB's loan mix, with increased focus on
higher yielding consumer loans and commercial loans to small and mid-sized
companies. In addition, BB has sustained profits by expanding
holdings of fixed-income securities and focusing on growing fee
income and containing operating expenses. Credit costs remain in
check. We anticipate, however, that incremental improvements
to profitability will not be sizable in future quarters because of BB's
expectation of low single-digit loan growth for 2019 and more competition
for lending rates in the banking system.
A key credit strength supporting the ratings is BB's ample and steady
funding structure, with a predominant participation of demand and
savings deposits, which is complemented by access to federal funds
and judicial deposits. Increasing competition for deposits may
lead to higher funding rates, but we expect BB will maintain its
sizable market shares in core, inexpensive deposits because of its
large branch capillarity and safe haven standing for depositors.
BB has a moderate capital position, as measured by Moody's
preferred ratio of tangible common equity (TCE) to risk weighted assets
(RWAs) of 10.9% in Q2 2019, which we calculate by
risk-weighting government securities at 100% and deducting
a large part of deferred tax assets (DTAs). At this level,
BB's TCE/RWA is above the ratio of its privately-held peers.
BB's capitalization improved significantly since June 2015,
when its TCE ratio was a low 6.9%. Replenishment
of shareholders' equity through earnings and the downsizing of its
balance sheet contributed mostly to strengthen BB's TCE/RWA ratio.
The improvement in capital ratio is a credit positive for BB's BCA,
and should support future loan growth. For 2019, we estimate
BB will maintain stable capitalization because of modest earning generation
and payouts in the range of 30% to 40% of net income,
which remains in line with payout ratios from the last five years.
Regarding asset quality, BB's problem loan ratio remains below
peak levels observed in 2016/2017 and is still aligned with a ba2 BCA.
BB's changing loan mix has resulted in retail loans accounting for
about one-third of its loan book, therefore improving borrower
concentration. Legacy problem loans from Brazil's latest
recession are less likely to affect asset quality metrics, now that
provisions and recoveries have been accounted for. We expect BB's
granular loan portfolio and low-risk rural loans will keep the
bank's asset quality metrics in line with those of its Brazilian
peers in the next 12 to 18 months, despite a brief rise in loan
delinquency in the first half of 2019 caused by a single large corporate
client that filed for bankruptcy proceedings.
BB has cultivated a strong risk governance culture and adhered to the
practices imposed by Brazil's securities commission and regulators.
In addition, the quality of information and disclosure has been
consistently high. For those reasons, Moody's does
not have any governance concern incorporated in BB's ba2 BCA,
which also does not incorporate social risk considerations. Moody's
views BB's role as an agriculture policy bank with leading market
share in agricultural loans as a credit strength. In June 2019,
rural loans comprised about 30% of BB's loan book.
BB's Ba2 long-term local currency deposit rating and Banco Do Brasil
S.A. (Cayman)'s foreign currency senior debt ratings reflect
the bank's ba2 BCA and Moody's assessment that, as a government-backed
institution, BB would benefit from very high government support
in a situation of stress. However, BB's BCA is positioned
at the same level as Brazil's sovereign rating to reflect the interconnectedness
between the bank and the sovereign's creditworthiness.
WHAT COULD CHANGE THE RATING -- DOWN/UP
BB's ba2 BCA, Ba2 deposit rating and Banco Do Brasil S.A.
(Cayman)'s senior unsecured debt ratings are aligned to Brazil's Ba2 sovereign
rating because of the strong credit interlinks between the sovereign and
the bank. Brazil's Ba2 sovereign rating has a stable outlook,
and therefore, there is no upward pressure on the ratings.
For the same reason, a downgrade of the sovereign rating could lower
BB's BCA. In addition, BB's BCA, as well as its
subordinated debt ratings, could be downgraded if there is material
deterioration in the bank's asset risk and profitability,
leading to weaker capitalization.
METHODOLOGY USED
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Banco do Brasil S.A., is headquartered in Brasilia,
Brazil, and reported BRL1,541 billion (USD402 billion) in
assets and BRL99.4 billion (USD25.9 billion) in shareholders'
equity as of 30 June 2019.
LIST OF AFFECTED RATINGS AND ASSESSMENTS
The following ratings and assessments of Banco do Brasil S.A.
were affirmed:
- Long-term global local currency deposit rating of Ba2,
stable outlook
- Short-term global local currency deposit rating of Not
Prime
- Long-term global foreign currency deposit rating of Ba3,
stable outlook
- Short-term global foreign currency deposit rating of Not
Prime
- Senior Unsecured Medium-Term Note Program of (P)Ba2
- Long-term global local currency counterparty risk rating
of Ba1
- Short-term global local currency counterparty risk rating
of Not Prime
- Long-term global foreign currency counterparty risk rating
of Ba1
- Short-term global foreign currency counterparty risk rating
of Not Prime
- Long-term Brazilian national scale deposit rating of Aa1.br
- Short-term Brazilian national scale deposit rating of
BR-1
- Long-term Brazilian national scale counterparty risk rating
of Aaa.br
- Short-term Brazilian national scale counterparty risk
rating of BR-1
- Baseline credit assessment of ba2
- Adjusted baseline credit assessment of ba2
- Long-term counterparty risk assessment of Ba1(cr)
- Short-term counterparty risk assessment of Not Prime(cr)
..Outlook Actions:
....Outlook, Stable
The following ratings and assessments of Banco Do Brasil S.A.
(Cayman) were affirmed:
- Long-term global local currency counterparty risk rating
of Ba1
- Short-term global local currency counterparty risk rating
of Not Prime
- Long-term global foreign currency counterparty risk rating
of Ba1
- Short-term global foreign currency counterparty risk rating
of Not Prime
- Long-term counterparty risk assessment of Ba1(cr)
- Short-term counterparty risk assessment of Not Prime(cr)
- Senior Unsecured debt rating of Ba2, stable outlook
- Senior Unsecured Medium-Term Note Program of (P)Ba2
- Subordinate Regular Bond/Debenture of Ba3
- Pref. Stock Non-cumulative of B2(hyb)
- Junior Subordinate Bond of B2(hyb)
- Other Short Term of (P)Not Prime
..Outlook Actions:
....Outlook, Stable
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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
Alexandre Albuquerque
Vice President - Senior Analyst
Financial Institutions Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 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
