New York, June 06, 2016 -- Moody's Investors Service has today lowered Caixa Economica Federal
(Caixa)'s baseline credit assessment to b1, from ba3,
and downgraded to B2(hyb), from B1(hyb), the debt rating assigned
to its $500 million Tier 2 subordinated notes issued under Basel
III rules. All other ratings assigned to Caixa were affirmed,
including long-term local and foreign currency deposit ratings
of Ba2 and Ba3, respectively, and the Ba2 foreign currency
senior unsecured debt rating. Moody's also affirmed the Aa1.br
and BR-1 long and short-term deposit ratings in the Brazilian
national scale, as well as the Not Prime global scale short-term
rating , and the Ba2(cr) and NP(cr) long and short-term counterparty
risk assessments. The outlook on the global scale ratings remains
negative, in line with the outlook on Brazil's sovereign rating.
The following assessment and rating assigned to Caixa Econômica
Federal were downgraded:
Baseline credit assessment: downgraded to b1, from ba3
Foreign currency subordinated debt rating: downgraded to B2(hyb),
The following ratings and assessments assigned to Caixa Econômica
Federal were affirmed:
Long-term global local currency deposit rating of Ba2, negative
Short-term global local currency deposit rating of Not Prime
Long-term foreign currency deposit ratings of Ba3; negative
Short-term foreign currency deposit rating of Not Prime
Long-term foreign currency senior unsecured debt rating of Ba2,
Long-term foreign currency senior unsecured debt rating assigned
to MTN of (P)Ba2
Long-term Brazilian national scale deposit rating of Aa1.br
Short-term Brazilian national scale deposit rating of BR-1
Long-term Counterparty Risk Assessment of Ba2(cr)
Short-term Counterparty Risk Assessment of Not Prime(cr)
The downgrade of Caixa's baseline credit assessment to b1 reflects the
steady decline in the bank's capitalization over the past 18 months
and Moody's expectation that it will shrink further over the next
12 to 18 months as asset quality and profitability continue to deteriorate.
Under Moody's measures, Caixa's tangible common equity (TCE)
relative to risk-weighted assets (RWAs), which excludes deferred
tax assets, fell to a very narrow 4.5% in March 2016
from 6.5% just six months earlier, partly as a result
of the increased risk weight on government bond holdings following the
downgrade of Brazil's government bond rating to Ba2 in February
2016. Although regulatory capital remains considerably stronger,
it has also been declining, notwithstanding a recent reduction in
the bank's dividend payout ratio. "The bank's
Tier 1 regulatory capital ratio dropped to 9.6% as of March,
one of the lowest of the largest Brazilian banks as Caixa's weak
earnings have been insufficient to replenish capital consumed by the continued,
albeit slowing, growth of its loan portfolio and phase-in
of Basel III capital deductions", said Ceres Lisboa,
Senior Vice President.
Caixa's 90-day past due loan ratio has risen slowly but steadily
to 3.5%, as of March 2016 from 2.9%
at year-end 2014. Were it not for the bank's sale
of BRL2 billion of loans in the first quarter, we estimate the aggregate
problem loan ratio would have increased further to 3.8%.
While non-performing loans (NPLs) ratio remains low compared to
most of Caixa's peers, this is because almost 70% of
the bank's loans is in the form of low risk loans, such as
housing and payroll loans, which, however, is not immune
to the crisis. In addition, the remaining loan book is composed
of riskier consumer loans to a client base that is highly vulnerable to
continued pressure in labor markets, and of corporate loans to both
SMEs and large firms, which face challenging liquidity conditions.
Non-performing corporate loans surpassed consumer NPLs in 1Q2016,
reaching 6.8%, as opposed to 6.4% for
individuals NPLs, and continue to climb sharply. In addition,
the flow of loan renegotiations rose by 50% in the first quarter
relative to the same period a year earlier.
The downgrade of the BCA to b1 also reflects continued deterioration in
Caixa's already weak earnings generation capacity. In the
twelve months to March 2016, Caixa's pre-tax income
fell to almost zero from BRL6 billion in 2014. While net income
continued to exceed this level, this is almost entirely due to tax
credits, which rose sharply in 2015 and the first quarter of 2016.
"The drop in pre-tax income reflects the share of long-term,
low-yielding fixed rate assets in Caixa's loan book combined
with rising funding costs and high credit costs, drivers that will
continue to pressure the bank's profitability over the next quarters",
according to Ceres. While loan loss provisions declined in the
first quarter, they nevertheless consumed more than 100%
of the bank's pre-provision income, reflecting constraints
on the bank's ability to provision against rising loan losses.
AFFIRMATION OF SUPPORTED RATINGS AND DOWNGRADE OF SUBORDINATED DEBT RATING
The affirmation of the Ba2 deposit and senior unsecured debt ratings,
as well as the Aa1.br Brazilian national scale deposit rating,
reflects our assessment of very high likelihood of government support
and derives from the incorporation of two notches of uplift to the b1
BCA. The deterioration in the bank's capital, asset
quality, and earnings will raise pressure on the bank to take steps
to bolster its core capital ratios, possibly by selling assets or
reducing dividends further. If these measures are unsuccessful
or insufficient, the bank may need to seek support from the government.
While we expect this to be forthcoming given the systemic importance of
Caixa, it will most likely be in the forms regulatory forbearance
rather than a capital injection, given the government's large
fiscal deficit and high and rising debt levels. Should a capital
injection prove necessary, however, the required amount is
not likely to exceed 0.3% of GDP or 1% of government
revenues, which the government should be able to afford despite
its fiscal straights.
The bank's Tier 2 subordinate debt rating was downgraded to B2(hyb)
from B1(hyb), as this rating is positioned at the bank's BCA minus
one notch. The B2(hyb) rating does not incorporate any uplift from
government support as Moody's does not expect that the government
will bail-out subordinated bond holders if the bank's finances
deteriorate further. The notching captures the risk of losses to
investors steaming from coupon suspension and principal write-down
before the bank reaches the point of non-viability.
WHAT COULD CHANGE THE RATING - DOWN
The bank's deposit and senior unsecured debt ratings have a negative
outlook in line with the outlook on the sovereign bond rating.
These ratings would be negatively impacted by further downgrades of the
sovereign debt rating. The outlook on these ratings will likely
return to stable if the sovereign outlook stabilizes.
Caixa's BCA of b1 adjusted BCA and the B2(hyb) subordinated debt rating
would come under further downward pressure if the bank's financial performance
continues to deteriorate dragged down by increases in loan losses and
loan growth that drain capitalization . However, the bank's
supported ratings would not be affected by any changes to its BCA.
METHODOLOGIES & LAST RATING ACTION
The principal methodology used in these ratings was Banks published in
January 2016. Please see the Ratings 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_189530.
The last rating action on Caixa Economica Federal was on 11 May 2016,
when Moody's repositioned the bank's long-term Brazilian
national scale rating at Aa1.br, in view of the recalibration
of the national rating scale methodology. All other ratings remained
Caixa Economica Federal is headquartered in Brasilia, Brazil.
The bank reported total assets of BRL1,241.6 billion ($350.3
billion) and equity of BRL62.96 billion ($17.76 billion)
as of 31 March 2016.
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
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
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
M. Celina Vansetti
MD - Banking
Financial Institutions Group
Moody's lowers Caixa's BCA and hybrid bond ratings. Affirms deposit and senior debt ratings; outlook remains negative
Moody's Investors Service, Inc.
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New York, NY 10007