New York, October 15, 2009 -- Moody's Investors Service upgraded the bank financial strength rating
(BFSR) of Banco do Brasil S.A. (BB) and of its subsidiary
Banco Nossa Caixa S.A. (BNC), to C+ from C,
which maps to an unsupported baseline credit assessment (BCA) of A2,
from A3. Moody's also lowered by one notch to A2 from A1,
the banks' global local currency long term deposit ratings and affirmed
their Prime-1 short term ratings. The rating actions conclude
the review for possible downgrade initiated on July 7, 2009.
The outlook on these ratings is now stable.
The downgrade of the deposit ratings was driven by the rating agency's
global reassessment of the ability of governments to support their countries'
banks during a protracted systemic crisis. The likelihood of such
support is an important part of Moody's credit analysis, and
it provides uplift to the ratings above that which would be implied by
the banks' own financial strength. For the Brazilian banks,
the downgrades bring the ratings closer in line with that of the government's
own rating of Baa3.
The A2 local currency deposit ratings for BB and BNC essentially reflect
the banks' unsupported baseline credit assessment. As the
ratings are above the new systemic support indicator of A3, these
banks' deposit ratings no longer benefit from uplift due to systemic
support.
BB's and NC's Baa3 foreign currency deposit ratings and BB's
Baa2 foreign currency debt ratings were not affected by this action and
remain constrained by Brazil's foreign currency deposit and debt
ceilings, which have a positive outlook. The national scale
deposit ratings of Aaa.br and BR-1 also remain unchanged.
UPGRADE OF BB AND BNC'S BANK FINANCIAL STRENGTH RATINGS
Moody's notes that BB's financial metrics have been consistently
converging with those presented by other highly rated bank peers over
the last two years. The steady improvement in recurrent financial
performance has been deriving from the reinforcement of BB's franchise
in various market segments, which has enhanced its competitive position.
This convergence was bolstered by adding critical product capability and
by expanding BB's footprint in important banking regions,
as it did through the acquisition of Banco Nossa Caixa.
Moody's also acknowledges that BB's broad and dominant liquidity
position that has benefited largely from the flight to quality by depositors,
has provided the bank with a reliable foundation with which to base its
credit growth in the coming quarters. BB should also achieve higher
market shares in its core business segments that should improve the bank's
core earnings generation capacity.
Moody's also believes that the recent market share gains from private
sector banks have been made under lending conditions that did not deviate
from BB's credit standards and spread policies. The reduced
banking spreads promoted by the public banks in Brazil were based on their
ample liquidity, which should be sustainable as macroeconomic conditions
improve.
In contrast to financial crises in past decades, the current global
turmoil has actually helped enhance BB's funding profile in international
markets. The bank has received sizable deposits from international
corporations and banks, which have further increased its already
strong deposit base from Brazilian companies and individuals. In
this context, BB was authorized to raise the limit for foreign ownership
in BB's capital from 12.5% to 20% in September of
this year through the issuance of American Depositary Receipts --
an opportunity for the bank to enhance its position in the international
market.
The upgrade of BB's unsupported rating also acknowledges its resilient
profitability and capitalization, which reflects an adequate loss
absorption capacity in light of Moody's scenario analysis of the
bank's earnings, risk assets, and capital. The
bank has historically maintained adequate reserves, which have been
reinforced of late in response to its high lending growth during the crisis
and an uncertain asset quality outlook as the global economy has decelerated.
BB has absorbed Banco Nossa Caixa's low- risk loan book into
its own credit portfolio. Along with its partnership with Banco
Votorantim, its portfolio mix should be strengthened through more
granular, secured loans. The quality of its large agribusiness
portfolio, where BB holds a leading position as a public bank,
is also likely to improve as a result of risk-mitigation schemes,
such as agri-insurance coverage and diversification.
DEPOSIT-RATING CHANGE REFLECTS REVISED APPROACH TO SYSTEMIC SUPPORT
Moody's has refined its assessment of systemic support for the Brazilian
banks to better reflect the capacity of the government to support the
banking system as a whole in the event of a systemic crisis. The
agency continues to believe that most governments are likely to support
their banking systems to avoid a meltdown of the local payment system
in such an event.
Nevertheless, Moody's also views the capacity of a country
and its central bank to support the nation's banks to be more closely
aligned with the government's own creditworthiness. The revised
approach to systemic support is outlined in the special report entitled
"Financial Crisis More Closely Aligns Bank Credit Risk and Government
Ratings in Non-Aaa Countries", published in May 2009.
Moody's said that the new systemic support indicator for Brazil
has been established at A3, thus replacing the A1 local currency
deposit ceiling as the systemic support input for bank ratings.
The A3 systemic support indicator nevertheless reflects three notches
of uplift from the government's Baa3 local currency bond rating.
The three-notch difference reflects Moody's assessment of
the Brazilian government's ability and willingness to support the
banking system, including a broad array of financial and non-financial
tools, as well as the intrinsic strength of the banking system demonstrated
during the recent global crisis. This view is underpinned by the
following:
(1) Swift actions during the current and past crises are indicative of
the high priority the government places on the stability of the financial
system. The authorities promptly and efficiently assisted the liquidity
needs of all financial institutions, using a modest part of the
sizable pool of reserve requirements (equivalent to 8% of GDP)
as a powerful tool that has proven to be an important counter-cyclical
measure to support the banking system. Despite the banks'
low reliance on external funding (representing only 8.6%
of total liabilities), the Brazilian authorities also made available
to the banks part of the country's US$ 230 billion in international
reserves-- largely through trade finance lines, spot USD,
and swaps -- as liquidity dried up in foreign markets.
(2) Banking institutions' largely domestic funding allowed the system
to manage through the financial crisis, despite some pressure on
credit fundamentals as a result of the economic contraction in Brazil.
The Brazilian banking system has experienced a limited level of stress
despite a riskier global environment. Notwithstanding the marked
decline in loan and transaction volumes, the system's asset
quality has been supported by low interest rates, high capital levels
(18% average system BIS ratio in 2008), and ample loan loss
reserves.
(3) The relatively modest size of the Brazilian banking system,
with credit assets equal to 45% of GDP as of June 2009, suggest
that the risk of crystallization of banking losses on the government's
balance sheet should be relatively moderate.
Moody's also points out that the Brazilian banking system has shown
signs of a gradual return to growth since June 2009 on the track of a
positive credit cycle as labor markets stabilize and as the national economy
rebounds in an environment of historically low interest rates and supportive
domestic demand. The banks' sound capitalization has largely
withstood increased delinquencies through the downturn and these remain
at comfortable levels to support future credit growth.
PREVIOUS RATING ACTIONS AND PRINCIPAL METHODOLOGIES
The last rating actions on Banco do Brasil were on September 22,
2009, when Moody's upgraded the long-term foreign currency
deposit rating to Baa3, with positive outlook, from Ba2,
and the foreign currency senior unsecured debt rating to Baa2, with
positive outlook, from Baa3, following the conclusion of the
review of Brazil's foreign currency deposit and debt ceilings.
The last rating actions on Banco Nossa Caixa were on September 22,
2009, when Moody's upgraded the long-term foreign currency
deposit rating to Baa3, with positive outlook, from Ba2,
following the conclusion of the review of Brazil's foreign currency
deposit ceiling.
The principal methodologies used in rating BB and BNC were Moody's "Bank
Financial Strength Ratings: Global Methodology" and "Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology", published in February and March 2007 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating these issuers can
also be found in the Rating Methodologies sub-directory on Moody's
website.
The following ratings were affected by this action:
Banco do Brasil:
Bank financial strength rating: upgraded to C+ from C,
stable outlook
Long term local currency deposits: downgraded to A2 from A1,
stable outlook
Banco Nossa Caixa:
Bank financial strength rating: upgraded to C+ from C,
stable outlook
Long term local currency deposits: downgraded to A2 from A1,
stable outlook
New York
M. Celina Vansetti
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Sao Paulo
Ceres Lisboa
Vice President - Senior Analyst
Financial Institutions Group
Moody's America Latina Ltda.
55-11-3043-7300
Moody's raises financial strength of Banco do Brasil and Nossa Caixa to C+; lowers local currency deposits to A2
