New York, November 28, 2019 -- Moody's Investors Service (Moody's) has today upgraded certain long-
term national scale ratings of Banco Cooperativo Sicredi S.A.
(Sicredi) -- a financial institution that is part of the
cooperative group Sistema Cooperativo Sicredi -- and affirmed all
other ratings and assessments. The national scale ratings that
were upgraded include Sicredi's long-term Brazilian national
scale issuer rating to Aa1.br from Aa2.br as well as its
long-term national scale Corporate Family Rating (CFR) to Aa1.br
The ratings that were affirmed include Sicredi`s Baseline Credit Assessment
(BCA) and Aadjusted BCA of ba2, the bank`s global CFR of Ba2,
long- and short-term global local currency issuer ratings
of Ba2 and Not Prime, long- and short-term Counterparty
Risk Ratings of Ba1 and Not Prime, long- and short-term
national scale Counterparty Risk Ratings of Aaa.br and BR-1,
and the short-term Brazilian national scale local currency issuer
ratings of BR-1. In addition, Moody's affirmed Sicredi's
long- and short-term Counterparty Risk Assessments Ba1(cr)
and Not Prime (cr). The outlook remains stable.
The following ratings and assessments of Banco Cooperativo Sicredi S.A.
- Long-term Brazilian national scale Corporate Family Rating
to Aa1.br from Aa2.br
- Long-term Brazilian national scale issuer rating to Aa1.br
The following ratings and assessments of Banco Cooperativo Sicredi S.A:
- Long-term global Corporate Family Rating of Ba2,
outlook remains stable
- Long- and short-term global local currency issuer
ratings of Ba2, outlook remains stable and Not Prime, respectively
- Long- and short-term Counterparty Risk Ratings
of Ba1 and Not Prime, respectively
- Short-term Brazilian national scale local currency issuer
rating of BR-1
- Long- and short-term Counterparty Risk Assessments
of Ba1(cr) and Not Prime(cr), respectively
- Long- and short-term Brazilian national scale Counterparty
Risk Ratings of Aaa.br and BR-1, respectively
- Baseline Credit Assessment of ba2
- Adjusted Baseline Credit Assessment of ba2
The affirmation of Banco Cooperativo Sicredi S.A.'s
(Sicredi) ratings and assessments reflect the cooperative system's
consistently low asset risk, strong capitalization and profitability,
and the granular funding structure that has supported Sicredi's
rapid loan growth. Sicredi's ratings also reflect the complexities
involved in operating a large federated cooperative system as well as
the bank's loan concentration to the agricultural industry. The
upgrade of Sicredi`s national scale issuer rating and CFR specifically
reflects its ability to maintain above average asset risk metrics during
economic downturns as well as sustain its capitalization and profitability
metrics at high levels that are on a par with similarly Aa1.br
Sicredi is the central banking entity of Sistema de Crédito Cooperativo
Sicredi (Sicredi Group, or the Group), a federated credit
cooperative system in Brazil that, as of 30 June 2019, was
comprised of 114 credit unions and more than 4.2 million depositors
(members) with presence in 23 Brazilian states. The Sicredi Group
offers traditional financial services to associates under a common brand
and following centralized risk policies and controls. As per the
cooperative culture, members of Sicredi's individual credit
unions are also the shareholders of those credit unions.
Since 2016, the Sicredi system has expanded its geographical reach
from its historical base in the south of the country to states and communities
in north and northeastern Brazil and the cooperatives are now present
in 23 states, from only 11 three years ago. The franchise
expansion has led to the number of Sicredi's members increasing
by over a third and a larger loan book that grew by an annual average
of 27.3% over this timeframe. Sicredi has built its
franchise primarily across small rural communities and municipalities,
but it has more recently expanded into metro areas and large cities in
Brazil. The Group was able to expand its operations during Brazil's
recent recession, when the broader banking system was retracting,
by using its brand strength to attract new credit unions in areas where
it previously didn`t operate into its system. At the same time,
larger retail banks began cost reduction programs that involved reducing
their branch numbers in these same areas.
Sicredi's rapid growth contrasts with the modest 1.3%
loan growth for the Brazilian banking system overall in the period 2016-19.
While above-average loan growth can lead to asset quality and earnings
volatility as loans season, the system`s asset risk has remained
relatively stable, as suggested by the 90 day problem loan ratio
averaging 1.5% over the past three years. These problem
loans have been more than sufficiently covered by reserves, which
were in excess of 300%. On the other hand Brazil`s banking
system`s average NPLs during this time were 3.3%,
backed by reserves of 197%. Positively, the Group
sets common risk policies and underwriting standards, such as maximum
exposure limits and minimum reserve coverage ratios, which are then
implemented by each credit union that make up the Sicredi system.
In addition, Moody`s notes that the Group actively monitors actual
and potential environmental risk that could come from its loans to corporate
associates and applies strict underwriting guidelines to manage its potential
reputational risks associated with lending to such companies. That
said, Sicredi`s asset risk is challenged by the high loan growth
and by concentrations in agricultural sector lending, which represented
36% of total loans as of 30 June 2019, although the granularity
of Sicredi's loan portfolio helps mitigate the risk of such concentrations
In addition, Sicredi's recent expansion into new lines of
business that have not traditionally been the core of its operations such
as payroll lending, credit cards and unsecured consumer loans may
lead to uptick in delinquencies as the economy recovers and competition
among banks increase.
Although Sicredi does not report consolidated capital metrics at the system
level, Moody's assesses the capitalization to be strong and
providing a significant cushion against potential losses. Under
the system's by-laws, the Group's credit unions
are required to comply with capital thresholds Sicredi sets that are well
above the regulatory minimum.
Similarly, Sicredi's consolidated profitability metrics have remained
strong and are buoyed by the fact that income from cooperative lending
activities is not taxable under Brazilian tax law. As of June 2019,
net income to tangible assets was 2.9%, significantly
higher than the wider banking system ratio of 1.2%.
This was largely driven by comparably lower funding costs from the deposits
of its members, which accounted for 86% of its total funding
as of 30 June 2019, also reflecting the relevant decline in interest
rates in the period. Moody's notes that market based funding
sources, which make up 19% of total funding, are broadly
onlending from government controlled development banks and expects the
system to continue to rely on associate deposits for its funding.
Operating efficiency has improved modestly to 56%, suggesting
the costs associated with the expansion of Sicredi's franchise and
balance sheet have not been a drag on profitability. The Group`s
developing digital initiatives, encapsulated in its Woop banking
application will also continue to give its credit unions greater ease
in capturing deposits and reaching out to members to deliver credit products.
Liquidity in the system is strong, with liquid assets accounting
for almost 40% of tangible banking assets. Importantly,
credit unions within the system are also protected by a cross guarantee
whereby the system`s credit unions support one another in the event that
any of them have liquidity or capital needs through a centrally managed
liquidity system operated by its banking entity. In addition,
depositors at each cooperative have protection first from Sicredi's
own guarantee funds and then from the national deposit guarantee fund
for cooperatives (Fundo Guarantidor do Coopertavismo de Credito).
In assigning Sicredi's ratings, Moody's assesses the financial strength
and creditworthiness of the combined institutions within the Sicredi group
on a consolidated basis, as if they operated as a single entity.
Moody's joint assessment of the Sicredi Group's financial performance
takes into consideration the high level of cohesion and cooperation among
the credit unions and the bank.
Moody's believes Sicredi Group's exposure to social risks
is moderate, consistent with our general assessment for the global
banking sector. As well, governance risks are largely internal
rather than externally driven. Moody's does not have any particular
governance concerns with Sicredi, and does not apply any corporate
behavior adjustment to the bank's scorecard.
WHAT COULD MAKE THE RATING GO UP
Sicredi's BCA is constrained by Brazil's sovereign rating and as result
it would only face upward pressure in the event of an upgrade in Brazil's
bond rating. As the outlook on Brazil's ratings is stable,
there is limited possibility for an upgrade in Sicredi's ratings.
WHAT COULD MAKE THE RATING GO DOWN
Negative pressure on Sicredi's ratings would derive from significant weakening
in its loan portfolio performance that pressures Sicredi's profitability
and capital generation. A downgrade in Brazil's ratings would
lead to a downgrade in Sicredi's ratings as well.
The principal methodology used in these ratings was Banks Methodology
published in November 2019. 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.
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