RIO DE JANEIRO, Brazil & SAO PAULO - (Business Wire) Fitch Ratings has affirmed today the following ratings of Banco do Brasil S.A. (BB): --Long-term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-';
--Short-term Foreign and Local Currency IDRs at 'F3';
--Support Rating at '2';
--Individual Rating at 'C/D';
--Support Rating Floor at 'BBB-';
--Long-term National Rating at 'AA+(bra)';
--Short-term National Rating at 'F1+(bra)'.
BB's Support Rating, IDRs and National ratings are derived from the support of its controlling shareholder, the Brazilian government, and are at their Support Floor. BB's Individual Rating reflects its robust franchise, with activities still expanding. With a broad and diversified deposit base, the bank is still considered a safe haven, which was once more demonstrated during the subprime crisis. The rating is also constrained by concerns over the quality of BB's capital base, which has been pressured by continued growth and increasing intangible assets.
Since 2007 BB's operating performance has improved on the back of higher revenue generation and credit portfolio growth mainly in higher-margin consumer credit operations, which have partially offset the pressures of significant weight of agribusiness exposure, stronger credit provisioning and future declines of interest rates. The Individual Rating is constrained and an upgrade would depend on improvement of capital quality and a sustainable performance through its cycle of growth. On the other hand, a downgrade would result from the deterioration of its capital structure, quality of credit portfolio and performance.
The worsening of the global financial crisis in 2008, the limited access from corporate to the international capital markets and reduced presence of foreign and small-sized banks led BB to assume a larger share of the Brazilian credit market. During this period, BB expanded significantly its operations either through its own origination channels, the acquisition of loans (mainly payroll deductible loans and vehicles financing) from small and medium-sized banks in 2008, taking advantage of possibility created by the authorities to use funds from reserve requirements for the acquisition of those portfolios and with the acquisition of public banks including Banco do Estado de Santa Catarina (Besc), Nossa Caixa (BNC) and 50% stake of Banco Votorantim (BV).
The bank's strategy has been to focus on strengthening its exposure towards retail credit and expanding its client and deposit base. The larger scale gained should be accompanied by gradual improvements of results after the second half of 2009 and further pressures on BB's capital base. Fitch believes that the expected synergy gains arising from BB's acquisitions and its strong franchise should allow the bank to remain more competitive and deliver a favourable performance over the long term. In the medium term, profitability should be affected by the margin compression in light of the declining trend in interest rates and increasing competition as well as higher credit costs and administrative expenses, partly related to the consolidation phase.
At June 30 2009, BB's combined assets including all recent acquisitions totaled around BRL643 billion, credit portfolio of BRL271 billion and deposits of BRL312 billion. Of note is that total consolidation of BV on BB's balance sheets and operating limits should only be effective by the third quarter of 2009.
Although hybrids and subordinated instruments have allowed the bank to maintain its regulatory capital ratios in recent years near to its peers, Fitch's eligible capital ratio has been declining to 13% as of June 2009.
Fitch still expects BB's capital base to be under pressure and ratios to decline further until year end 2009, due to the acquisition of BV. Intangible assets correspond to about 43% of the combined regulatory capital in June 2009 without taking into account additional adjustments which could be made after the integration. The agency will continue to closely monitor BB's capital quality and expects the bank to use its financial flexibility to raise capital to allow for additional growth of its operations and the absorption of acquisitions.
BB is the largest financial conglomerate in Brazil and a market leader in several segments, agricultural and export financing, asset management and deposits, due to its strong base of sight deposits, time deposits and savings.
Fitch's national ratings provide a relative measure of creditworthiness for rated entities in countries where the sovereign's foreign and local currency ratings are below 'AAA'. National ratings are not internationally comparable since the best relative risk within a country is rated 'AAA' and other credits are rated only relative to this risk. They are signified by the addition of an identifier, for the country concerned, such as 'AAA (bra)' for national ratings in Brazil.
Additional information is available at 'www.fitchratings.com'.
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Fitch Ratings
Maria Rita Goncalves, 55-21-4503-2600 (Rio de Janeiro)
Maria Laura Pessoa, 55-11-4504-2600 (Sao Paulo)
Brian Bertsch, +1-212-908-0549 (Media Relations, New York)
brian.bertsch@fitchratings.com
