June 26, 2017 / 8:03 PM / a year ago

Fitch Affirms Banco do Brasil S.A.'s IDR at 'BB'; Outlook Negative

(The following statement was released by the rating agency) RIO DE JANEIRO/SAO PAULO, June 26 (Fitch) Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Banco do Brasil S.A. (BdB) at 'BB' and its long-term National rating at 'AA+(bra)'. Rating Outlooks on the Long-Term IDRs and National rating remain Negative. Fitch also affirmed BdB's Viability Rating (VR) at 'bb-', Support Rating (SR) at '3', Support Rating Floor at 'BB'. A full list of rating actions can be found at the end of this release. KEY RATING DRIVERS - IDRS, NATIONAL RATINGS The affirmation of BdB's IDRs reflect Fitch's view that the bank would receive support from the federal government, should the need arise. BdB's IDRs are driven by sovereign support and are aligned with Brazil's sovereign ratings. This reflects the majority federal government ownership, its key policy role in the implementation of government economic policies particularly through rural lending, and the bank's systemic importance. The Outlook on BdB' LT IDRs remain Negative, mirroring the outlook of the sovereign ratings. Fitch believes that BdB, similar to other public entities, remain subject to political influence given its state owned nature and strong links with the government. KEY RATING DRIVERS - VIABILITY RATING The affirmation of BdB's VR reflects the bank's asset quality, profitability and capitalization indicators that came under greater pressure than its large private sector peers during the 2015-2016 recession. While these are showing signs of improvement, downside risks to asset quality and consequently profitability remain, given the continued weaknesses in the operating environment. The VR also reflects the bank's strong franchise and stable funding. Under BdB's new strategy, the bank aims to attain higher profitability and stronger internal capital generation that will ensure its adherence to the fully implemented Basel III requirements without any need for external support by 2019. Fitch believes that the bank's targets now appear more feasible, in light of the measures taken in the past year. In first-quarter 2017 (1Q17), BdB's Fitch Core Capital (FCC) ratio improved to 10.9% (10.2% and 7.8% in 2016 and 2015, respectively), due to lower risk-weighted assets (RWAs) and a slight improvement in profitability. In the same period Common Equity Tier 1 ratio dropped slightly to 9.2% (9.6% and 8.2% in 2016 and 2015, respectively), due to the increase in regulatory deductions, as Basel III rules continue to be phased-in. BdB's asset quality indicators have come under pressure as the operating environment worsened significantly since 2014, which resulted in a sharp increase in the bank's loan impairment charges through 1Q17. At March 2017, BdB's non-performing loans (NPLs) as a percentage of gross loans rose to 3.9% (3.3% in 2016 and 2.2% in 2015), edging closer to its two large private competitors' average of 4.5%. The deterioration was mainly driven by loans to companies, while the increases in rural and individual lending were modest and NPLs remained relatively low. Fitch expects BdB's asset quality to remain under pressure, mainly from the corporate segment, as long as operating environment weaknesses persist and economic recovery remains slow. The still high concentration in the bank's large corporates loan book increases downside risks. In 2016 and 1Q17 BdB's operating profit improved, with operating profit/RWA increasing to 1.9% and 2.3%, respectively, up from 0.5% in 2015. However, pressure on earnings from high credit costs is likely to persist through 2017, although solid cost control and lower risk appetite should prevent a severe significant decline during this period. Potential large corporate defaults and/or debt restructurings are downside risks. BdB has leading franchises in multiple business segments, including lending, insurance, asset management and debit/credit cards. It is Brazil's largest bank in terms of assets and deposits. Its funding is diversified and retail-based. Customer deposits and local financial bills, which are very similar to deposits, made up 48% of total funding at March 2017. Locally, the bank is considered as a safe haven during times of crisis. KEY RATING DRIVERS - SUPPORT RATING, SUPPORT RATING FLOOR The affirmation of BdB's SRs at '3' reflects the moderate probability of sovereign support. Fitch believes that the Brazilian government would have a high willingness to support BdB in case of need; however, its capacity to do so has fallen in the recent past, as reflected in the successive sovereign rating downgrades in 2015 and 2016. BdB's SRF is affirmed at 'BB' and aligned with the sovereign rating. KEY RATING DRIVERS - SENIOR DEBT RATING The affirmation of BdB's senior debt ratings at 'BB' reflects the affirmation of the bank's LT Foreign Currency IDR, which is the anchor rating for the debt ratings. RATING SENSITIVITIES - IDRS, NATIONAL RATINGS, SUPPORT RATINGS, SUPPORT RATING FLOORS, DEBT RATINGS Any changes in Brazil's sovereign ratings or in Fitch's evaluation of the government's willingness to provide support to BdB, in case of need, would directly affect these banks' IDRs, SRs, SRFs and debt ratings, all of which are driven by expected sovereign support. The National ratings of BdB will not necessarily be downgraded in the case of a sovereign ratings downgrade. However, the Negative Outlook of the LT National rating reflects that there could potentially be changes in the local relativities that, in turn, could lead to a downgrade of the National ratings, if the sovereign ratings are downgraded. RATING SENSITIVITIES - VIABILITY RATING BdB's VR would be negatively affected if asset quality deteriorates or profitability weakens more than expected, leading its FCC ratio to fall below 7% and/or its regulatory capital ratios to approach the minimum requirements earlier than Fitch's forecast. Fitch has taken the following rating actions: --Long-Term Foreign and Local Currency IDRs affirmed at 'BB', Outlook Negative; --Short-Term Foreign and Local Currency IDRs affirmed at 'B'; --National long-term rating affirmed at 'AA+(bra)', Outlook Negative; --National short-term rating affirmed at 'F1+(bra)'; --Support Rating affirmed at '3'; --Support Rating Floor affirmed at 'BB'; --Senior unsecured notes due 2018, 2019, 2020 and 2022 ratings affirmed at 'BB'; --Viability Rating affirmed at 'bb-'. Contact: Esin Celasun Director +55 21 4503-2626 Fitch Ratings Brasil Ltda. 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