Credit Opinion: Banco Indusval S.A. (BI&P)Global Credit Research - 23 Mar 2015
Sao Paulo, Brazil
Category Moody's Rating
Bank Deposits B1/NP
NSR Bank Deposits -Dom Curr Baa2.br/BR-3
Baseline Credit Assessment b1
Adjusted Baseline Credit Assessment b1 Contacts
Ceres Lisboa/Sao Paulo 55.11.3043.7300 Alcir Freitas/Sao Paulo
M. Celina Vansetti/New York City 1.212.553.1653 Thiago Scarelli/Sao Paulo 55.11.3043.7300 Key Indicators
Banco Indusval S.A. (BI&P) (Consolidated Financials)
9-14 12-13 12-12 12-11 12-10 Avg.
Total Assets (BRL billion) 5.5 4.9 4.0 4.3 3.3 13.8
Total Assets (USD billion) 2.2 2.1 2.0 2.3 2.0 3.2
Tangible Common Equity (BRL billion) 0.5 0.5 0.5 0.5 0.4 3.5 Tangible Common Equity (USD billion) 0.2 0.2 0.3 0.3 0.2 -6.1
Problem Loans / Gross Loans (%) 1.5 2.1 1.2 4.0 3.3 2.4
Tangible Common Equity / Risk Weighted Assets (%) 9.3 10.8 12.6 13.5 13.8 10.0
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%)
8.0 8.9 5.0 14.1 11.7 9.5
Net Interest Margin (%) 2.6 2.8 5.0 4.2 6.3 4.2
PPI / Average RWA (%) -0.3 -0.7 2.2 1.7 3.4 -0.5
Net Income / Tangible Assets (%) -0.2 -2.5 0.4 -0.7 0.9 -0.4
Cost / Income Ratio (%) 107.2 122.3 64.9 70.0 55.1 83.9
Market Funds / Tangible Banking Assets (%) 18.6 36.9 40.3 50.0 44.3 38.0
Liquid Banking Assets / Tangible Banking Assets (%) 34.8 29.5 27.5 41.3 39.1 34.4
Gross Loans / Total Deposits (%) 79.2 129.9 140.4 139.0 125.5 122.8
 All figures and ratios are adjusted using Moody's standard adjustments  Basel III - fully-loaded or transitional phase-in; LOCAL GAAP  Basel II; LOCAL GAAP  Compound Annual Growth Rate based on LOCAL GAAP reporting periods  LOCAL GAAP reporting periods have been used for average calculation  Basel III - fully-loaded or transitional phase-in & LOCAL GAAP reporting periods have been used for average calculation
Moody's assigns a baseline credit assessment of b1 to Banco Indusval S.A. (BI&P), that remained unchanged following the implementation of the new bank methodology on 16 March 2015.
The b1 BCA reflects BI&P's volatile financial fundamentals, particularly those involving its earnings recurrence generation and capital replenishment capacity. The bank's limited recurring earnings generation over the past three years has been impacted by its efforts to clean up legacy non-performing loans, challenging margin conditions and high credit cost, effects of the bank repositioning its franchise towards the more selective SME lending and agribusiness segments. Moreover, while the bank has been able to manage operating costs related to active pursuit of partnerships and acquisitions to diversify its operations over the past years, the bank's overall business have been operating close to breakeven point. While the performance of these new platforms are taking on more time than expected, in an environment of intense competition among investment banks and slow
macroeconomic conditions that are delaying growth plans, the fee-related business has grown 80% in 2014. In these conditions, the bank's capital replenishment capacity as weak, after years of rapid capital consumption because of both poor bottom line results and robust loan growth. However, we note that BI&P's partners have contributed with BRL398 million as capital since April 2011, proving their commitment to the bank's strategic shift and growth plans. The loan growth was primarily in agricultural segment, which reached 25.6% of total loans in 2014. Over the past three years, BI&P has cleaned up its loan book from potential problematic loans originated under its previous administration; these increments to reserves have rapidly dragged down the bank's
capitalization in 2014 (13.1% Tier 1 ratio), a thin loss-absorption buffer compared to those of other banks in Brazil that are similar in size. The annualized provisioning expense of the new portfolio improved materialy as a result of the portfolio cleanup promoted in 2013.
BI&P'S RATING IS SUPPORTED BY THE MODERATE+ MACRO PROFILE ON BRAZIL
Brazil's macro profile reflects its large and diversified economy, its high and rising indebtedness and the
dominance of public sector banks. Notwithstanding the size of the economy, growth has fallen below potential for more than three consecutive years, weighed down by increased economic uncertainty, a slowdown in
consumption and weak investment. In addition, persistently high inflation has raised questions regarding the credibility of the central bank's inflation targeting regime. Moreover, the banking system has become bifurcated, with public banks controlling a 54% share of the system's credit market as a result of years of rapid loan growth driven by government stimulus measures, while private banks remained more conservative. However, loan growth has moderated over the past year, which has alleviated pressure on banks' capital and funding following a period of robust credit market expansion. Brazil`s sizeable international reserve position, limited reliance on foreign borrowings and sound banking system support its low susceptibility to event risk.
- Improved credit risk policies, following the change in management, which has been translating into relatively lower delinquency ratios
- Inherent sector concentration risk, as the banks reinforces its focus on the agribusiness sector - Weak profitability and relatively low capital ratios compared to peers
- Challenging operating environment, which will keep asset quality, business generation and efficiency under pressure
- Expansion of services platforms adds income diversification as the operation matures
- Efforts to enhance funding structure with more granular deposit-like instruments taking advantage of its brokerage house to access retail depositor base
All ratings have stable outlook. The stable outlook incorporates the changes in business strategy in recent years, which have been adding complementary platforms, as well as reinforced its risk structure and enhanced
management expertise. Moody's also acknowledges efforts made towards diversifying funding, which has added more granular and thus, less vulnerable retail-based clients, benefiting overall funding cost. Although funding and liquidity remain a negative rating driver for BI&P, as well as for other midsized banks in Brazil, given the
vulnerability of its wholesale nature, Moody's acknowledges the improvement these efforts have made in replacing institutional deposits with deposit-like LCA and LCI instruments (notes linked to an agribusiness loan or a real estate loan), which are covered by local FDIC and offer tax exemptions to individual investors. The bank was able
to leverage distribution from its broker dealer Guide Investimentos, and several partnerships with distributors, private banks and independent investment advisor offices.
What Could Change the Rating - Up
Long-term consistency in the fundamentals could move the standalone credit assessment up. However, there is limited upward pressure on the ratings at this point.
What Could Change the Rating - Down
Persistence of poor profitability and further capital erosion, which could come from a delay in the results envisaged in the strategic plan, would pressure the bank's rating down. Additionally, weakening in the liquidity position or excessive borrower concentration could also trigger further downgrades.
DETAILED RATING CONSIDERATIONS
BETTER RISK GUIDELINES IMPROVED HISTORICAL NPLS, BUT SIZEABLE SECTOR CONCENTRATION POSES DOWNSIDE RISKS TO THE FRANCHISE
Despite the timid growth of 6.9% of loans in 2014, BI&P reported a relative stable nonperforming loans ratio of 1.7% in 2014. The legacy portfolio, however, was responsible for a slight deterioration of 20 bps in delinquency, while the portfolio originated under the revised credit guidelines (adopted since mid-2011) continues to present stable NPLs. As part of the new strategy and addressing the challenging economic scenario, the bank continues to focus on corporate clients (with annual revenues between BRL500million and BRL3 billion) which accounted for 62% of total loans in 2014 (52% in 2013). Additionally, management see that the segment offers more cross selling opportunities, as the bank transits to a new business platform offering more sophisticated products, such as derivatives and investment banking. On the other hand, we see that this strategy may expose the bank to additional risk concentration per client, as indicated by the increase in average ticket since 2012.
However, BI&P poses a relevant sector concentration risk, as its credit operations in the agribusiness sector (in particular with soy producers) continue to increase rapidly. In Moody's view, BI&P's expertise in this field helps mitigating the risks, which are inherent to the consolidation of its franchise as a specialized agribusiness player, but nevertheless the concentration should be monitored, since agriculture segment already accounts for more than 25% of the bank's BRL4.1 billion extended credit portfolio (including credit exposure in marketable securities portfolio and sureties). Our assessment of ba3 for asset risk considers the high exposure to the agribusiness sector that accounts for 1.75x the reported Tier 1 equity and the still volatile long-run loan losses since 2012. CAPITAL BUFFERS GRADUALLY ERODED BY WEAK RESULTS
Capitalization has been affected by the poor results and the past years of high loan growth. In 2014, BI&P reported a regulatory capital ratio of 13.1% (fully composed of Tier 1), its lowest ratio since 2006 and one of the lowest among its peers. The shareholders (including the US private equity fund Warburg Pincus and recognized executives in the investment banking market) have proven to be committed with the bank's new strategy by injecting more than BRL 290 million in capital since 2010, which were necessary to cover the provisions built in the portfolio cleanup process. The capital also benefited from an BRL107.5 million increase following the acquisition of Banco Intercap in the end of 2013, when two experienced executives, one of them with relevant expertise in the agribusiness segment joined the board. Our TCE ratio of 9.3% scores ba3 and applies 50% risk-weighting on the bank's holdings of Brazilian government securities (Baa2), as per Basel guidelines, adjusting the risk weighted assets (RWA), as well as considers a portion of DTA arising from temporary differences related to loan loss provisions as per our analytical approach that DTAs may not have the ability to absorb losses during the resolution of a bank.
Going forward, the bank will face the challenge to maintain healthy capital levels while it continues to grow in a competitive segment. In Moody's view, current BIS ratios offer a limited cushion to absorb losses, in particular considering the bank's inherent sector concentration risks.
POOR EARNINGS STABILITY REFLECTS CHALLENGING MARKET CONDITIONS AND STILL WEAK EFFICIENCY
After three years of portfolio cleanup, BI&P continues to report volatile profitability ratios, negatively pressured by its shift toward the Corporate and upper-middle market (where competition for the best borrowers keeps credit spreads low), and it is still modest scale (which compromises the bank's efficiency ratios). For 2014, the bank reported net losses of BRL5.2 million, still showing breakeven on a quarterly basis since the 2Q, and despite the
improve risk profile of its portfolio and lower credit costs incurred in the period. On the positive side, the gradual rise of fee-based income offers some earnings diversification to the bank, as the acquisitions and investments made over the previous quarters mature toward the breakeven point. In 2014, the bank reported around BRL60.9 million in net fees and commissions income, more than 35% related to its investment banking activities. Our assessment of caa2 for profitability still reflects the negative bottom line results. Management needs to prove capable to increase profitability in the coming quarters, presenting sustainable earnings recurrence generation. MARKET FUNDING RELIANCE RENDERS ITS FUNDING PROFILE, ALTHOUGH THE BANK HAS FOCUSED ON INCREASING BROKER-SOURCED DEPOSITS
As other midsized niche banks, BI&P's funding is primarily concentrated in wholesale, vulnerable to fluctuations in investor sentiment but it has been able to rapidly expand its retail investor-base, leveraging from its sizeable agribusiness portfolio to issue securities backed by rural credit (Letras de Crédito do Agronegócio, LCA and Letra de Crédito Imobiliária, LCI), both deposit-like instruments. These tools grew strongly since 2013 behind the tax exemption feature and its deposit insurance coverage, which allowed mid-size banks, such as BI&P to attract individual investors' interest. Those features combined with BI&P's enhanced distribution platforms helped LCAs and LCIs to account for 40% of total funding in 2014, up from 4% in March 2011, lowering the average funding cost and increasing its granularity. However, our assessment of b2 for funding structure considers that still low quality of the funding, which low-tenure and highly sensitive as a broker-sourced funds. The concentrated and expensive DPGEs (time deposits collateralized with resources from the insurance deposit fund and tenor above 2 years) still accounted for 30% of total funding, or the majority of total deposits in 2014. However, one third of DPGEs are already made of the second generation of DPGEs (secured by a loan), which reduces the cost compared to the first DPGEs. The risk behind this structure relates to maturity and ticket concentration, while it helps to extend the average tenor of the liabilities. Efforts around increasing funding tenor also considers trade finance facilities with correspondent banks (5%) and onlending from the federal development bank BNDES (4%).
BI&P had a free cash position of BRL749 million in 2014, 13.6% of total assets and 18.7% of deposits, which was largely comprised of government securities.
In the absence of a bail-in resolution regime framework in Brazil, the ratings of subordinated debts, bank hybrids, and contingent capital securities follow the "Additional Notching Guidelines", as per the Rating Methodology: Banks. In these cases, the approach takes into account other features specific to debt classes, resulting in additional notching from the adjusted baseline credit assessment (BCA) of the issuer.
The B1 global local currency deposit rating derives from BI&P's standalone baseline credit assessment of b1, and does not benefit from any government support uplift because of the bank's modest market share in local banking system deposits. The global local currency deposit rating of B1 has historically been associated with default frequencies of 10.9% and 19.0% over 3- and 5-year investment horizons, respectively.
About Moody's Bank Scorecard
Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity.
Banco Indusval S.A. (BI&P)
Weighted Macro Profile Moderate +
Factor Historic Ratio Macro Adjusted
Credit Trend Assigned Score
Key driver #1 Key driver #2
Solvency Asset Risk Problem Loans / Gross
2.2% baa1 ← → ba3 Long-run loss
TCE / RWA 9.3% ba3 ← → ba3 Risk-weighted
Profitability Net Income / Tangible
-0.8% caa2 ← → caa2 Return on
assets Combined Solvency Score ba2 b1 Liquidity Funding Structure
Market Funds / Tangible Banking Assets 36.9% b1 ← → b2 Deposit quality Market funding quality Liquid Resources Liquid Banking Assets /
Tangible Banking Assets
29.5% baa2 ← → baa3 Quality of
liquid assets Combined Liquidity Score ba2 ba3 Financial Profile b1
Qualitative Adjustments Adjustment Business Diversification 0 Opacity and Complexity 0 Corporate Behavior 0 Total Qualitative Adjustments 0 Sovereign or Affiliate constraint Baa2 Scorecard Calculated BCA range ba3 - b2 Assigned BCA b1 Affiliate Support notching 0 Adjusted BCA b1
Instrument Class Loss Given Failure notching Additional notching Preliminary Rating Assessment Government Support notching Local Currency rating Foreign Currency rating Deposits 0 0 b1 0 B1 B1
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on http://www.moodys.com for the most updated credit rating action information and rating history.
© 2015 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY’S (“MOODY’S PUBLICATIONS”) MAY INCLUDE MOODY’S
CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY
ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR
COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S
PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR
INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR
PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE
REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s Publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at
www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for “retail clients” to make any investment decision based on MOODY’S credit rating. If in doubt you should contact your financial or other professional adviser.
For Japan only: MOODY'S Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of MOODY'S Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.