Credit Opinion: Banco Bonsucesso S.A. Global Credit Research - 23 Mar 2015
Belo Horizonte, Brazil
[1]
All figures and ratios are adjusted using Moody's standard adjustments
[2]Basel III - fully-loaded or transitional
phase-in; LOCAL GAAP
[3]Basel II; LOCAL GAAP
[4]Compound Annual Growth Rate based on LOCAL GAAP
reporting periods
[5]LOCAL GAAP reporting periods have been used for average calculation
[6]Basel III - fully-loaded
or transitional phase-in & LOCAL GAAP reporting periods have been used for average calculation
SUMMARY RATING RATIONALE
We assign a baseline credit assessment (BCA) of b2 to Banco Bonsucesso S.A., reflecting the execution and transition risks associated with the bank's ongoing franchise repositioning and reshaping of its earnings structure, particularly as a result of its agreement with Banco Santander (Brasil) S.A. to create a joint venture (JV) to originate payroll loans and payroll credit cards.
The BCA also reflects the reduction in the bank's revenues, especially during this prolonged period of slow economic activity. The bank's BCA is constrained by Bonsucesso's modest business diversification and intrinsic wholesale funding.
BONSUCESSO'S RATING IS SUPPORTED BY BRAZIL'S MODERATE+ MACRO PROFILE
As a bank with operations totally comprised within the domestic territory, Bonsucesso is solely influenced by Brazil's Macro Profile of Moderate+. 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
Ratings
Category Moody's Rating
Outlook Stable
Bank Deposits B2/NP
NSR Bank Deposits -Dom Curr Ba1.br/BR-4 Baseline Credit Assessment b2 Adjusted Baseline Credit Assessment b2
Subordinate B3
Contacts
Analyst Phone
Alexandre Albuquerque/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 Bonsucesso S.A. (Unconsolidated Financials)[1]
[2]6-14 [2]12-13 [3]12-12 [3]12-11 [3]12-10 Avg.
Total Assets (BRL billion) 2.7 2.9 3.4 2.6 2.5 [4]1.8
Total Assets (USD billion) 1.2 1.2 1.6 1.4 1.5 [4]-5.2
Tangible Common Equity (BRL billion) 0.4 0.4 0.3 0.4 0.4 [4]0.9 Tangible Common Equity (USD billion) 0.2 0.2 0.2 0.2 0.2 [4]-6.0 Problem Loans / Gross Loans (%) 5.9 5.2 3.9 4.5 1.1 [5]4.1 Tangible Common Equity / Risk Weighted Assets (%) 12.1 12.1 8.8 10.2 12.0 [6]12.1 Problem Loans / (Tangible Common Equity + Loan Loss
Reserve) (%) 20.7 20.0 19.5 15.0 4.4
[5]15.9 Net Interest Margin (%) 16.9 18.8 19.1 20.4 28.1 [5]20.7
PPI / Average RWA (%) 6.4 5.7 3.7 3.2 4.5 [6]6.0
Net Income / Tangible Assets (%) 2.3 1.2 0.8 1.5 3.5 [5]1.9 Cost / Income Ratio (%) 57.8 62.4 65.2 76.1 77.2 [5]67.7 Market Funds / Tangible Banking Assets (%) 3.9 3.7 6.7 7.2 18.4 [5]8.0 Liquid Banking Assets / Tangible Banking Assets (%) 15.4 12.7 11.3 22.7 23.2 [5]17.1 Gross Loans / Total Deposits (%) 123.7 132.0 138.0 89.2 109.8 [5]118.5 Source: Moody's
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.
Rating Drivers
- Bank with limited market share, operating in niche with modest growth prospects
- Profitability compressed by delinquencies in the SME portfolio and by operating expenses, which tend to decline with the transfer of the payroll operation to the JV
- Liquidity position improves as bank proceed transferring assets to the JV
- Funding structure based on confidence-sensitive instruments, consisting mostly of time deposits with asset management companies, corporate clients and institutional investors
- Adequate capitalization levels
Rating Outlook
The outlook on all ratings is stable.
What Could Change the Rating - Up
We could upgrade Bonsucesso's ratings if the bank improves its core profitability consistently as it repositions its franchise. The transfer of the payroll business to the JV results in a bank with a leaner structure and good capitalization and liquidity, but it is also challenged by its decreased ability to originate revenues.
What Could Change the Rating - Down
Ratings could be negatively affected by transition risks associated with changing the bank's franchise within a more competitive market. Bonsucesso needs to develop business lines during a period of slow economic activity, which could hurt margins and asset quality.
DETAILED RATING CONSIDERATIONS
The financial data in the following sections are sourced from Bonsucesso's financial statements unless otherwise stated. FUTURE ASSET QUALITY DEPENDS ON MANAGEMENT'S GROWTH STRATEGY
The b2 score assigned to Bonsucesso's asset risk reflects the high problem loan ratio reported by the bank as a result of loan delinquencies in operations with small and medium-sized companies (SMEs). Delinquencies in SME lending rose in 2012 and peaked in September 2013, as the slow economic environment reduced companies' capacity to repay loans. As a result, Bonsucesso's ratio of problem loans to total loans increased to 5.87% in June 2014, compared with 5.17% in December 2013 and 3.98% in December 2012.
In addition, the b2 score also reflects our view that single name concentration should increase as the bank transfers its retail portfolio to the JV and retain the SME loan portfolio on its balance sheet. In June 2014, single name concentration is adequate, with the 30 largest borrowers representing 41.1% of the bank's tangible common equity (TCE) - the ratio was 56% in 2013 and 59.8% in 1H12.
For a long time, Bonsucesso's focus on payroll-deductible loans to public servants and retirees, products of inherently low credit risk, resulted in good asset quality indicators that were well-placed among peers. In 2012 and 2013, the bank's delinquency ratios and concentration risk increased owing to the increase in volume of on-balance loans and to the growth of loans to small- and medium-sized enterprises (SMEs). The bank's coverage ratio of 107.1% as of June 2014 provides a cushion against current non-performing loans.
CAPITAL WILL BENEFIT FROM AGREEMENT
The baa3 score assigned to capital reflects Bonsucesso's adequate capitalization. As of June 2014, Bonsucesso reported a total BIS ratio of 18.44% and a TCE to risk-weighted assets (RWA) ratio of 12.1%, translating into adequate cushioning over minimum regulatory thresholds. The increase in capital in 2013 resulted mostly from the reduction in the volume of the bank's loan book. Overall, Bonsucesso's capital metrics have been adequate historically compared with peers. Over the years, the bank's conservative earnings retention policy has supported its capital ratios.
The transfer of assets to the JV will reduce Bonsucesso's leverage, release capital allocation and increase its capital ratio. As a result, we expect improvement of the bank's capital ratio as it transfers assets to the JV. As of June 2014, the total of on-balance payroll loans was BRL1.08 billion, while the remaining portfolio (mostly loans to SMEs) reached BRL673 million. Considering an equity position of BRL405.6 million, this results in a leverage ratio of 1.66x for SME loans only. Additionally, the revenues from the JV will likely improve the bank's capital position.
FUTURE REVENUES REMAIN UNCERTAIN
Our assessment of ba3 for Bonsucesso's profitability reflects the volatility in earnings reported in recent years, as the bank's bottom-line result was affected by the increase in loan losses provisions related to the SME portfolio, and prospects of future fluctuations in earnings as the bank transfers the operation of payroll lending to the JV. It is still difficult to predict how the bank's future business model will affect profitability, since the total volume of revenues the JV will originate remains unclear. Most of the bank's revenues originated from payroll
loans and payroll credit cards. On the other hand, Bonsucesso's operating and administrative costs will also decline significantly with the transfer of the payroll business to the JV. We also expect the bank to begin to grow its fee-based product offerings, as its commercial loan business to SMEs remains slow given borrowers' small credit appetite and weak earnings generation.
FUNDING LIKELY TO IMPROVE AFTER LOAN SALE TO JV
We assign a score of b3 to Bonsucesso's funding structure. The score reflects the wholesale-based instruments in the bank's funding base, with small participation of demand deposits. In our assessment, this profile of confidence-sensitive institutional funding weights on the score for funding structure. The b3 score also incorporates the high concentration of deposits amongst the largest investors in the bank's funding base. However, the ongoing deleveraging of the bank, as it sell assets to the JV, improves Bonsucesso's liquidity and reduces its need of sizable, long-term funding.
As of June 2014, time deposits represented 57% of Bonsucesso's funding, while most of the deposits consist of special time deposits guaranteed by the insurance deposit fund, known as DPGEs. The large volume of DPGEs in Bonsucesso's funding structure place additional pressure on the bank's average cost of funding because of the DPGEs' insurance component. However, the long-term nature of this funding instrument contributed to the increase in the average tenor of the bank's funding base, thus making it more consistent with that of its payroll loan portfolio. Bonsucesso also relied on credit assignment lines to financial institutions and receivable investment funds (FIDCs) to lengthen funding tenure. Bonsucesso reported BRL190 million in loans sold to other financial institutions in June 2014.
LOW VOLUME OF LIQUID ASSETS
The score of ba3 for liquid resources reflect the low level of liquid assets reported by the bank, as payroll loans used to have a heavy height on the bank's balance sheet. The agreement with Banco Santander stipulates Bonsucesso to sell BRL1.1 billion in payroll loans and payroll credit cards to the JV. As a result, the bank's balance sheet shrinks substantially from the BRL2.7 billion in assets reported in June 2014. This reduction affects positively Bonsucesso's liquidity structure and funding costs, as the bank will be able to repay credit assignment lines. QUALITATIVE ADJUSTMENTS
We assign an adjustment of -1 to corporate behavior reflecting our assessment of execution risks associated with Bonsucesso's transition from a monoline to a more diversified franchise as it revamps its business profile.
Bonsucesso has sold its portfolio of payroll loans and payroll credit cards to the JV established with Banco Santander and retained a 40% stake in the new entity. Without its payroll business, Bonsucesso will focus on strengthening its current platform of fee-based products, such as pre-paid cards, and its international department, which offers foreign-exchange related products and services. The bank may increase its small commercial lending platform, targeted at small- and medium-sized enterprises (SME), provided borrowers' credit appetite increases and market conditions in the sector improve.
Notching Considerations
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 "Global Banks" Methodology. 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.
GOVERNMENT SUPPORT
We believe there is a low likelihood of government support for Bonsucesso's rated deposits and senior unsecured debt, which reflects the bank's small share of deposits and assets in Brazil's banking system.
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.
Rating Factors
Banco Bonsucesso S.A.
Macro Factors Weighted Macro Profile Moderate + Financial Profile Factor Historic Ratio Macro
Adjusted Score
Credit Trend Assigned Score Key driver #1 Key driver #2
Solvency Asset Risk Problem Loans / Gross
Loans
5.9% ba2 ← → b2 Long-run loss
performance
Sector concentration
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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
Capital
TCE / RWA 12.1% baa2 ← → baa3 Expected trend
Profitability Net Income / Tangible
Assets
1.4% baa1 ← → ba3 Earnings quality Combined Solvency Score baa3 ba3 Liquidity Funding Structure Market Funds / Tangible Banking Assets
3.7% a1 ↓ ↓ b3 Deposit quality Market funding quality Liquid Resources Liquid Banking
Assets / Tangible Banking Assets
12.7% ba3 ← → ba3 Quality of liquid
assets Combined Liquidity Score baa1 b2 Financial Profile b1 Qualitative Adjustments Adjustment Business Diversification 0 Opacity and Complexity 0 Corporate Behavior -1 Total Qualitative Adjustments -1 Sovereign or Affiliate constraint Baa2 Scorecard Calculated BCA range b1 - b3 Assigned BCA b2 Affiliate Support notching 0 Adjusted BCA b2 Instrument Class Loss Given
Failure notching Additional notching Preliminary Rating Assessment Government Support notching Local Currency rating Foreign Currency rating Deposits 0 0 b2 0 B2 B2 Dated subordinated bank debt -1 0 b3 0 B3
