October 23, 2013 / 8:25 PM / 4 years ago

Fitch Affirms Brazilian Development Banks' IDRs

(The following statement was released by the rating agency) RIO DE JANEIRO, October 23 (Fitch) Fitch Ratings has affirmed the long-term foreign and local currency Issuer Defaults Ratings (IDRs), Support Ratings, Support Rating Floors (SRFs) and National Ratings of Banco Nacional de Desenvolvimento Economico e Social (BNDES), Banco do Nordeste do Brasil S.A. (BNB) and Banco da Amazonia S.A. (Banco da Amazonia). Fitch does not assign Viability ratings to any of these banks due to their development bank status. A full list of rating actions is provided at the end of this release. The IDRs of all three development banks are equalized with and linked to Brazil's sovereign ratings, hence all the banks are rated at their respective Support Rating Floor. Their support ratings of '2' reflect Fitch's view that the probability of support from the federal government would be high, in case of need. The ratings reflect the important role that these banks play in the implementation of government development policies. Fitch believes that government support is unlikely to change in the short and medium term. Despite this, the government may gradually reduce the transfers of funds that drive their asset growth. Going forward, Fitch will monitor any possible changes in the support philosophy of the Brazilian government in light of other trends identified around the world, although, right now, this is not a likely scenario. The strategy of all three development banks remains directly linked to government policies. BNDES is the largest of the three banks and has a national focus. At June 2013, it was the fifth largest bank in Brazil in terms of assets, which totaled BRL729 billion. Banco da Amazonia and BNB are much smaller and have a regional focus (the northern region and the northeastern region of Brazil, respectively). Their respective assets totaled BRL11 billion and BRL34 billion at June 2013. BNDES continued to grow solidly in 2012 and the first half of 2013 (loan growth was 15.5% and 6.5%, respectively), and its asset quality ratios remain very good (impaired loans-to-gross loans were 0.8% and 0.9%, at June 2013 and December 2012, respectively). On the other hand, Banco da Amazonia and BNB's asset growth slowed down in 2012 and their total loans fell slightly at June 2013 (-2.6% and -3.3%, respectively) in comparison to December 2012. There was also some deterioration in their asset quality (their loan loss reserves for impaired loans-to-gross loans ratios increased to 9.0% and 11.4% at June 2013, from 8.6% and 9.9% at December 2012, respectively - considering the credit risks shared with the public funds). All three banks depend on public sources for funding and capitalization. While the bulk of Banco da Amazonia's total regulatory capital is made up of Tier 1 capital, a significant part of the regulatory capital of BNB and BNDES is made up of hybrid instruments and subordinate debt provided by public bodies. Consequently, Banco da Amazonia's Fitch core capital ratio, Fitch's cornerstone capital measure which does not take into account hybrid instruments, is higher than that of BNB and BNDES (10.80%, 7.78% and 6.48%, respectively, at June 2013). Nevertheless, Fitch notes that Banco da Amazonia may need further capital injections for future growth, especially following the reduction of the bank's capital base due to the honoring of its actuarial obligations with its proprietary pension fund, Caixa de Previdencia Complementar (CAPAF). The government is expected to mitigate the effect of the aforementioned equity reduction via hybrid instruments later in 2013 or early 2014. There was a drop in the profitability ratios of all three banks in the first half of 2013, when a drop in net interest margin was observed. Banco da Amazonia's performance was affected by higher loan impairment costs, while BNDES was affected by a continued drop in income from investments. BNDES continues to have the best efficiency ratio (its non-interest expense/gross revenues ratio was 17.10% versus 61.29% and 73.00% of Banco da Amazonia and BNB, respectively, at June 2013). The return on assets (ROA) of the banks (Banco da Amazonia: 0.86%, BNB: 1.23% and BNDES: 0.91%, at June 2013), were all lower than those of 2012 (1.63%, 1.74% and 1.22%). KEY RATING DRIVERS BNDES: BNDES's ratings are also based on support, and reflect the federal government's full ownership, its key role in the implementation of government economic development policies, and ample access to government resources, part of which are earmarked by the constitution. BNDES is Brazil's main long-term lender to the private and public sector, and for infrastructure projects. It also plays a crucial role in short-term export and working capital financing, and implementation of countercyclical programs. Furthermore, it supports large companies and financial markets through minority shareholdings (mainly through its subsidiary BNDES Participacoes S.A., BNDESPAR) and investments in corporate debt. The National Treasury (Tesouro Nacional ) remains the largest provider of funding to BNDES, followed by the Workers' Assistance Fund (Fundo de Amparo ao Trabalhador ) (57% and 25% of total liabilities at June 2013 and December 2012, respectively). FAT is required by the federal constitution to transfer a minimum 40% of its annual revenues to BNDES. A significant proportion of BNDES' regulatory capital is made up of hybrid instruments and subordinated debt provided by TN and FAT (58% at June 2013). These are not included in the Fitch core capital (FCC) ratio, which stood at a low 6.48% at June 2013 (8.73% and 12.66%, in 2012 and 2011).The gradual drop in FCC is explained by the decline in the securities revaluation reserves under total equity. The balance of these reserves fell to negative BRL438 million at June 2013 from BRL29 billion at year-end 2010, due to the fall in the fair value of securities available for sale. The federal government recently made some announcements indicating its willingness to reduce TN funding to BNDES and shift the bank's focus back to long-term infrastructure and investment lending, away from shorter-term corporate lending. As BNDES' asset growth is linked to the funding it receives from TN, any such reduction would directly lead to a parallel deceleration in loan growth. Under this scenario, Fitch would expect slowdown to be gradual, overall government support to continue, and the bank to continue to play an important role in supporting investment and growth, given the low risk appetite of private banks for long-term lending. If there is reduction in funding by TN, BNDES could dispose of part of its securities portfolio or shareholdings in order to raise funds, or reduce loan origination. In this case, part of the mark-to-market losses in the securities portfolio, accounted for through equity, may need to be realized, although the probability of this scenario is low. The disposal of some investments could also lead to a fall in recurrent earnings, as income from investments significantly contributed to overall income in the recent years. The ratings of BNDES' senior unsecured debt are aligned with the IDR of the bank due their senior unsecured nature. BNB: BNB's ratings are also based on the support from its ultimate shareholder - the federal government of Brazil. This reflects BNB's importance for the development of the Brazilian northeastern region. As in Banco da Amazonia's case with the FNO, BNB's revenues also benefit from the fact that it is responsible for the management of the Constitutional Fund of the Northeast (FNE). The bank's liquidity and revenues are dependent on deals linked to FNE (BRL45.5 billion equity at June 2013). The Brazilian constitution grants BNB with the exclusive management of the fund, rendering the bank with a management fee of 0.25% per month over the fund's equity in addition to the annual 'del-credere' fees of 3% over the deals with shared risk. These revenues represented around 42% of the bank's overall operational results during the first half of 2013. BNB's non-performing loans ratio is presenting some deterioration, especially after the financial crisis in 2008/09, and more recently, due to the significant drought in the northeastern region of Brazil. Like Banco da Amazonia, BNB acts in the region as a development bank, so Fitch does not expect a rapid recovery in this ratio in the short- to medium-term. Banco da Amazonia: Banco da Amazonia's ratings are based on its ownership structure and support from its main and ultimate shareholders, the National Treasury and the federal government of Brazil, respectively. Banco da Amazonia plays a significant role in the execution of federal government policies for the development of the northern region. The bank's main competitive advantage is the subsidized interest rates provided by its main funding source FNO. The fund is the main driver for the growth of the bank's business, allowing cross selling and adding more clients to the bank's portfolio. Operations are mostly related to the rural, industrial, tourism, infrastructure, commercial, and services sectors. The exclusive managerial control of FNO (total assets of BRL15.9bn at June 2013) grants Banco da Amazonia an important monthly 0.25% fee over the fund's total portfolio, in addition to an annual 3% 'del credere' fee - charged on credit risks shared with the bank - that has been one of the bank's main key revenue sources. Banco da Amazonia sponsors its proprietary pension fund CAPAF. Previc (the Private Pension Authority) issued an intervention decree on Oct. 4, 2011, following the bank's failure to adopt a restructuring process to tackle CAPAF's actuarial deficit. As a result, Banco da Amazonia restructured CAPAF's funds and registered a (net) reduction of BRL477 million in its equity during the first half of 2013. This has restricted the bank's capital ratio for future growth (its regulatory capital ratio was low at 11.6% at June 2013). Banco da Amazonia maintains an additional provision of BRL479 million against this contingency and is looking into alternative solutions, such as raising Tier 2 capital, but further expenses with provisions in the long term cannot be dismissed. RATING SENSITIVITIES All three banks' ratings would be affected by potential changes in the sovereign ratings of Brazil and/or in the federal government's willingness to provide support. The latter is a highly unlikely scenario under the current support philosophy of the Brazilian government. A change in BNDES' long-term foreign currency IDR may result in changes in the ratings of its issuances. Fitch has affirmed the following rating actions: BNDES: --Long-term foreign and local currency IDRs at 'BBB', Outlook Stable; --Short-term foreign and local currency IDRs at 'F2'; --Long-term national rating at 'AAA(bra)', Outlook Stable; --Short-term national rating at 'F1+(bra)'; --Support Rating at '2'; --Support Rating Floor at 'BBB'; --Long-term foreign currency rating at 'BBB'; --Senior unsecured USD notes due 2016, 2019 and 2023 at 'BBB'. BNB: --Long-term foreign and local currency IDRs at 'BBB', Outlook Stable; --Short-term foreign and local currency IDRs at 'F2'; --Long-term national rating at 'AAA(bra)', Outlook Stable; --Short-term national rating at 'F1+(bra)'; --Support Rating at '2'; --Support Rating Floor at 'BBB'. Banco da Amazonia: --Long-term foreign and local currency IDRs at 'BBB', Outlook Stable; --Short-term foreign and local currency IDRs at 'F2'; --Long-term national rating at 'AAA(bra)', Outlook Stable; --Short-term national rating at 'F1+(bra)'; --Support Rating at '2'; --Support Rating Floor at 'BBB'. Contact: Primary Analyst (BNDES) Esin Celasun Associate Director +55 21 4503-2626 Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20 - 401 B, Rio de Janeiro, RJ, Brasil Primary Analyst (BNB and Banco da Amazonia) Claudio Gallina Director +55 11 4504-2216 Fitch Rating Brasil Ltda. Alameda Santos 700 Sao Paulo, Brazil Secondary Analyst (BNDES) Luiz Vieira Associate Director +55 21 4503-2617 Secondary Analyst (BNB and Banco da Amazonia) Eduardo Ribas Associate Director +55 21 4503-2626 Committee Chairperson Franklin Santarelli Managing Director +1-212-908-0739 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --'National Ratings Criteria' (Jan. 19, 2011). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here National Ratings Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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