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Fitch Affirms BNDES's IDR at 'BB'; Outlook Negative
June 26, 2017 / 8:06 PM / 6 months ago

Fitch Affirms BNDES's IDR at 'BB'; Outlook Negative

(The following statement was released by the rating agency) RIO DE JANEIRO, June 26 (Fitch) Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Banco Nacional de Desenvolvimento Economico e Social (BNDES) at 'BB' and its long-term National rating at 'AA+(bra)'. The Outlooks of the Long-Term IDRs and National rating remain Negative. Fitch also affirmed BNDES's Support Rating (SR) at '3', Support Rating Floor (SRF) at 'BB' and long-term National rating at 'AA+(bra)'. A full list of the rating actions can be found at the end of this release. KEY RATING DRIVERS - IDRS, NATIONAL RATINGS The affirmation of BNDES's IDRs reflect Fitch's view that the bank would receive support from the federal government, should the need arise. BNDES's IDRs are driven by sovereign support and are aligned with Brazil's sovereign ratings. This reflects the full federal government ownership and its key policy role in the implementation of government economic policies. Fitch considers BNDES a public-mission bank and does therefore not assign a Viability rating. The Outlook on BNDES's Long-Term IDRs remains Negative, mirroring the Outlook of the sovereign ratings. Fitch believes that BNDES, similar to other public entities, remain subject to political influence given its state-owned nature and strong links with the government. BNDES's executive management generally undergoes changes following changes in the government. Most recently, in the second quarter of 2017, a new CEO was appointed following the resignation of the former CEO, who, in turn, had taken office in 2016 following the inauguration of the new government. BNDES has been subject to intensified public and political scrutiny in recent years, with respect to alleged irregularities in a number of its lending and investment operations in Brazil and abroad. As of the publication date of this release, an official investigation of its subsidiary BNDES Participacoes S.A.'s (BNDESPAR) operations with J&F Investimentos S.A., the holding company of JBS S.A., was ongoing. In May 2017, a parliamentary commission was created for the same purpose. An earlier parliamentary commission was concluded in February 2016 without identifying any misconduct. BNDES has historically been Brazil's main lender of long-term credit at preferential rates. However, Fitch expects BNDES's market share to gradually decline over the long term, as the bank will not be able to count on new low-cost funding from the National Treasury (Tesouro Nacional; TN) for loan growth, as per government policy changes in 2016. BNDES prepaid BRL100 billion of its debt to the TN at year-end 2016; this had only a minor effect on its funding structure. At March 2017, TN funds, excluding hybrid capital, were 52% of the bank's total liabilities, while funds from the Workers' Assistance Fund (Fundo de Amparo ao Trabalhador; FAT) corresponded to a further 30% (57% and 26%, respectively, in June 2016). Since 2015, lower demand for loans, tightening of underwriting standards and lower risk appetite jointly led to a continuous drop in BNDES's loan disbursements. In 2015 and 2016 total disbursements fell 28% and 35%, respectively, due to continued suppressed demand and offer of loans, despite a reduction in the pace of the decline in the third quarter of the year. The negative trend has persisted through May 2017. As a result, in first-quarter 2017 (1Q17) and 2016, loan growth was negative 3% (quarter-on-quarter) and 11% (annual), respectively. BNDES's loan quality indicators remain better than sector averages, despite the downward revision of internal borrower ratings and the subsequent increase in impaired loans and provisioning requirements in 2016. Further, since 3Q16, BNDES has been setting up loan loss reserves above the minimum requirements. The relatively low impairment ratios are partly explained by BNDES's loans to financial institutions for on-lending which made up 43% of total loans at March 2017. Impaired loans classified in the D-H range under the central bank's range and non-performing loans above 90 days stood at 3.8% and 2.1%, respectively, at March 2017 (3.6% and 2.4% in 2016). In the same period, chargeoffs remained very low at 0.4% of average gross loans (0.07% in 2016 and 2015, respectively), and reserve coverage of D-H loans and non-performing loans (NPLs) over 90 days stood at an adequate 67% and 122%, respectively (58% and 86% in 2016). BNDES's profitability has been declining since 2015 as a result of loan and securities impairment charges, and lower income from investments (either via dividends or the equity method), reflecting both the deterioration in the operating environment and the bank's revision of its reserve policy. Impairment charges reached 72% of pre-impairment operating income at March 2017 (62% and 54%, in 2016 and 2015, respectively). As a result, operating profit/risk weighted assets (RWAs) declined to an historically low 0.93% in the same period (1.40% and 1.47%, in 2016 and 2015, respectively). Fitch expects BNDES's profitability to remain modest over the next year, as loan impairment charges are likely to remain high and further loan rating reviews might be needed. Large single-name exposures both in the loan book and in the equity and investments holdings of BNDESPAR pose downside risks to earnings. In Fitch's view, BNDES's capitalization is adequate considering the expected continuation of modest loan growth and the adoption of a more conservative dividend policy. At March 2017 the bank's FCC ratio stood at a comfortable 14.39%, compared with an average of 10.10% between 2013 and 2015 and 13.51% in 2016. In 2016 a significant increase in the security revaluation reserves (from negative BRL12.3 billion at year-end 2015 to positive BRL7.2 billion at year-end 2016), the decline in RWAs and the fall in the dividend payout to 27% of net income (from an average of 105% between 2012 and 2015) boosted capitalization. In the same period, the recognition of impairments in the stock portfolio and their transfer from security revaluation reserves to the income statement explained about a quarter of the increase in these reserves. KEY RATING DRIVERS - SUPPORT RATING, SUPPORT RATING FLOOR The affirmation of BNDES's SRs at '3' reflects the moderate probability of sovereign support. Fitch believes that the Brazilian government would have a high willingness to support BNDES 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. BNDES's SRF is affirmed at 'BB' and aligned with the sovereign rating. KEY RATING DRIVERS - SENIOR and SUBORDINATED DEBT RATING The affirmation of BNDES's senior debt ratings at 'BB' reflects the affirmation of the bank's Long-Term 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 BNDES, in case of need, would directly affect these banks' IDRs, National ratings, SRs, SRFs and debt ratings, all of which are driven by expected sovereign support. The National ratings of BNDES will not necessarily be downgraded in the case of a sovereign ratings downgrade. However, the Negative Outlook of the long-term 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. Fitch has affirmed the following ratings: --Long-term Foreign and Local Currency IDRs at 'BB', Outlook Negative; --Short-term Foreign and Local Currency IDRs at 'B'; --National long-term Rating at 'AA+(bra)', Outlook Negative; --National Short-term Rating at 'F1+(bra)'; --Support Rating at '3'; --Support Rating Floor at 'BB'; --Senior unsecured notes due 2019 and 2023 'BB'. Contact: Esin Celasun Director +55 21 4503-2626 Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20-401 B, Rio de Janeiro, RJ, Brazil Claudio Gallina Senior Director +55 11 4504-2216 Committee Chairperson Alejandro Garcia, CFA Managing Director +1-212-908-9137 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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