Fitch Ratings has affirmed
The Rating Outlooks are Stable. In addition, Fitch has affirmed BdB's Viability Rating (VR) at 'bb-'. A full list of rating actions follows at the end of this rating action commentary.
Key Rating Drivers
Government Support Drives Ratings: BdB's IDRs are driven by potential government support and equalized with those of
Despite BdB's high linkage with the sovereign rating, substantive enhancements to the company's governance structure and efforts to isolate itself from government intervention have materially improved BdB's business and financial profile in recent years. While Fitch's base case assumes no structural change of the bank's overall strategy in the near term, Fitch will continue to monitor the potential for federal government interference that could materially affect BdB's role and financial metrics.
The National Ratings reflect the entities' creditworthiness in local currency relative to that of other Brazilian issuers.
Sound Standalone Profile: BdB's VR is driven by its leading and diversified banking franchise in
However, the VR is one notch below the implied VR of 'bb' as the rating remains highly linked to the sovereign, given BdB's majority federal ownership, and could be constrained in the future if a change in its business model negatively affects the bank's risk profile.
Diversified Business Profile: BdB's strong and diversified franchise is a key rating strength and results in resilient structural profitability and access to large, stable deposit bases. BdB is the leading domestic bank, accounting for 15% and 16% of Brazilian banking system assets and deposits, respectively, and is particularly strong in the agricultural segment (56% market share). Revenue diversification is strong by income stream and has allowed the bank to generate capital consistently across economic cycles.
Adequate Asset Quality: BdB has maintained stable and stronger asset-quality indicators than domestic peers due to its improved underwriting standards, lower exposure to unsecured lending relative to its main peers and a large share of rural loans that benefits from better economic fundamentals than the national average. At
Fitch expects some asset-quality deterioration in 2023 as the effects of high interest rates and high inflation will become more evident on borrowers' repayment capacity, in particular for some SMEs and unsecured lending. However, Fitch expects moderate deterioration, with BdB's impaired loan ratio remaining closely in line with current levels over the next two years, aided by a large share of well-performing rural and secured payroll loans.
Earnings Resilience: BdB's domestic franchise and diversified business model have led to resilient income through the cycle despite revenue pressures. Revenue quality is good, with significant contributions from fee and insurance income. The acceleration of efficiency and commercial measures has supported strong revenue growth and led to profitability metrics above historical averages.
The bank's operating profit/risk-weighted assets ratio of 4.0% in 1Q23 (2022: 2.9%) reflected higher lending revenues and business volumes, as well as higher yields on government bonds. Fitch expects the operating profit/risk-weighted assets ratio to remain above 3.5% in 2023, driven by the higher interest rate and growth environment.
Capitalization Commensurate with VR: BdB's common equity Tier 1 (CET1) ratio of 12.0% at
Furthermore, part of the resources provided by the Fundo Constitucional de Financiamento do Centro-Oeste - (FCO), which comprises the bank's entire Tier 2 capital, are subject to a 10% annual phase out between 2021 and 2029. Given the bank's good internal capital generation prospects, these reductions are likely to be manageable from a capital adequacy point of view.
Diversified Funding, Stable Liquidity: Fitch views BdB's funding and liquidity as stable and a positive driver for its VR, supported by its large deposit franchise with frequent access to secured and unsecured wholesale markets. The bank's liquidity position is sound and supported by large buffers of high-quality liquid securities. The core metric of loans to deposits of 118% increased slightly at YE22 from YE20 pre-pandemic level of 113% as loan growth accelerated and deposit growth moderated, but we expected the ratio to stabilize as loan growth decelerates in the coming years.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IDRs, GSR and VR
Rating downside is primarily contingent on a downgrade of
BdB's VR would be negatively affected if its CET1 ratio falls below 10% and/or its regulatory capital ratios approach the minimum requirements, due to a combination of asset quality deterioration, weakening of profitability or higher than expected growth.
National Ratings
BdB's National Long-Term Rating is also sensitive to a negative change in Fitch's opinion of the bank's creditworthiness relative to other Brazilian issuers'.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IDRs, GSR and VR
An upgrade of the GSR and Long-Term IDRs would require a sovereign upgrade. In addition to a sovereign upgrade, the bank would have to maintain healthy financial metrics to upgrade the VR.
National Ratings
BdB's National ratings may be affected by a change in Fitch's perception of the bank's local relativities with respect to other Brazilian entities.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
BdB's 'BB-' senior debt rating is in line with the bank's Long-Term Foreign Currency IDR, as default on senior obligations is equal to the default of the bank.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade
BdB's senior unsecured debt ratings are sensitive to a change in its IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade
BdB's senior unsecured debt ratings are sensitive to a change in its IDR.
VR ADJUSTMENTS
The VR of 'bb-' has been assigned below the 'bb' implied VR due to the following adjustment reason: Risk Profile (negative)
The Asset Quality score of 'bb-' has been assigned above the 'b' category implied score due to the following adjustment reason: Collateral and Reserves.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Bdb's ratings are equalized with
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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