Fitch Ratings has affirmed Banco BOCOM BBM S.A.'s (BOCOM BBM) Long-Term (LT) Foreign Currency (FC) Issuer Default Rating (IDR) at 'BB', LT Local Currency (LC) IDR at 'BB+' and LT National Rating at 'AAA(bra)'.

The Rating Outlook is Stable.

In addition, Fitch has affirmed BOCOM BBM's Viability Rating (VR) at 'bb-'.

Key Rating Drivers

IDRs, NATIONAL RATINGS AND SHAREHOLDER SUPPORT RATING

High Probability of Support: BOCOM BBM's IDRs, National Ratings and SSR reflect a high probability of support from its from its Chinese ultimate parent bank, Bank of Communications Co, Ltd. (BOCOM; Long-Term Foreign Currency IDR A/Stable and Viability Rating bb-).

BOCOM BBM's LT FC IDR is rated one notch below that of BOCOM's and constrained by Brazil's 'BB' Country Ceiling, while its LT LC IDR is currently capped at two notches above Brazil's LC sovereign rating (BB-/Stable). This reflects Fitch's view that BOCOM's ability to provide support to its subsidiary's senior creditors is linked to Brazilian sovereign risk, and might be reduced in case of extreme sovereign stress, despite the group's strategic commitment to the country

The support assessment also incorporates Fitch's view that BOCOM BBM's activities in Brazil are strategically important for the parent. This is demonstrated by the group's efforts to deepen commercial activity since over the past years, ordinary support in terms of funding and capital and BOCOM BBM's efforts to increase synergies and operational integration within its parent.

BOCOM owns 80% of BOCOM BBM and the parent's IDRs are driven by the Chinese state's ownership in the bank and its systemic importance. Under Fitch's assessment, Chinese state support to BOCOM would flow through to BOCOM BBM, should the need arise. BOCOM has a strong ability to provide support if needed, as BOCOM BBM's modest size relative to the overall group is unlikely to represent a constraint.

VR

Intrinsic Credit Fundamentals: The VR is supported by the bank's growing, albeit modest in size, corporate lending franchise in the domestic market and the bank's proved record of business stability over the past four years. It also reflects a conservative risk appetite towards domestic corporates, resulting in stronger asset quality than many of its peers. BOCOM BBM's capitalization is adequate for its risk profile, while funding and liquidity is comfortable and benefits from ordinary support from BOCOM.

Strengthened Franchise: BOCOM BBM is a medium-sized commercial bank focused primarily on corporate lending. The bank's market share by total loans is small on a national basis, but Fitch's assessment of BOCOM BBM business profile highlights the bank's improved banking franchise in recent years that has translated into incremental revenue generation over the past four years despite a more challenging and highly competitive operating environment.

The bank's management team has successfully executed its business-expansion plans on the bank's core corporate lending franchise, while strengthening fee-based business units so as to support revenue diversification. Intra-group benefits from being part of the Chinese BOCOM group supported this plan.

Resilient Asset Quality: BOCOM BBM has maintained better asset quality throughout the recent years than domestic peers due to its conservative risk profile, which should put them in good stead to absorb some deterioration from higher interest rates and Brazil's still low economic growth. At end-2021, its impaired loan ratio (which includes impaired loans from D-H under local resolution) was 0.4%, and was supported by a strong impaired loans coverage ratio of 163%. Fitch believes BOCOM BBM's strong metrics should help the bank maintain asset-quality metrics that are consistent with a 'bb-' score.

Improving Commercial Scale: BOCOM BBM's profitability metrics are somewhat below that of the average of 'bb category' banks, partially explained by the bank's conservative asset mix toward large corporates. However, core earnings have been fairly improving in recent years helped by growing business volumes, improving mix and cost optimization measures. BOCOM BBMs operating profit-to-RWAs ratio was 3.3% in FY21 from 2.3% in FY18, supported by sound revenue performance. Accordingly, the bank's operating income of BRL561 million in FY21 grew 2.0x from FY18 levels of BRL292 million.

Fitch anticipates most of the earnings rebound in 2021 will be challenged in the next 18 months due to weaker business prospects, but profitability will likely remain resilient due to growing corporate lending volumes and the continued expansion toward new businesses, including in SME lending and in the bank's client fund management divisions.

Adequate Capitalization: Capitalization levels are adequate considering BOCOM BBM's credit risk profile, well managed market risks and ordinary support from the parent. BOCOM BBM's below peer average CET1 ratio of 9.8% at the end of March 2022 reflects its parent BOCOM largely managing the subsidiary's capitalization on a need-cost optimization basis. Fitch expects ordinary support to remain available for business growth, should it be needed.

Further loss-absorption capacity in the form of hybrid instruments is added by tier 1 perpetual notes placed within its group of around BRL 200 million. Also, in February 2022, BOCOM BBM's demonstrated good access to wholesale debt markets through an issuance of BRL270 million of tier 2 subordinated debt. The latter explains BOCOM BBM's improved total regulatory capital ratio of 15.3% at the end of March 2022 from 12.6% the end of 2021.

Stable Funding: Fitch's assessment of BOCOM BBM's funding and liquidity profile incorporate the benefits it derives from being part of BOCOM. Intragroup funding accounted for 34% of BOCOM BBM's funding base at the end of March 2022. BOCOM BBM also funds its loan book with a mix of customer deposits and deposit like instruments. The bank's liquidity buffers are adequate given limited forthcoming maturities. At the end of March 2022, high-quality liquid assets reached BRL2.6 billion, representing an adequate 19% of total assets.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

BOCOM BBM's IDRs, National Ratings and SSR could be downgraded if BOCOM's IDRs, from which they are notched, suffer a multiple-notch downgraded. However, BOCOM BBM's Long-Term IDR would not be downgraded to a level below that of its VR.

The VR has enough headroom to absorb moderate deterioration in asset quality. They could be downgraded if the recovery of the Brazilian economy suffers a severe setback causing a material weakening of the operating environment. In this scenario, pressure could stem from rapidly rising private-sector indebtedness and permanent erosion of business prospects.

The VR could also be downgraded if contrary to expectations, BOCOM BBM's impaired loan ratio deteriorates durably above 5% that results in deterioration of its earnings.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

BOCOM'S IDRs could be upgraded if the rating on the Brazilian sovereign is also upgraded, provided that BOCOM BBM remains strategically important to BOCOM.

An upgrade on the VR is unlikely and would be contingent on a sovereign upgrade.

VR ADJUSTMENTS

The Business Profile 'bb-' has been assigned above the implied 'b' Business Profile Score due to the following adjustment reason: Group benefits and risks (positive).

The Earnings & Profitability 'b+' has been assigned below the implied 'bb' Earnings & Profitability Score due to the following adjustment reason: Revenue Diversification (negative).

The Funding & Liquidity of 'bb-' has been assigned above the implied 'b' Funding & Liquidity Score due to the following adjustment reason: Non-deposit funding (positive).

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

BOCOM BBM's IDRs and National Ratings are driven by support from the Bank of Communications Co, Ltd. (BOCOM; LT FC IDR A/Stable and VR bb-), which owns 80% of BOCOM BBM.

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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