Fitch Ratings has affirmed Banco de Brasilia S.A.'s (BRB) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-' and its Long-Term National rating at 'A+(bra)'.

Fitch has revised the Rating Outlook on the National Rating to Stable from Negative. Fitch has also affirmed BRB's Short-Term IDR and National Rating at 'B' and 'F1(bra)', respectively.

The LT National Rating Outlook revision reflects that BRB's performance through the last few quarters has been better than expected, reducing the likelihood of the downside scenario contemplated when Fitch assigned the Negative Outlook in April 2020. The bank has maintained adequate asset quality and sound profitability ratios, which gives Fitch greater confidence that its financial profile will remain consistent with its current national rating over the next two years. The Negative Outlook on the IDRs mirrors the sovereign's Outlook, as BRB's IDRs are at the same level of Brazil's ratings.

Key Rating Drivers

BRB's Long-Term Local Currency and Foreign Currency IDRs are driven by its 'bb-' Viability Rating (VR). The bank's VR is highly influenced by its resilient company profile and also captures the limitations imposed by the Brazilian operating environment. BRB continues to maintain its strong franchise in the Federal District with a stable and diversified retail funding base and a good financial profile.

The bank is also investing in its digital platform, with the objective of expanding its operations to other Brazilian states, which would strengthen and diversify its revenues sources. During the first half of 2021 the bank posted 1 million of new digital accounts, increasing its customer base by 175.2% in one year. In Fitch's view, although the digital strategy may initially pressure the institution's results due to the increase in expenses, in the long term it should expand the bank's franchise, bringing scale gains and cross-selling opportunities.

BRB's asset quality ratios are good, reflecting its focus on secured lending. At June 2021, payroll deductible loans and mortgages made up 48.6% and 18.5% of gross loans, respectively. Both portfolios present low credit risk due to the robustness of the type of guarantee. During the same period, nonperforming loans (NPLs) stood at a comfortable 1.5% of gross loans, down from 1.6% a year earlier. Loans classified in the 'D-H' range also fell to 3.9% at June 2021 from 5.0% at June 2020.

Fitch's base case assessment assumes that asset quality will remain under pressure until at least 2022, but it should remain manageable aided by the bank's proactive risk management and improved economic prospects from 2H21 onwards. The small amount of renegotiated loans related to the pandemic at this stage (around 9.8% of total loans) signals that borrowers' repayment capacity remains adequate so far.

The bank maintained solid profitability, with operating profit at a high 5.0% of risk-weighted assets (RWAs) at June 2021 (from a 5.4% a year earlier), favored by the increase of net interest income and fees. In Fitch's view even with the increase of expenses related to development of the digital platform, BRB's profitability will remain above peers and in line with its current rating category.

BRB's capitalization is adequate, and its common equity Tier 1 (CET1) stood at 12.7% at the end of 2Q21, slightly below its peers' average of 14.3%. This reduction is result of the strong growth of 29.1% of RWA YoY, due mainly to the high appetite on the market for payroll loans and mortgages. The bank is planning to carry out a follow-on in the upcoming months, which in Fitch's opinion will support its growth strategy.

The bank's funding and liquidity kept good and stable until 1H21. BRB funds its loan book through a combination of low cost retail deposits, deposits from related parties (mainly the Governo do Distrito Federal [GDF]) and judicial deposits. At June 2021, the Loans/Customers Deposits ratio reached 104.8%.

Support Rating

Fitch has affirmed BRB's Support Rating (SR) at '4'. The bank's SR reflects the limited probability of support from its majority shareholder, GDF. Fitch believes GDF has relatively limited capacity to support BRB should the need arise despite being very willing to do so. BRB is strategically important for GDF, as it is the local government's main financial agent and it has a meaningful market share in the state's loans and time deposits. In addition to its commercial operations, BRB performs a policy role for the region through lending operations that promote development and economic growth.

RATING SENSITIVITIES

VR and IDRs

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

A downgrade of Brazil's sovereign rating, due to the constraint of the sovereign ratings on the bank's long-term IDRs and VR.

A sustained decline in the operating profit/RWA ratio below 2.5%.

A sustained deterioration in the bank's CET1 ratio below 11%.

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

A sustained recovery in the macroeconomic environment, including a reduction of vulnerabilities in the Brazilian economy that could underpin an IDR's Outlook revision to Stable.

Although unlikely, an upgrade of the sovereign.

BRB's foreign currency IDRs have a Negative Outlook, which makes an upgrade in the near future highly unlikely.

National Ratings

Changes in BRB's credit profile relative to its Brazilian peers could result in changes to its national ratings.

Support Rating

Material changes in Fitch's assessment of GDF's ability and willingness to provide support to BRB could affect the SR of the bank.

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

BRB's support rating is driven by Fitch's internal opinion of GDF's creditworthiness.

ESG Considerations

BRB - Banco de Brasilia SA has an ESG Relevance Score of '4' for Governance Structure due to its ownership by the state, which increases potential political interference risks. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

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

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
BRB - Banco de Brasilia SA	LT IDR	BB- 	Affirmed		BB-
	ST IDR	B 	Affirmed		B
	LC LT IDR	BB- 	Affirmed		BB-
	LC ST IDR	B 	Affirmed		B
	Natl LT	A+(bra) 	Affirmed		A+(bra)
	Natl ST	F1(bra) 	Affirmed		F1(bra)
	Viability	bb- 	Affirmed		bb-
	Support	4 	Affirmed		4

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2021 Electronic News Publishing, source ENP Newswire