BRB - BANCO DE BRASÍLIA S.A.
Fitch Ratings has downgraded
The Rating Outlook on the IDRs and Long-Term National Rating is Stable. In addition, Fitch has downgraded BRB's Viability Ratings (VR) to 'b' from 'b+' and placed it Rating Watch Negative (RWN). A full list of rating actions follows the end of this release.
The one-notch downgrade of BRB's Long-Term IDRs, VR and National rating highlights further weakening in the bank's core capitalization and earnings following the announcement of the bank's 1Q23 financial statements on
Key Rating Drivers
BRB's IDRs and National ratings are now driven by shareholder support of its majority shareholder, the Government of
This follows Fitch's recent downgrade action 'Fitch Downgrades BRB's LT IDRs to 'B+'/Stable and LT National Rating to 'A(bra)'/Negative' published on
Unless noted below, BRB's Key Rating Drivers are those outlined in the previous rating action commentary.
IDRs, SHAREHOLDER SUPPORT RATING AND NATIONAL RATINGS
BRB's IDRs and Shareholder Support Rating (SSR) are based on Fitch's expectation of support, reflecting a moderate probability of support from GDF. This considers GDF's moderate propensity to support BRB, but also limited ability to do so. BRB is strategically important for GDF, as it is the local government's main financial agent and has a meaningful market share in the
The support assessment is also influenced by its strategic role and importance as a development bank in BRB's hometown, the
BRB's National Ratings have been notched from Fitch's view of GDF's creditworthiness on the national scale. Fitch believes the bank's national scale rating better reflects its creditworthiness relative to its respective supporting entity.
The Stable Outlook on the Long-Term IDR and National Rating reflect Fitch's view that any downside on the ratings that could potentially arise from a further weakening of BRB's standalone profile would be limited given the potential of support from its majority shareholder.
VR
The downgrade of BRB's VR reflects the continued deterioration in capitalization in 1Q23 and in operating profitability prospects, as well as Fitch's expectation that the financial profile will deteriorate further in the coming quarters. The CET1 ratio of 7.6% at 1Q23 (7.8% YE22) and the operating profit/ risk-weighted assets (RWA) ratio of negative 0.5% at the same date (0.8% in 2022) were lower than Fitch anticipated, bringing the CET1 ratio closer to the regulatory minimum of 7%.
As a result, Fitch believes that the trend in BRB's core capitalization and earnings metrics due to the implementation of remediation actions will take longer to recover relative to prior expectations. Hence, Fitch no longer views the bank's capital position, in particular, as commensurate with a 'b+' VR rating.
The Negative Watch indicates that there is a heightened probability of a negative rating action over the near term and reflects increased risks of the bank's CET1 ratio breaching the minimum regulatory requirement of 7.0%, when including the capital conservation buffer. This has become incrementally challenging in the context of high loan growth and weaker than expected earnings. As a result, Fitch has revised its assessment of BRB's capitalization and leverage score to 'b-'/negative from 'b'/stable.
A sustained deterioration in profitability adds further uncertainty to BRB's solvency and organic loss-absorption capacity in the near term. The bank's business model focuses on retail and commercial banking activities in
In addition, the worse than expected performance on the execution of BRB's digital expansion, exacerbated by the challenging operating environment in
In 1Q23, BRB posted net earnings of
Management continues to prioritize remediation actions through RWA optimization, asset sales and operational agreements with some of its affiliates. In 2Q23, management expects an additional
Fitch has affirmed the 'bb-' score on its assessment of BRB's funding and liquidity profile. BRB's funding and liquidity remained stable since the last review. Reliance on institutional depositors is modest as BRB benefits from a stable and diversified customer base. The bank funds its loan book through a combination of low-cost retail deposits (27% of deposits as of 1Q23), deposits from its majority shareholder, the Federal District Government (10%) and judicial deposits (38%), and from corporates/institutions (18%). The bank's liquidity position is adequate against short-term maturities.
Fitch expects to resolve the Watch status no later than six months from now once it has fully assessed the bank's ability to rebuild its capital metrics and estimated levels going forward.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IDRs, NATIONAL RATINGS and SSR
Material negative changes in Fitch's assessment of GDF's ability and willingness to provide support to BRB could affect the ratings.
If the VR were to be downgraded further from the current level, then the downside on the IDRs would be limited to the level indicated by the bank's SSR, given the potential of support from the GDF.
VR
If BRB fails to restore its CET1 ratio above 9% over the next two quarters, either due to larger than expected operating losses or a material increase in RWAs, then the VR would be downgraded. A weakening of asset quality ratios, steaming from BRB's credit expansion plans for unsecured lending, would also put negative pressure on the ratings.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IDRs, NATIONAL RATINGS and SSR
Positive changes in Fitch's assessment of GDF's ability and willingness to provide support to BRB could affect the SSR of the bank.
VR
An upgrade of VR ratings is unlikely in the near term given the RWN.
A replenishment of BRB's CET1 capital buffer to levels moderately above requirements, including the capital conservation buffer, coupled with a stabilization or contained deterioration operating profit metrics would support the VR to be removed from RWN.
In the event BRB is able to withstand rating pressure on its standalone profile, upside to the VR would be limited and a stable outlook would be contingent to its ability to demonstrate a recurring positive trend in its operating profitability metrics, coupled with strengthening CET1 ratios, as an indication of the consolidation and success of the ongoing digital expansion strategy, and healthier capital structure.
VR ADJUSTMENTS
BRB's 'b' VR has been assigned below the implied 'b+' VR due to a negative adjustment for the 'weakest link' financial profile Key Rating Driver: Capitalization and Leverage.
Earnings and Profitability midpoint of 'b' is set below the implied score of 'bb', based on an adjustment of historical and future metrics.
Asset Quality midpoint of 'b+' is set below the implied score of 'bb', based on an adjustment of underwriting standards and growth.
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.
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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