NEW YORK & SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Banco Bradesco S.A. (Bradesco), Itau Unibanco Holding S.A. (IUH), Itau Unibanco S.A. (Itau Unibanco), and Banco Itau BBA S.A. (IBBA) A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.
IUH and Bradesco are the largest private sector financial groups in Brazil. They are present in a wide range of lending segments in the local market from commercial lending to small-to-medium enterprises (SMEs) and corporates, to lending to individuals for credit cards, payroll deductible loans, vehicles, personal loans, mortgages, and insurance among other fee business. In most of these segments, they are among the top five banks in terms of market share.
As of March 2014, Bradesco's assets and deposits market share was near 12% of the Brazilian financial system while IUH participation was around 15%. Both banks are listed on stock exchanges in Brazil and the U.S. and their overseas activities continue to gradually grow, mainly connected to the needs of large Brazilian companies and the country's internationalization process.
Both banks maintain conservative risk cultures, stable and diversified funding, comfortable liquidity cushion, and proven management skills in an environment of constant change. In that regard, Bradesco and IUH have proven to be successful in preserving their profitability at levels that are above or near the median of similarly rated banks and other larger banks around the world. Profitability has remained stable despite the margin compression of the last five years and the weak operating environment since 2012, which led them to adopt a more conservative approach toward a lower risk business mix notwithstanding the growing competition with public banks and strategic reduction in some niches.
Their performance and delinquency ratios clearly showed the benefits of the change in the retail credit mix toward lower risk segments such as payroll and mortgage lending while restricting credit to riskier segments such as SMEs, consumer finance, and vehicle finance.
The recent increase in interest rates and the diversified base of income and good cost controls also helped to boost results in this lackluster economy. Bradesco has posted strong profits, as shown by an average ROAA above 1.5% for the last four-and-a-quarter years and operating ROAA of 2.2% for the same period. IUH has had a similar performance with an average ROAA of above 1.7% and operating ROAA near 2.3% above its average peers.
After a deterioration in asset quality in mid-2011 to early-2012, Bradesco and IUH's asset quality saw a gradual but continual improvement until the first quarter of 2014 (1Q'14), especially in the loan portfolio to individuals. At the end of 1Q'14 the ratio of total non-performing loans (NPL) over 90 days-to-total loans for Bradesco and IUH declined to 3.4% and 3.5%, respectively (YE2012 NPL ratios of 4.1% and 4.8%, respectively). Providing further comfort to the challenging scenario foreseen for the remainder of 2014 and 2015, Fitch also observes that both banks maintain high levels of loan loss reserves beyond the required Central Bank minimum levels. Their reserve coverage for 90-day NPLs at the end of 1Q'14 were at a comfortable level of 194% for Bradesco and 176% for IUH, way above the average of international peers and the aggregate of private banks, which is around 150%. This is partially explained by their business mix and the fact that, historically, Bradesco has maintained a stable cushion of around BRL4 billion, in excess of Central Bank required provisions similar to IUH group which has BRL5.2billion in 1Q'14 .
Bradesco and IUH present an adequate regulatory capital base in comparison to international peers. Fitch Core Capital comparisons are not as strong but this ratio should be seen in the light of the excess capital in subsidiaries. In the case of Bradesco, the Fitch Core Capital average of 7.2% is compensated for by excess capitalization in its insurance subsidiary. Bradesco maintains its regulatory capital ratios well-above the already conservative local requirements ( Tier 1 Capital of 11.9% and regulatory capital of 15.7% as of March 14), with estimates that future fully phased-in BIS III ratios, considering the current mix, will be around 10.9% for Tier 1 . The IUH Fitch Core Capital ratio reached 8.7% as of March 2014 while regulatory capital ratios were 11.1% for Tier 1 capital and 15.6% for total capital ratio. Its fully phased-in ratio is near 9.6% for Tier 1 and will benefit mainly from its sustained profitability.
Both IUH and Bradesco are expected to meet upcoming BIS III minimum capital levels. This considers their current capital levels, overall internal capital generation capacity, and also their financial flexibility to issue hybrids to top up those levels as part of their policy to preserve a prudent cushion on top of the required minimums. As of today, the fully phased-in BIS III Total Capital Ratio for Bradesco stands at 14.8% and for Itau 12.8%; the minimum required at end of the five-year phase-in process is expected to be 13%. Current strategies for both to optimize their capital base also consider some changes of capital allocation during the BIS III transition period.
On May 30, 2014, a portion of IBBA's assets and liabilities totaling BRL0.9 billion of equity was transferred to Itau Unibanco. This spin-off was done in order to optimize its capital structure and to concentrate all of the financial intermediation activities of the Itau group within Itau Unibanco. IBBA will now be able to focus on investment banking and local cash management, two functions which do not require additional capital. Fitch views the above-mentioned changes as neutral to the banks' respective ratings given that IBBA remains a 'core' subsidiary of IUH despite its soon to be smaller size and modified position within the group.
IUH has also recently announced the sale of its major risk insurance operation to ACE insurance group which would be reflected on its balance sheet in 2015. Fitch views the successful completion of this sale as neutral to IUH's ratings, given the relatively limited size of the overall net income contribution in comparison to the overall income from its other insurance subsidiaries.
KEY RATING DRIVERS:
BRADESCO
Bradesco's Issuer Default Ratings (IDRs) are driven by its Viability Rating (VR). Its foreign currency IDR is constrained by Brazil's Country Ceiling (rated 'BBB+'); while its local currency IDR is two notches above the sovereign currency rating of Brazil, thanks to its very strong credit profile, funding franchise and its deposit stability. Under Fitch's rating criteria, this is the maximum uplift that an exceptionally strong entity can have compared to the rating of the sovereign where it is incorporated. The affirmation of current ratings was based on the proven resilience of Bradesco's results during a challenging operating environment with a diversified base of income sources and business. Also considered was the bank's conservative risk culture, and stable and diversified funding with proven management skills. The ratings also consider Bradesco's current capital base, and its ratios, which while trending slightly below that of similarly rated banks are compensated by ample loan loss reserves and a proven history of satisfactory results along the economic cycle.
Bradesco is the third largest bank in Brazil and Fitch believes that given Bradesco's size, interconnections and nationwide presence, the Brazilian government would provide the support required, which explains its current Support Rating (SR) of '2', while its Support Rating Floor is 'BBB-'.
The ratings of its subordinated notes, issued under Basel II rules, were two notches below its VR, reflecting the regular notching applied by Fitch to hybrid securities with coupon deferral mechanisms. More specifically, the securities are notched once due the higher loss severity derived from its subordinated nature and another notch due to incremental non-performance risk imposed by the ability to defer coupon payments when the minimum regulatory capital ratio is breached.
Bradesco's national scale rating reflects the same financial strength as its VRs and remains at the highest national scale rating in Brazil.
IUH, ITAU UNIBANCO AND ITAU BBA
IUH, Itau Unibanco and Banco Itau BBA's IDRs are driven by their VR. Their foreign currency IDRs are constrained by Brazil's Country Ceiling ('BBB+'), while their local currency IDRs are two notches above the sovereign currency rating of Brazil, thanks to their very strong credit profile, funding franchise and deposit stability. Under Fitch's rating criteria, this is the maximum uplift an exceptionally strong entity can have compared to the rating of the sovereign where it is incorporated. IUH, Itau Unibanco and Banco Itau BBA have 'Common' VR's and hence the IDRs are the same as those of IUH, as explained in Fitch's criteria for Rating FI Subsidiaries (quoted at the end of this Rating Action Commentary). Both subsidiaries are highly integrated in terms of management, balance sheet, and systems, meaning that the subsidiaries and parent credit profile are highly correlated and clearly managed in a consolidated manner.
The affirmation of IUH's VRs is driven by the group's ability to maintain performance, asset quality and capital levels at healthy levels along the economic cycle; this is all enhanced by a very stable and diversified funding base and conservative risk management techniques. The ratings also consider the bank's current capital base and its ratios, which are trending slightly below those of similarly rated banks but compensated for by ample loan loss reserves and a proven history of satisfactory results along the economic cycle.
IUH is the second largest banking group in Brazil and Fitch believes that given IUH's size and its nationwide presence, the Brazilian government would provide the bank the support it requires, which explains its current SR of '2', while its Support Rating Floor is 'BBB-'.
The rating of IUH's subordinated notes, two notches below its VR, reflects the regular notching applied by Fitch to hybrid securities with a coupon deferral mechanism. More specifically, the securities are notched once due to the higher loss severity derived from its subordinated nature and another notch due to incremental non-performance risk imposed by the ability to defer coupon payments when the minimum regulatory capital ratio is breached.
The IUH's Grand Cayman senior unsecured rating, denominated in Brazilian Reais (BRL), corresponds to the bank's IDRs and ranks equal with other senior unsecured and unsubordinated debt. The subscript - emr - was added to the rating of this issuance to reflect the embedded market risk of the exchange rate fluctuation between the BRL and the USD given that the issuance will be denominated in BRL while the settlement will be in USD.
IUH, Itau Unibanco and Banco Itau BBA's national scale ratings reflect the same financial strength of its VRs and remains at the highest national scale rating in Brazil.
RATING SENSITIVITIES:
BRADESCO
Bradesco IDRs could be affected by changes in the sovereign ratings of Brazil although an upgrade in the sovereign rating would not likely lead to an upgrade in the ratings of this bank as Fitch views the upside as restricted in the near-term horizon. Currently, the upside potential for the Long Term Foreign Currency IDR is limited by the country ceiling.
Its VR could be negatively affected if Bradesco's loss absorption capacity is diminished as evidenced by a sustained decrease in their Fitch Core Capital Ratio (FCC) below 7% and loan loss reserve ratios which may hinder the bank's loss absorption capacity. Also, sustained periods of ROAA below 1.25% and 90-day NPL ratios above 6% may trigger a downgrade in its ratings.
The sensitivity of the ratings of the subordinated debt is subject to any change in the VR rating of Bradesco. The national scale ratings of the banks are sensitive to the same factors as the VR.
IUH, Itau Unibanco and IBBA
IUH's IDRs could be affected by changes in the sovereign ratings of Brazil although an upgrade in the sovereign rating would not likely lead to an upgrade in the ratings of this bank, as Fitch views the upside as restricted in the near-term horizon. Currently, the upside potential for the Long Term Foreign Currency IDR is limited by the country ceiling.
IUH's VR could be negatively affected if its loss absorption capacity is diminished as evidenced by a sustained decrease in FCC below 7% and a decrease in loan loss reserve ratios from current levels which may hinder the bank's loss absorption capacity. Also, sustained periods of ROAA below 1.25% and 90-day NPL ratios above 6% may trigger a downgrade in its ratings.
As the ratings of Itau Unibanco and IBBA are currently equalized to those of its parent, any change to the rating of IUH is likely to affect the rating of these subsidiaries. The ratings of the subordinated debt are subject to any change in the VR rating of IUH. The national scale ratings of the banks are sensitive to the same factors as the VR.
Fitch has affirmed the ratings of Banco Bradesco S.A. as follows:
--Long-term Foreign Currency IDR at 'BBB+'; Outlook Stable;
--Short-term Foreign Currency IDR at 'F2';
--Local Currency long-term IDR at A-; Outlook Stable;
--Local Currency short-term IDR at 'F1';
--Viability Rating at 'a-';
--Support Rating at '2';
--Support Rating Floor at 'BBB-';
--Long-term National Rating at 'AAA(bra)'; Outlook Stable;
--Short-term National Rating at 'F1+(bra)';
--Subordinated notes due September 2019 at 'BBB';
--Subordinated notes due January 2021 at 'BBB';
--Subordinated notes due March 2022 at 'BBB'.
Fitch has affirmed the ratings of Itau Unibanco Holding S.A. as follows:
--Long-term Foreign Currency IDR at 'BBB+'; Outlook Stable;
--Short-Term Foreign Currency IDRs at 'F2';
--Local Currency long-term IDR at A-; Outlook Stable;
--Local Currency short-term IDR at 'F1';
--Viability Rating at 'a-';
--Support Rating at '2';
--Support Rating Floor at 'BBB-';
--Long-term National Rating at 'AAA(bra)'; Outlook Stable;
--Short-term National Rating at 'F1+(bra)';
--Market-linked notes due November 2015 at 'BBB+emr';
--Subordinated notes due April 2020 at 'BBB';
--Subordinated notes due January 2021 at 'BBB';
--Subordinated notes due December 2021 at 'BBB';
--Subordinated notes due March 2022 at 'BBB';
--Subordinated notes due August 2022 at 'BBB';
--Subordinated notes due May 2023 at 'BBB'.
Itau Unibanco S.A.
--Long-term Foreign currency IDR at 'BBB+'; Stable Outlook;
--Foreign currency short-term IDR at 'F2';
--Local currency long-term IDR at 'A-'; Stable Outlook;
--Local currency short-term IDR at 'F1';
--Viability rating at 'a-';
--Support rating at '2';
--Support rating floor 'BBB-';
--National long-term rating at 'AAA(bra)'; Stable Outlook;
--National short-term rating at 'F1+(bra)'.
Banco Itau BBA S.A.
--Long--term Foreign long-term IDR at 'BBB+'; Stable Outlook;
--Foreign currency short--term IDR at 'F2';
--Local currency long-term IDR at 'A-'; Stable Outlook;
--Local currency short-term IDR at 'F1';
--Viability rating at 'a-'
--Support rating at '2';
--Support rating floor 'BBB-';
--National long-term rating at 'AAA(bra)'; Stable Outlook;
--National short-term rating at 'F1+(bra)'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012)
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Jan. 31, 2014)
--'Rating Financial Institutions above the Sovereign' (Dec. 12, 2012)
--'National Scale Ratings Criteria' (Oct. 30, 2013);
- Fitch: Superior Justice Court Decision Negative for Brazilian Banks; Final Impact Still Unknown'(May 23 2014)
Applicable Criteria and Related Research:
National Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Rating Financial Institutions Above the Sovereign
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696373
Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840755
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