SAO PAULO & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has today affirmed the ratings for Banco Bradesco S.A.'s (Bradesco), including the Long-Term Foreign and Local Currency IDRs at 'BB+'/Outlook Negative. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
VR, IDRs, NATIONAL RATINGS AND SENIOR DEBT
Bradesco's Long-Term Foreign- and Local-Currency IDR are driven by the bank's 'bb+' Viability Rating (VR) and reflects its consistent performance throughout the economic cycles, even during periods of economic crises; the solid franchise in the local market; conservative risk administration; diversified revenue and funding bases; strong liquidity; adequate asset quality; and good capitalization.
Bradesco's VR is constrained by the Brazil's operating environment. Its VR was downgraded some notches since October 2015, following the downgrades of Brazil's sovereign rating. Bradesco's IDRs are one notch above Brazil's rating and are constrained by the country ceiling (BB+), reflecting the bank's very strong credit profile.
The Negative Outlook for the banks' Long-Term IDR mirrors the Negative Outlook on the sovereign's IDRs. The Rating Outlook for the National Long-Term Rating is Stable.
On June 8, 2016 the authorities approved the acquisition, by Bradesco, of HSBC Bank Brasil S.A. - Banco Multiplo (HSBC Brasil), the sixth largest commercial bank in the country. In Fitch Ratings' opinion, this transaction is complementary with the bank's current business model, mainly in high net-worth and in the corporate market, although the bank paid a high price for the acquisition. Such an acquisition should add between 2% and 3% market share in terms of assets, credit and deposits, thus improving its already strong franchise and competitive position. As with any merger and acquisition transaction, the business model and IT integration will be essential, as well as the retention of clients and professionals, but Bradesco has capacity to overcome these challenges, given the banks' successful record with other acquisitions.
Bradesco has achieved or has been close to achieving its credit, revenue and result goals, showing the flexibility to revise them during adverse economic scenarios. This view has prevailed since 2012, given the country's weak operating environment. Bradesco has a relatively low and very well-controlled risk appetite, especially with credit, including its exposure to private securities.
Bradesco's profitability is still better than that of local retail banks' averages, with ROAE and ROAA of 18.7% and 1.5%, respectively, since 2012, despite the increase credit costs and the lower credit portfolio growth. The bank has adopted a strategy of controlling credit expansion in traditional business segments and higher exposure to lower risk segments, which should minimize pressures from the current operating environment challenges.
As with local peers, Bradesco's asset quality indicators have been weakening since 2014, with non-performing loans (NPLs) of 4.6% in June 2016 from 4.1% in December 2015 and 3.5% in 2014, following the recessive operating environment. However, the bank has increased credit provisions, and loan loss reserves covered a high 201%, with BRL6.4 billion provisioning above local rules in June 2016. The bank's robust revenue-generating capacity and conservative level of provisions should provide it with strong loss absorption capacity.
Bradesco's ample client deposit base, as well as its conservative funding policies, ensures a strong liquidity position. The adequate Fitch core capital (FCC, 11.9% in June 2016) ratio has increased since 2013, following the gradual implementation of Basel III local rules, which should not be a challenge for the bank. The regulatory capital has remained stable (17.7% in June 2016).
SUPPORT RATING AND SUPPORT RATING FLOOR
Bradesco's Fitch Sovereign-based Support Rating of '3' and Support Rating Floor of 'BB-', reflect the bank's ample size and domestic systemic importance, but also indicates the moderate probability of support due to uncertainties surrounding the capacity or willingness of the Brazilian government to provide support. Bradesco is systemically important for the country, as it is the second largest private bank. It holds high market share in various domestic financial system segments, with approximately 11% of total assets and 9% of the financial system deposits in December 2015 and plays a fundamental role in the private pension system and insurance sector.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The IDR of its subordinated notes is 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.
RATING SENSITIVITIES
IDRs, SENIOR AND SUBORDINATED DEBT
Bradesco's IDRs and debt ratings are sensitive to a change in Fitch's assumptions around specific issuer rating factors and rating factors affecting the sovereign. The Negative Outlook on the IDRs reflects Fitch's current negative view on the operating environment for Brazilian banks, which in turn is heavily influenced by the Negative Outlook on Brazil's Sovereign rating. Bradesco's ratings could be downgraded if the sovereign's ratings are further downgraded. The Rating Outlook for the sovereign is negative.
NATIONAL RATINGS
As the National Ratings are at the highest possible rating on Fitch's Rating Scale, a further upgrade would not be possible, thus the Rating Outlook for the National Rating is Stable. These ratings could only be downgraded in the event of Bradesco being rated at or below the sovereign rating on the international scale.
VR
Bradesco's VRs are sensitive to a change in Fitch's assumptions regarding the bank's rating factors. Bradesco's VR could be negatively affected in case of loss absorption capacity reduction, or sustained FCCs lowering to less than 9% and decline in provisioning ratios from current levels. ROAA below 1.25% and NPLs above 6%, for a sustained period, could also lead to a downgrade of the bank's ratings.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SR is potentially sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Bradesco's subordinated debt ratings are broadly sensitive to the same considerations that might affect bank's VR.
Fitch has affirmed the following ratings:
Banco Bradesco
Long-term Foreign and Local-Currency IDR at 'BB+'; Outlook Negative;
Short-term Foreign and Local-Currency IDR at 'B';
Viability Rating at 'bb+';
Support Rating at '3';
Support Rating Floor at 'BB-';
National Long-term Rating at 'AAA(bra)'; Outlook Stable;
National Short-term Rating at 'F1+(bra)'.
Subordinated Notes due September 2019, January 2021 and March 2022
Long-term Foreign-Currency Rating at 'BB-'.
Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'.
Applicable Criteria
Global Bank Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884135
National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/site/re/720082
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011142
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011142
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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