NEW YORK & SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Banco BMG S.A. (BMG) at 'BB-'/Outlook Negative. See the full list of rating actions at the end of this release.
KEY RATING DRIVERS
IDRS, VR AND NATIONAL RATINGS
The affirmation of BMG's Viability Rating (VR), IDRs and National Ratings reflects Fitch's view on the expected improvement in funding and capitalization resulting from the upcoming sale of BMG's 40% share of its joint venture partnership (JV) with Itau Unibanco in the payroll deductible lending business (Consignado). As announced in late September of this year, Itau Unibanco, IDR 'BB+'/'AAA(bra)', which owns the remaining 60%, will be paying approximately BRL1.28 billion updated by CDI interest rate since Dec. 31, 2015, to BMG upon the closing of the sale. The sale is expected to take place before year-end, following regulatory approval. The proceeds are expected to strengthen BMG's credit metrics, mainly the regulatory capitalization ratios, while it continues to grow its core business of credit card lending backed by payroll deduction ('cartao de credito consignado'). Despite the sale of all of its JV shareholdings to Itau Unibanco, the two banks will continue to maintain an association via a 10-year agreement for the distribution of the JV's payroll-backed loans on an exclusive basis through the distribution channels linked to BMG.
The ratings also consider BMG's challenge to maintain its asset quality in the continued challenging macroeconomic scenario that will limit operational profitability. BMG had been operating with a more comfortable liquidity position since transferring most of its consignado loan portfolio to the JV over the past two years and since deciding to stop growing and then exit its vehicle finance business. Using its excess liquidity, the bank has reduced the amount of its more expensive liabilities including prepaying a portion of its subordinated bonds due in 2019 and 2020 at a discount. The bank had also diversified its funding, increasing the amount of stable deposits rather than depending on asset sales and overseas funding.
While BMG will no longer be able to benefit from its soon to be sold 40% equity in earnings in the JV, it will be able to use the proceeds to support the growth of its core business segments, which have already seen their exposure grow by slightly more than 175% during the last 12 months. Fitch believes management will conservatively manage the expansion of its payroll deductible credit card segment, in which BMG has considerable expertise and a 60% market share. Management is cognizant that increased competition in the segment will impact its share but it also comfortable that there is sufficient demand - especially with the expected improvement in the economy (Fitch forecasts that Brazil's GDP will grow by 1.2% in 2017 and even more in 2018 - following negative growth in 2016). Even if the recovery is delayed, the weak operating environment is expected to have a lower impact on this product than it has on its other credit products such as pre-owned vehicle financing and commercial lending. The bank's 'cartao de credito consignado' portfolio balance has already reached BRL4.9 billion at Sept. 30, 2016.
To support such growth, the bank had recently enhanced its risk management team and has maintained sophisticated systems for risk mitigation. In view of the still weak operating environment, the credit approval process is expected to remain cautiously selective as to new credit disbursements in its core segments.
The bank continues to amortize the goodwill expense from past purchases of other banks and this amount is now reduced to approximately BRL700 million. BMG continues to carefully monitor its cost controls; however, profitability was impacted by high expenses resulting from the positioning of its Payroll Credit Card business and the need for provisioning in its commercial credit portfolio which offset the still-low revenues from its remaining core business. BMG was able to report positive earnings during the third quarter 2016 as a result of a non-recurring fee from Grupo Generali in the amount of Euro45 million (about BRL164 million) in exchange for an exclusive right to distribute Grupo Generali's insurance products through BMG's business channels over the next 20 years.
The Negative Outlook on the IDR was maintained as it reflects Fitch's view that many of the key credit metrics of this mid-sized wholesale bank are highly influenced by the operating environment and could see further pressure considering our expectations for continued weakness in the domestic operating environment, as evidenced by the still negative outlook assigned by Fitch to the Brazilian banking sector.
SUPPORT RATING AND SUPPORT RATING FLOOR
BMG's Support Rating and Support Rating Floor are based on Fitch's view that BMG is not considered to be a domestically important financial institution, due to the size of its deposit and loan market share. As such it is unlikely to receive external support from the Brazilian sovereign.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
BMG's subordinated debt is rated three notches below its VR to reflect its subordinated status. It has thus been affirmed due to the affirmation of the bank's VR.
RATING SENSITIVITIES
IDRS, VR and NATIONAL RATINGS
BMG's ratings could be downgraded in case of further sustained deterioration in its asset quality (non-performing loans over 90 days remaining above 3%) and weak performance (such as a continued negative operating profit-to-risk-weighted assets, and/or a deterioration in capitalization (Fitch Core Capital [FCC] falling below 12%).
A revision in the Outlook to Stable is unlikely in the short- and medium-term as it is contingent on significant improvements in operational profitability and a sustained improvement in the impaired loan ratio (D-H) to below 6% of total loans while BMG's FCC remains above 13%. An operating profit-to-risk-weighted assets ratio above 2% would trigger a positive rating review by Fitch.
SENIOR UNSECURED AND SUBORDINATED DEBT
Senior and subordinated debt ratings would generally move together with the bank's Long-Term IDR. The subordinated debt will remain three notches below the bank's IDR.
Fitch has affirmed the following ratings:
Banco BMG:
--Long-Term Foreign Currency IDR at 'BB-'; Outlook Negative;
--Short-Term Foreign Currency IDR at 'B';
--Long-Term Local Currency IDR at 'BB-'; Outlook Negative;
--Short-Term Local Currency IDR at 'B';
--Viability Rating at 'bb-';
--Support Rating at '5';
--Support Rating Floor 'No Floor';
--National long-term rating at 'A(bra)'; Outlook Negative;
--National short-term rating at 'F2(bra)';
--Subordinated notes due 2019 & 2020
Long-term foreign currency rating at 'B-';
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Bank Rating Criteria (pub. 25 Nov 2016)
https://www.fitchratings.com/site/re/891051
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=1015807
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015807
Endorsement Policy
https://www.fitchratings.com/regulatory
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