RIO DE JANEIRO & SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has downgraded Banrisul's (Banco do Estado do Rio Grande do Sul S.A.) Long-Term Issuer Default Ratings (IDR) to 'B+' from 'BB-' and National Long-Term Rating to 'A-(bra)' from 'A+(bra)'. The Rating Outlook remains Negative.
A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Banrisul's downgrade reflects the ongoing worsening of the economic and operating environment in the state of Rio Grande do Sul (ERGS), where the bulk of the bank's operations are concentrated. Fitch has a more negative view on Banrisul's operating environment, as it is materially weaker and remains under pressure.
Fitch believes that the deterioration of ERGS's credit profile will not have a material direct and immediate impact on Banrisul's financial profile, but the worsening environment in the bank's core market will likely translate gradually on negative trends in terms of asset quality, earnings, and consequently capitalization, which has already been under pressure.
Banrisul has posted weaker capitalization and credit quality indicators in relation to previous years and other peers. The operating profitability remains under pressure due to potential provision expenses related to the deterioration of the bank's loan exposures. Fitch expects that downside risks will remain for both the operating environment and most financial figures, which drives the Negative Outlook.
Banrisul's Viability Rating (VR) and its IDRs reflect the bank's regional importance, stable retail funding base, profitability and adequate liquidity metrics. Banrisul's Negative Rating Outlook reflect Fitch's expectations regarding a worsening of the bank's asset quality and capitalization due to the weakening of the financial profile of ERGS, Banrisul's main shareholders, as well as the continued worsening on the local operating environment. Banrisul's goals and strategies may be influenced by the weak economic and financial situation, and potentially also by the policy role Banrisul plays for its main shareholder.
Banrisul operates as a commercial bank, targeting both companies and to individuals. The bank has a strong presence in Rio Grande do Sul, with a 17% credit market share and 47% of term deposits (in June 2016). Loans to the state's public servants represent around 15% of the bank's credit portfolio. Fitch expects the performance of these loans to further deteriorate linked to delays in the disbursement of salaries to the state's employees.
The Support Rating '4' and the Support Rating Floor 'B' reflect the limited support probability provided by the Federal Government under a stress scenario due to the bank's relative systemic importance. Banrisul was the 11th biggest financial institution in the country in terms of assets, and the 7th regarding deposits (as per September 2016). However, there are no explicit support guarantees from the Federal Government.
Non Performance Loans (NPL 90+ days) presented some deterioration, mainly in the bank's corporate portfolio, throughout 2015 and until September 2016. NPLs totalled 5.4% of the portfolio in September 2016 (4.3% in 2015, 3.4% in 2014). Loans classified as rated 'D-H' increased to 13% against 10% in 2015. Even though Fitch still considers Banrisul's credit portfolio quality to be adequate, the agency expects an additional deterioration in 2017.
The capitalization indicators remain under pressure as a consequence of the acquisition (for BRL 1.3 billion), in September 2016, of exclusive rights to provide banking services regarding the payroll of active and retired public servants of the State of Rio Grande do Sul, for the period of 10 years. From 2007 to May 2016 Banrisul had a non-encumbering exclusive contract with the state. The intangible asset generation of this transaction had a negative impact on the bank's capitalization indicators. The Fitch core capital fell to 13.4% in September 2016 from 14.8% in December 2015.
Banrisul's Debt
Financial Treasury Bills: The issuance of unsecured national treasury bills is classified with the same criteria as other senior debts that lack real guarantees, subsequently their rating follow the downgrade of the bank's National Long-Term Rating.
Tier 2 Capital Subordinated Notes in Dollars: Banrisul's subordinated notes maturing in 2022, evaluated by Fitch, were downgraded to 'B-' and assigned 'RR6' and remain two grades below VR 'b+'. The classification includes the deduction of one grade due to the characteristics of loss severity and to its condition as subordinated debt. Another grade was deducted due to the moderate risk regarding a possible performance failure.
These notes were classified with the same criteria as other subordinated bank debts and count on an accrued deferred-coupon mechanism, which may be applied if the requirements of minimal regulatory capital are not attained. These notes have been traded with discounts due to the fact that they do not qualify as capital according to Basel III
RATING SENSITIVITIES
Negative Rating Action: Banrisul's ratings are likely to be downgraded if a major weakening of the assets quality indexes and an increase of non-performing credits higher than 7% take place, or if the Fitch Core Capital (FCC) falls below 11%. Moreover, Banrisul's ratings may be impacted by any change of Fitch's opinions regarding the operating and economics of the state of Rio Grande do Sul due to the banks' strong presence in that state.
Positive Rating Action: Banrisul's Rating Outlook could be revised to Stable should the bank maintain its profitability at adequate levels (expressed by an operating profit/average total assets ratio above 2%, with good asset quality indexes, NPLs around 4% and FCC of 14%), coupled with a material stabilization of the currently adverse economic environment.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
--Long-Term Foreign and Local Currency IDR downgraded to
'B+' from 'BB-'; Negative Outlook;
--Short-Term Foreign and Local Currency IDR affirmed at 'B';
--Viability Rating downgraded to 'b+' from 'bb-' ;
--Support Rating affirmed at '4';
--Support Rating Floor affirmed at 'B';
--National Long-Term Rating downgraded to 'A-(bra)' from 'A+(bra)'; Negative Outlook ;
--National Short-Term Rating downgraded to 'F2 (bra)' from 'F1(bra)' ;
--Rating of first issuance of unsecured senior financial notes downgraded to 'A-(bra)' from 'A+(bra)' ;
--Rating of Tier II Capital Subordinated Notes with maturity in February 2022, downgraded to 'B-' from 'B' ; Recovery Rating 'RR6'.
Additional information is available at '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=1015970
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015970
Endorsement Policy
https://www.fitchratings.com/regulatory
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