SAO PAULO, Brazil & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed Banco Bonsucesso S.A.'s long-term ratings and revised the Rating Outlook to Stable from Negative. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The Outlook revision to Stable reflects the benefits from Bonsucesso's joint venture (JV) with Banco Santander Brasil S.A. (Santander, IDR 'BBB +'/Outlook Stable). The JV, which concluded in February 2015, operates in the payroll loan business. Santander has a 60% stake in the JV, named Banco Bonsucesso Consignado S.A. (BBC), while Bonsucesso has 40%.
The transfer of the payroll loan portfolio and the operational structure related to this portfolio of Bonsucesso for the BBC will allow the bank to address its operating costs, improve its capital base, the funding structure and its liquidity indicators. This should help Bonsucesso to be better positioned in the domestic highly competitive scenario and grant more flexibility while the bank still prepares a new business model in a challenging operating environment.
The current operating environment in Brazil adds special challenges to the bank in order to develop its new business plan away from its historic focus on payroll loan business. While capitalization, funding and liquidity will remain adequate to foster new business, the need to enhance current results on the business lines to be preserved at Bonsucesso is the largest challenge of the bank.
BBC's main business line will be the payroll lending business and will concentrate all activities related to this segment, including the payroll-linked credit card business and Santander's operations originated out of its branch network. Nevertheless, Fitch expects the majority of Bonsucesso's revenue stream will continue to come from its payroll product, which is now received through equity resulting from its minority interest in BBC. The revenues from this business line should constitute roughly 65% of Bonsucesso's revenue generation, at least during the next two years, since the bank still needs to develop, implement and test a new business model.
The success of BBC and its resulting equity result contribution to Bonsucesso will be driven by easy funding access in the recently created bank, supported by Santander's extensive franchise. As of February 2015, monthly production at Bonsucesso of payroll loans grew almost 5x if compared to September 2014 levels and are expect to be transferred to the JV loan book in the following months of 2015.
It is still relatively early to anticipate potential effects on Bonsucesso's standalone earnings generation. These will depend on operating environment conditions, management's capacity to deliver new operating activities and the reorganization of existing business, such as credit to small and medium enterprises (SMEs) and cards.
The ratings also consider Bonsucesso's relatively modest size, which makes it more susceptible to fluctuations of the economy compared to peers, its limited business profile with high dependence of payroll business, still improving asset-quality and low profitability since 2011.
Fitch believes Bonsucesso's overall structure should be favored by the new business model, as BBC operations will be conducted by the same management (with vast knowledge in the payroll segment) of Bonsucesso and BBC's installations were not changed, which reduces the likelihood of errors and operating systems. However, Fitch also believes it is still relatively early to estimate the full extent of future BBC's contributions to Bonsucesso's bottom-line results, due to the dynamics of market demand, fierce competition and funding costs at the new bank. The bank's strategy is to further accelerate payroll loan production, which is already occurring since September 2014, after the JV announcement. The bank also intends to increase other activities, such as credit cards and credit for SMEs, depending on the economic environment, which is still poor in terms of volume and revenue.
Funding structure have also improved and should further improve after the full transfer of payroll loans to the BBC, reducing its dependence on costly funding sources, such Special Guaranteed Time Deposits (DPGE). These decreased from 58% of total deposits in December 2013 to 26% in September 2014.
Smaller banks have faced strong competition in payroll loans, as large banks are more active in secured type of loans, as a result of rising delinquency in the local financial system in other segments, such as consumer finance and corporate lending. These banks were also facing other important challenges such as rising commission costs and restrictions on fees, as fixed- rates and other rates ceilings imposed by the government for the most profitable contracts (such as the INSS). Banco BMG SA also formed a joint venture with Itau Unibanco Holding SA (IDR Local Currency 'A-'/Outlook Stable), with a slightly different structure in order to keep expanding their existing business, along with a strong partner in terms of funding capacity.
The number of Bonsucesso loans nonperforming for more than 90 days decreased to 2.4% in September 2014 from 2.7% in 2013, while loans within the D-H category improved to 8.8% from 10.2%. The high delinquency ratios on the bank still reflect the problems faced in the past in the SME portfolio, which reveals a certain concentration in Fitch's opinion. This has led to higher provisions costs for overdue loans since 2011, which, associated with lower credit production and high funding costs have reflected in lower profitability. The credit quality of this portfolio and the growing share of other businesses mentioned before will be key in order to deliver better operating results excluding the equity participation on the expected results from its JV.
On the other hand, the strategy to deleverage its balance sheet has contributed to a more adequate Fitch Core Capital ratio (FCC) (considering its business profile) of 15.5% in September 2014, compared to 11.4% in December 2013.
Ultimately controlled by Pentagna Guimaraes family, Bonsucesso originated in 1992 from a car finance company (Bonsucesso Financeira). The bank operates on the payroll deductible loans for civil servants and retirees/pensioners of the Brazilian social security agency Instituto Nacional do Seguro Social (INSS). On a lesser scale, Bonsucesso lends to small and midsize companies.
Positive rating actions could result if Bonsucesso is able to develop and well-implement a new business model and, in the medium term, demonstrate adequate and recurrent levels of profitability (operational ROA above 1%), superior levels of asset quality and maintain an adequate capital position. On the other hand, if the transaction is not successful and / or the bank cannot develop other businesses lines in the medium term, suggesting that profitability remains dependent on BBC's operating profits, the ratings could be downgraded. Operational ROA and Fitch Core Capital below 0.5% and 10%, respectively, and / or major deterioration in credit quality could also trigger negative actions on the ratings.
Fitch has affirmed Bonsucesso's ratings as follows:
--Long-term FC and LC Issuer Default Rating (IDR) at 'B', Outlook revised to Stable from Negative;
--Short-term FC and LC IDR at 'B';
--Viability rating at 'b';
--Support rating at'5';
--Support rating floor at 'NF';
--Long-term National Rating at 'BBB(bra)', Outlook revised to Stable from Negative;
--Short-term National Rating at 'F3(bra)'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'National Ratings: Methodology Update' (Oct. 30, 2013).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
National Scale Ratings Criteria