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Fitch Affirms Banco Bradesco S.A.'s IDRs; Outlook Negative
August 29, 2017 / 9:26 PM / 3 months ago

Fitch Affirms Banco Bradesco S.A.'s IDRs; Outlook Negative

(The following statement was released by the rating agency) SAO PAULO/RIO DE JANEIRO, August 29 (Fitch) Fitch Ratings has today affirmed the ratings for Banco Bradesco S.A. (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 IDRS, NATIONAL RATINGS AND SENIOR DEBT Bradesco's LT Foreign- and Local-Currency IDRs are driven by the bank's 'bb+' Viability Rating (VR) and reflect its consistent performance through economic cycles, even during periods of economic crises; its solid franchise in the local market; along with its conservative risk administration and robust financial metrics. Bradesco's VRs are one notch above Brazil's sovereign rating given the bank's sound business and financial profile, but they remain constrained by Brazil's challenging operating environment. The National Rating of 'AAA(bra)'/Stable Outlook was also affirmed, reflecting the bank's very strong credit profile. The Negative Outlook for the bank's Long-Term IDR mirrors the Negative Outlook on the sovereign's IDRs. The Rating Outlook for the National LT Rating is Stable. Bradesco concluded the merger with HSBC Bank Brasil S.A. in the second semester of 2016 and, with total assets of BRL 1.3 trillion, is now Brazil's second largest private-sector bank and the fourth-largest Brazilian financial institution in terms of assets - still behind Caixa Economica Federal, Itau Unibanco and Banco do Brasil. Bradesco has a a strong franchise, focused on the Brazilian market, with a large distribution network which fully covers the geography of the country and all the economic classes through the segmentation of its client base. Supported by this nationwide coverage of its branches and service points, the bank is mainly funded by the stable and low-cost deposits from 26.1 million checking accounts which represent 47.5% of its total funding. Bradesco has a relatively low and well-controlled risk appetite, especially with credit, including its exposure to private securities. With the ongoing weak macroeconomic environment and the lack of credit demand, the loan portfolio has contracted by 4% YTD. Based on the soft numbers reported in second half 2017, Bradesco lowered its expanded loan portfolio growth guidance for 2017, from maximum +5% to maximum -1%. According to management, loan origination has been steadily improving in most of its household products, while in the corporate segment it is mainly working capital lines. The bank posts a controlled delinquency ratio despite the weak macroeconomic environment. In June 2017, Bradesco's asset quality indicators showed an overall improvement, with the 90-day delinquency ratio lower for the second quarter in a row, to 4.9% in 2Q17 from 5.6% in the 1Q17 (5.4% excluding a specific corporate client). All lines showed an significant decline, contributing to the overall improvement in asset quality, with the largest improvement in SME where 90-day delinquencies fell over 100bps to 7.20% from 8.26%. The bank has strong coverage ratios with loan loss reserves coverage of 233%, with BRL6.9 billion of provisioning above local rules in June 2017. The bank's robust revenue-generating capacity and conservative level of provisions should provide it with strong loss absorption capacity. The improvement of the asset quality allowed Bradesco to improve its guidance for loan loss provisions in 2017. Despite the impact from new revolving credit card rules and the lower interest rate, the bank maintained its profit levels by focusing on OPEX reduction and loan loss provisions which more than offset the weaker top line. As of June 2017, the cost-cutting efforts included shutting down 246 branches and reducing headcount by over 3,000 employees since December 2016. Furthermore, the bank announced a voluntary dismissal program, which should increase the impact of OPEX reduction on the bottom line. Bradesco's ample client deposit base, as well as its conservative funding policies, ensure a strong liquidity position. The adequate Fitch core capital (FCC, 11.45% in June 2017) ratio has increased since 2013, following the gradual implementation of Basel III local rules, which should not be a challenge for the bank. Regulatory capital has remained stable (16.7% in June 2017). SUPPORT RATING AND SUPPORT RATING FLOOR Bradesco's Sovereign-based Support Rating of '3' and Support Rating Floor of 'BB-' reflect a moderate probability of support from the Brazilian government, in view of the uncertainty as to its capacity and willingness to do so. It also mirrors Bradesco's ample size and domestic systemic importance. Bradesco is the second-largest Brazilian private bank, holding high market share in various domestic financial system segments, with approximately 13% of total assets and 11% of the financial system deposits in December 2016. The institution 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 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. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT Bradesco's IDRs and debt ratings are sensitive to a change in Fitch's assumptions as to 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 rating is Negative. VR Bradesco's VRs are sensitive to a change in Fitch's assumptions regarding any of the bank's rating factors. Bradesco's VR could be negatively affected in case of loss absorption capacity reduction, or sustained FCC falling to less than 9% and a decline in provisioning ratios from current levels. ROAA below 1.25% and NPLs above 6%, for a period of time, could also lead to a downgrade of the bank's ratings. NATIONAL RATINGS As the National Ratings are at the highest possible rating on Fitch's rating scale, there is no upside potential for these ratings, thus the Rating Outlook for the National Rating is Stable. These ratings could be downgraded in the event of Bradesco being rated at or below the Sovereign rating on the international scale. 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 the 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-'. Contact: Primary Analyst Pedro Gomes Director +55-11 4504-2604 Fitch Ratings Brasil Ltda. Alameda Santos, 700 - 7 andar Cerqueira Cesar, Sao Paulo - SP - CEP: 01418-100 Secondary Analyst Robert Stoll Director +1-212-908-9155 Committee Chairperson Alejandro Garcia Managing Director +1-212-908-9137 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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