October 16, 2017 / 6:02 PM / a year ago

Fitch: Big Brazil Private Bank Capital Adequate in Stress Test

(The following statement was released by the rating agency) NEW YORK/SAO PAULO, October 16 (Fitch) Brazil's large private banks' loss absorption capacity remains adequate despite the protracted challenging operating environment, says Fitch Ratings. Under an asset quality stress scenario conducted by Fitch, these banks could absorb a significant one-off loss to their credit portfolio without breaching the minimum 2017 Tier 1 capital requirements (6.00% Tier I capital plus applicable capital conservation and systemic buffer requirements totaling 7.50%). The stress test results indicate that large private banks would be able to absorb a one-off additional provisioning of about BRL140 billion without breaching minimum capital ratios, as defined by the Tier 1 regulatory capital ratio. This is equivalent to a 2.0x increase in current outstanding provisions for this group and means they would be able to accommodate a sudden deterioration in provision costs of approximately 200%. Such a scenario is unlikely even under a sharp macroeconomic deterioration and is not our base case. Under central bank rules, provisions usually increase gradually as long as banks downgrade problematic loans. The stress scenario assumed a 100% credit loss event, beginning with lower rated borrowers and increasing to better quality counterparties, until the capital cushion (before triggering minimum required capital requirements) would be fully consumed by credit losses. At this point, final credit losses would reach 22% of total exposures - 9.0x higher than the average over the past seven years. This is without assuming any income from recovered loans, which has ranged from 18% to 24% of final losses over multiple economic cycles. The scenario also excludes any potential benefit from highly collateralized loans, such as payroll, real estate and auto loans, which usually presents a lower loss-given-default when compared to traditional loans. Large private banks averaged 28% of their total credit risk exposure to these segments as of June 2017. The stress test also considered the full implementation of Basel III capital requirements required by 2019. Large private banks would show a Tier 1 equity capital cushion of BRL93 billion under Basel III requirements for phased-in prudential adjustments and applicable regulatory deductions and increased minimum required ratios of up to 9.5% (including applicable buffers). This would still be enough to absorb a one-off loss of 14% and would represent an increase of 2.4x in the banks' current balance of reserves based on June 2017 data. In this case, Fitch's calculations did not include any benefit of future earnings or the respective activation of potential credit tax assets for the next 2.5 years - the final schedule for the full implementation of Basel III requirements in Brazil. Since 2009, the average capital ratio for the system was 16.8%. This is despite asset quality pressures and weak earnings in some segments that limited internal capital generation. Fitch expects these banks to maintain robust capitalization amid the phase-in of the Basel III regulatory framework, which includes stricter standards and requirements for higher quality capital. Recently, loss absorption capacity has actually increased for Brazilian banks as a result of restrained credit growth and a contraction in risk-weighted assets. The system total capital ratio, according to the central bank, reached 17.2% at year-end 2016 (14.2% assuming fully loaded Basel III requirements), up from 15.8% a year earlier. The vast majority of banks accounting for the bulk of system assets already meet the higher CET1 ratio minimum required under the multiyear Basel III phase-in. Contact: Raphael Nascimento Associate Director, Financial Institutions Fitch Ratings Brasil Ltda. Alameda Santos, 700 -7 andar, Cerqueira Cesar Sao Paulo +55 11 3957 3664 Claudio Gallina Senior Director, Financial Institutions +55 11 4504 2216 Justin Patrie, CFA Senior Analyst, Fitch Wire 33 Whitehall St. New York, NY +1 646 582 4964 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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