Research Update:
Banco Indusval & Partners S.A. 'BB-'
Global Scale And 'brA-' National Scale
Ratings Affirmed, Outlook Remains
Negative
Primary Credit Analyst:
Guilherme Machado, Sao Paulo (55) 11-3039-9754; [email protected]
Secondary Contact:
Edgard Dias, Sao Paulo +55 (11) 30399771; [email protected]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Ratings Score Snapshot
Related Criteria And Research
Ratings List
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Research Update:
Banco Indusval & Partners S.A. 'BB-' Global Scale
And 'brA-' National Scale Ratings Affirmed,
Outlook Remains Negative
Overview
• Banco Indusval & Partners S.A. (BI&P) continues to have a small market
share and generate poor profitability metrics; however, the bank is
trying to improve its revenue diversification.
• We are affirming our global scale 'BB-/B' and national scale 'brA-/brA-2'
issuer credit ratings on the bank. The outlook remains negative.
• The negative outlook reflects our view of the negative trend in Brazil's
BICRA Economic Risk and our belief that BI&P could experience financial
deterioration from pressures on the Brazilian banking system as a result
of the impact of fiscal and monetary tightening in our economic
assessment of Brazil.
• The outlook also reflects a negative trend that we see in the bank's
business position. We believe its small market presence and its small
customer base could continue to pressure the bank business stability, as
evidenced by its poor financial results in the past 24 months.
Rating Action
On July 13, 2015, Standard & Poor's Ratings Services affirmed our global scale
long-term 'BB-' and short-term 'B' issuer credit ratings on BI&P. At the same
time, we affirmed our national scale long-term 'brA-' and short-term 'brA-2'
issuer credit ratings on the bank. The outlook remains negative.
Rationale
Under our bank criteria, we use our Banking Industry Country Risk Assessment's
(BICRA) economic risk and industry risk scores to determine a bank's anchor,
the starting point in assigning an issuer credit rating. Our anchor for a
commercial bank operating only in Brazil is 'bbb-', based on the country's
economic risk score of '6' and an industry risk score of '5'. Brazil's
economic risk reflects its low GDP per capita levels and modest growth
prospects that limit household debt capacity and the country's ability to
withstand economic downturns. Although still significant, the economic
imbalances risk has somewhat decreased in 2014 as credit and house price
growth has moderated while banks' asset quality has gradually improved and
nonperforming loans (NPLs) and credit losses have stabilized at manageable
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Research Update: Banco Indusval & Partners S.A. 'BB-' Global Scale And 'brA-' National Scale Ratings Affirmed,
Outlook Remains Negative
levels. On the other hand, the country is facing challenging political and
economic conditions. Brazil's economic growth prospects have weakened in 2014
while fiscal debt burden remains high. We believe likely economic contraction
will take its toll on banks, which in our view will move into a correction
phase in the next 12-18 months. Such scenario would prompt a reversal in the
recent improvement in asset quality and profitability. Therefore we assess our
economic risk trend as negative. While large and most mid-size banks are well
prepared to weather weak economic prospects, we believe some medium and
smaller banks will face significant credit losses.
Our industry risk assessment for Brazil reflects the significant presence of
government-owned banks, which has caused material distortions over the past
few years, weakening competitive dynamics. On the other hand, the country's
regulatory structure has extensive coverage and is broadly in line with
international standards. Brazilian banks benefit from a stable core customer
deposit base and fluid access to local and international capital markets.
Banks' external funding constitutes only 7.3% of their total liabilities.
We continue to base our assessment of BI&P's "weak" business position on the
bank's marginal market presence, poor financial results during the past 24
months, and small customer base, which pressure the bank's business stability.
As of March 31, 2015, the bank's total assets were Brazilian real (R$) 5.2
billion, representing a market share of about 0.1%. During the same period,
its expanded loan portfolio was R$3.9 billion, mainly composed of corporate
loans (64%), and upper middle market loans (36%). BI&P's strategy is to
deleverage its loan portfolio and to focus on fee-based business, such as
investment banking, and on its full service wealth management and trading
platform (Guide Investimentos). Still, the bank continues to originate most
of its credit in its corporate segment, in which the bank has expertise and
know-how. Therefore, we believe the bank won't increase its market share,
which could continue to pressure its business stability. BI&P has posted poor
performance during the past two years as the bank struggles to increase its
loan portfolio amid a stagnating economy and low GDP per capita levels, which
limit the country's credit capacity. Its newly-employed strategy of focusing
on noncredit related revenues could improve its revenue stability if the bank
succeeds in realizing those business lines.
Our assessment of the bank's capital and earnings reflects BI&P adequate
capital ratios. According to our risk-adjusted capital framework (RACF)
methodology, we expect an average 7.7% ratio for the next two years as the
bank continues to implement its conservative growth strategy in its loans
portfolio. The bank reduced its growth pace considerably during 2014 and 2015
amid a sluggish economy. Management's decision to restrict lending to protect
the bank against eventual spikes in delinquency has somewhat eased pressure on
the bank's risk adjusted capital (RAC). Nevertheless, we expect the bank to
show low profitability in the next two years. The decrease in the bank's loan
portfolio should hurt its net interest income, but an increase in revenues
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Research Update: Banco Indusval & Partners S.A. 'BB-' Global Scale And 'brA-' National Scale Ratings Affirmed,
Outlook Remains Negative
from fees and commissions--as the bank continues to develop its brokerage
business—will somewhat compensate for it. The bank's client profile provides
better asset quality than banks that cater to small and midsize enterprises
(SMEs); however, it doesn't represent high credit spreads, which prejudices
its profitability indicators, albeit with lower risk. We do not anticipate any
capital injections in the next two years, and we do not expect the bank to
make any dividend payments through 2016.
The bank's "adequate" risk position stems from its stable asset quality
indicators even in an adverse economic environment, as well as its
conservative risk management. BI&P's loan portfolio has performed better than
its peers'. As of March 15, 2015, NPLs stood at 2.33% while net charge-offs
were 0.74%; these ratios compare well with banks within the system that focus
on the SMEs and corporate segments, which have shown significant asset quality
deterioration. On the other hand, we still believe that BI&P's high credit
risk concentration will pressure the bank's risk position. As of March 2015,
its top 20 customers represented 22% of its loan portfolio, a level slightly
higher than its peers', and it has remained relatively stable.
Furthermore, agribusiness is still BI&P's core business line, representing
significant portion of its loan portfolio (26% as of March, 2015). We expect
the agribusiness segment to continue to represent a high percentage of the
bank's loan portfolio during the next two years because of its strong
profitability.
In our opinion, BI&P's funding is "below average" compared to the overall
Brazilian banking industry. Its main funding source is core customer deposits,
which accounted for 91% of the total funding base as of March 2015. Time
deposits represent a significant share of BI&P's core deposits and 18.5% of
those had a liquidity condition, according to Brazilian Central Bank data as
of December 2014. On the other hand, the bank has taken the initiative to
diversify its funding portfolio with the issuance of letters of credit: its
agribusiness, financial, and real estate bills already correspond to 39% of
its total funding base (up from 18% in June 2013). In addition, the bank has
other sources such as foreign borrowing and on-lending, representing 9% of the
total base, mainly comprised of trade finance operations and on-lendings from
the Brazilian Development National Bank (BNDES). Even though BI&P's stable
funding ratio is adequate at 118%, we still view the bank's funding profile as
"below average," given its concentration in and reliance on wholesale funding,
which we believe to be more volatile and expensive than retail depositors.
Still, the bank has been increasing its retail funding base lately, somewhat
improving its funding profile.
We view BI&P's liquidity as "adequate." The bank's broad liquid assets totaled
R$1.4 billion as of March 2015, covering 50% of its short-term customer
deposit base, which reflects its prudent liquidity management. In addition,
BI&P's broad liquid assets, which are well-positioned compared to its peers',
covered its short-term wholesale funding by 3.1x, as of March 2015. We expect
continued "adequate" liquidity management going forward.
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Research Update: Banco Indusval & Partners S.A. 'BB-' Global Scale And 'brA-' National Scale Ratings Affirmed,
Outlook Remains Negative
Outlook
The negative outlook reflects our view of the negative trend in Brazil's BICRA
Economic Risk; it also reflects potential financial deterioration from
pressures on the Brazilian banking system as a result of the impact of fiscal
and monetary tightening in our economic assessment of Brazil. A confirmation
of this negative trend could trigger a downgrade on the ratings on the bank,
as well as a downgrade on SACP, because we believe a more difficult operating
environment would hurt the bank.
The outlook also reflects a negative trend that we see in the bank's business
position. We believe its small market presence and customer base could
continue to pressure the bank's business stability, as demonstrated by poor
financial results during the past 24 months. We will keep monitoring how the
bank's revenues base develops as it deleverages its loans portfolio and
focuses on noncredit related business lines.
We could revise our outlook on BI&P to stable if the negative trend in
Brazil's BICRA Economic Risk abates and the bank improves its profitability
through a stable revenue base.
Ratings Score Snapshot
Issuer Credit Rating
BB-/Negative/B
SACP
Anchor
Business Position
Capital and Earnings
Risk Position
Funding and liquidity
bbbbbWeak (-2)
Adequate (0)
Adequate (0)
Below average and Adequate (-1)
Support
GRE Support
Group Support
Government Support
0
0
0
0
Additional Factors
0
Related Criteria And Research
Related Criteria
• National And Regional Scale Credit Ratings, Sept. 22, 2014
• Standard & Poor’s National and Regional Scale Mapping Tables, Sept. 30,
2014.
• Banking Industry Country Risk Assessment Methodology And Assumptions,
Nov. 9, 2011
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011
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Research Update: Banco Indusval & Partners S.A. 'BB-' Global Scale And 'brA-' National Scale Ratings Affirmed,
Outlook Remains Negative
• Bank Capital Methodology And Assumptions, Dec. 6, 2010
• General: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Ratings List
Ratings Affirmed
Banco Indusval & Partners S.A.
Counterparty Credit Rating
Brazil National Scale
BB-/Negative/B
brA-/Negative/brA-2
Complete ratings information is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by
this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.
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