Rating Action: Moody's affirms BDMG's ratings, outlook stable
Global Credit Research - 23 Dec 2020
Sao Paulo, December 23, 2020 -- Moody's America Latina Ltd., ("Moody's") has today affirmed Banco de Desenvolvimento de Minas Gerais S.A. (BDMG)'s long-term local currency issuer rating at B2, long-term local and foreign currency counterparty risk ratings at B1 and the long-term counterparty risk assessment at B1(cr). At the same time, Moody's affirmed the bank's baseline credit assessment (BCA) at b2, the national scale rating long-term issuer rating at Ba1.br as well as other ratings and assessments. The outlook on the ratings remains stable.
A full list of ratings and assessment is provided at the end of this press release.
RATINGS RATIONALE
The affirmation of BDMG's ratings and assessments reflects the strong macroeconomic and institutional linkages with Minas Gerais state (B2 stable). Established to act as a financial development agent of the state government, BDMG has limited ability to diversify and operate beyond the boundaries of the state. Consequently, the bank is highly dependent upon and exposed to the local state economy and its loan book, therefore, tends to have important sector and borrower concentrations. In affirming the bank's ratings, Moody's acknowledges the bank's robust capital position, which provides an important buffer against potential asset quality deterioration and pressure on BDMG's profitability over the next twelve to eighteen months.
In 2020, BDMG adopted a countercyclical role to support the financial needs of small and micro companies against the negative effects of the coronavirus, which resulted in its loan book increasing by 27%. This rapid growth has helped contain problem loans at very low levels, in part reflecting government guarantees for more than 30% of the new loans, and the high volume of loan renegotiations and deferrals. However, asset quality deterioration is likely, as stand-still periods end and government support measures expire, but strong loan loss reserves at more than 4x problem loans mitigate asset risk. BDMG had reserves equivalent to more than 100% of its problematic loans related to renegotiations and deferrals.
BDMG's loan portfolio has traditionally been geographically concentrated owing to its footprint in Minas Gerais state. Overall loan growth in smaller companies and tightening of lending limits provide a more granular loan portfolio by borrower, albeit still concentrated, with its top 20 borrowers equivalent to 26% of total loans while large companies represent 44% of loans. This could expose the bank to asset quality and earnings volatility. In addition, loan deferrals triggered by the effects of the coronavirus outbreak accounted for 16% of BDMG's loan book, in line with loans renegotiations in prior years.
As a development bank, BDMG's , profitability tends to be modest and lower than the Brazilian banking system's as a whole. Potential higher delinquencies that could require additional provisions for credit losses could pressure future earnings in a low interest rate environment.
BDMG counts on a robust capitalization, with Moody's tangible common equity (TCE) relative to adjusted risk weighted assets (RWA) of 22.4% as of September 2020, in part reflecting the low capital weighting of its loans to municipalities. If these were accounted as 100% risk-weighting, BDMG's adjusted TCE to RWA would still be at comfortable 15%. Strong capital buffers provide a shield against increasing pressure on asset risk and profitability. Also, the State of Minas Gerais has historically supported the bank with capital injections, including BRL 100 million in H1 2020, despite limited dividends distributions.
Moody's acknowledges BDMG's efforts in diversifying its funding dependence away from government resources provided by Banco Nacional de Desenvolvimento Economico e Social (BNDES Ba2 stable, ba2) by accessing long-term funds from multilateral agencies as well as other instruments, including DPGEs and deposit like-instruments, mainly rural notes. This diversification strategy, however, may imply higher funding costs. With liquid assets representing 15% of tangible banking assets in September 2020, the bank has maintained an adequate liquidity cushion, further supported by satisfactory asset-liability management.
Moody's continues to assess as high the willingness of the state government of Minas Gerais to provide financial support to BDMG if necessary. This, however can be limited by the state's fiscal constraints. The outlook is stable, in line with the outlooks on its government-shareholders and the government of Brazil. The stable outlook also incorporates Moody's expectation that BDMG's financial profile will remain consistent with a b2 BCA over the next 12-18 months, despite the still weak economic environment.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The bank's ratings could face upward pressure if the ratings of the State of Minas Gerais were upgraded. An upgrade of the bank's ratings and assessments could also be considered if its asset quality is preserved and if profitability improves after government support programs expire, and as loan volumes increase. Successful diversification of funding through stable and low costs resources could also put upward pressure on BDMG's ratings.
Conversely, a downgrade of the ratings of the State of Minas Gerais could pressure BDMG's ratings downward, as well as rapid loan growth that leads to an increase in loan losses and a need for additional reserves, which could negatively affect profitability and its capital.
METHODOLOGY USED
The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com.br for a copy of this methodology.
Headquartered in Belo Horizonte, BDMG is a development bank owned by the State of Minas Gerais with assets of BRL 7.6 billion and equity of BRL 2 billion in September 2020.
LIST OF RATINGS AND ASSESSMENTS
The following ratings and assessments of Banco de Desenvolvimento de Minas Gerais S.A. were affirmed:
Long-term local-currency issuer rating at B2, Stable
Short-term local-currency issuer rating at Not-Prime
Long-term Brazilian national scale issuer rating of Ba1.br
Short-term Brazilian national scale issuer rating of BR-4
Long-term local-currency counterparty risk rating at B1
Long-term foreign-currency counterparty risk rating at B1
Long-term Brazilian national scale counterparty risk rating of Baa2.br
Short-term local-currency counterparty risk rating at Not Prime
Short-term foreign-currency counterparty risk rating at Not Prime
Short-term Brazilian national scale counterparty risk rating of BR-3
Long-term counterparty risk (CR) assessment at B1(cr)
Short-term counterparty risk (CR) assessment at Not-Prime(cr)
Adjusted baseline credit assessment at b2
Baseline credit assessment of b2
Outlook, Remains Stable
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
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The date of the last Credit Rating Action was 22/6/2018.
Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.
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Theresangela Araes Vice President - Senior Analyst Financial Institutions Group Moody's America Latina Ltda. Avenida Nacoes Unidas, 12.551 16th Floor, Room 1601 Sao Paulo, SP 04578-903 Brazil JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 M. Celina Vansetti-Hutchins MD - Banking Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's America Latina Ltda. Avenida Nacoes Unidas, 12.551 16th Floor, Room 1601 Sao Paulo, SP 04578-903 Brazil JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653
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