Fitch Ratings has today affirmed the ratings of Banco Votorantim S.A. (BV) and BV Leasing Arrendamento Mercantil as follows:
--Foreign and local currency Long-term Issuer Default Ratings (IDRs) at 'BBB-'; Outlook Stable;
--Foreign and local currency Short-term IDRs at 'F3';
--Viability Rating at 'bb-';
--Support Rating at '2';
--National long-term rating at 'AA+ (bra)'; Outlook Stable;
--National short-term rating at 'F1+ (bra)';
--BRL Senior Unsecured Notes due May 2016, Foreign Currency Rating at 'BBB-'.
BV Leasing Arrendamento Mercantil S.A.
--1st and 2nd Debentures Issuances, National Long-Term Rating at 'AA(bra)'.
KEY RATING DRIVERS - Banco Votorantim
The IDRs and national ratings of Banco Votorantim S.A. (BV) are based on the support that Fitch believes the bank receives from Banco do Brasil S.A. (BdB; 'BBB'/'AAA[bra]'/Stable Outlook). Fitch considers BV to be strategically important to BdB, since BV performs important complementary activities where BdB operates outside its network of agencies.
BV's viability rating is constrained by its recent weak performance, high leverage and challenges to its asset quality metrics. Also BV's VR considers its adequate position within its niche market - the auto loans segment - and the benefits provided by the ordinary support of its shareholders in terms of liquidity and funding availability.
BV received a BRL2 billion capital injection in June 2012, equally split between the two shareholders, BdB and Votorantim Financas (VF; controlled by Votorantim Participacoes S.A., 'BBB'/'AAA[bra]'/Stable Outlook), maintaining their participation in the bank. Despite the support provided by the Votorantim Group (VG), the ratings are solely based on the support of BdB, which has demonstrated its willingness and capacity to support the bank. BdB has granted BV an interbank credit line of BRL7 billion that has never been utilized.
Fitch core capital was 8.7% in December 2012, with high leverage. BV's capitalization is still negatively affected by tax credits, net losses of BRL2 billion in 2012, and by BRL4.7 billion of Tier II issuances. With losses expected to continue in 2013, BV's capitalization should be further pressured. This is mitigated by the decreasing of the credit portfolio in 2012, but loan origination has increased since end-2012.
Management expects to achieve quarterly break-even by the end of 2013. Although it is difficult to assess that expectation, Fitch recognizes that the bank is carrying out the necessary adjustments in consumer loans. BV's results have been affected by substantial provisions in vehicle financing following the aggressive expansion during the 2010-2011 period. Moreover, credit revenues have declined in 2012 due to the reduction in credit origination since the fourth quarter of 2011.
Impairment loans increased to 10.6% of the total portfolio in December 2012, from 8.9% in December 2011 and 2.8% in December 2010. Nevertheless, quarterly data indicate improvements since June 2012, even when considering the credit portfolio reduction in 2012. BV has been able to reverse this trend by tightening controls and collection procedures, but the amount of credit deemed to be of low quality is still significant. Despite the 2012 increase in delinquency levels of its corporate clients, especially SMEs, levels are still acceptable.
BV has materially improved its funding profile, which was one of the main constraints. Even though its cost of funding is higher than large Brazilian banks due to its wholesale profile, substantial term mismatches between assets and liabilities have been materially reduced with the issuance of financial bills - 'letras financeiras'. BdB remains important to BV's funding, given its acquisition of secured loans totaling BRL9.1 billion from BV as of December 2012.
KEY RATING DRIVERS - BV Leasing Arrendamento Mercantil S.A. Issuances
The rating of the issuances of BV Leasing Arrendamento Mercantil, which are notched down from the supported IDR of BV ('AA+(bra)') reflect the loss severity of the instrument due to its subordination to senior creditors in case of liquidation of the entity. Fitch considers that support to those issuances will be available from its parent BV. Hence the current notching incorporates only the loss severity in case of liquidation.
RATING SENSITIVITIES - Banco Votorantim
IDRs and National Ratings: Despite the unlikelihood in the short term, any change in BdB's ratings, or in its willingness or capacity to provide support, could result in changes in BV's ratings.
Viability Rating: The VR could benefit from the reversal of its weak performance, expressed by an ROA above 1%, and from the sustainable improvement in its performance and credit quality metrics. The VR could be downgraded if there is further deterioration in credit portfolio, reduction in capitalization, and weak performance.
RATING SENSITIVITIES - BV Leasing Arrendamento Mercantil S.A. Issuances
The National long-term rating of the 1st and 2nd debenture issuances of BV Leasing Arrendamento Mercantil could be reviewed in the case of changes in Banco Votorantim's rating. Moreover, although unlikely in the short term, any changes in BdB's ratings or in its willingness or capacity to provide support could result in changes in BV's ratings.
Banco Votorantim is the sixth largest private bank focused on vehicle financing. Headquartered in Sao Paulo, Brazil, BV had consolidated assets of BRL121 billion (USD60.5 billion) and equity of BRL8.2 billion (USD4.1 billion) as of Dec. 31, 2012. BV Leasing Arrendamento Mercantil S.A. is a fully controlled subsidiary of BV.
Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 05, 2012);
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).
Applicable Criteria and Related Research
Rating FI Subsidiaries and Holding Companies
National Ratings Criteria
Global Financial Institutions Rating Criteria
Assessing and Rating Bank Subordinated and Hybrid Securities