Fitch Ratings has taken the following rating actions on Banco Daycoval S.A. (Daycoval):
--Long-term foreign and local currency Issuer Default Ratings (IDRs) upgraded to 'BBB-' from 'BB+'; Outlook Stable;
--Short-term foreign and local currency IDRs upgraded to 'F3' from 'B';
--Viability rating upgraded to 'bbb-' from 'bb+';
--Support rating affirmed at '5';
--Support rating floor affirmed at 'No Floor';
--Long-term national rating upgraded to 'AA(bra)' from 'AA-(bra)'; Outlook Stable;
--Short-term national rating affirmed at 'F1+(bra)';
--Senior unsecured USD notes due March 2015, foreign currency rating upgraded to 'BBB-' from 'BB+';
--Senior unsecured USD notes due January 2016, foreign currency rating upgraded to 'BBB-' from 'BB+'.
KEY RATING DRIVERS
Daycoval's rating upgrades reflect the bank's consistent track record of performance, maintained in different cycles of local economy, higher business diversification and comfortable liquidity and capitalization positions. The bank has recorded consistent profitability, even during stress scenarios, sustained by an adequate asset pricing, strong cost control and low funding cost. It is also worth its prudent liquidity management and adequate assets and liabilities management that help to mitigate the burden of a less diversified funding base compared to larger peers.
Daycoval has been successful in expanding its operations and increasing profitability since mid-2009. In view of the high delinquency in credits to small and medium-sized companies in 2012, the bank addressed its growth to consumer credit, mainly to the lower risk payroll discount loans. The expansion into this segment helps to better dilute debtor concentrations and also its income sources.
Profitability remains good and better than other midsize banks -- despite lower leverage -- due to better efficiency and good pricing of credit risk, which should continue to have an influence on its results, despite higher credit provisions can reduce profitability over the short and medium-term. In Fitch view the recent spike in credit costs may persist in the short term while the recently expanded portfolio matures and also given the less vigorous economic activity in Brazil seen since 2012. Daycoval has been successful to preserve its profitability ratios based on effective cost controls and improved margins benefited by lower funding costs in the recent past years Fitch expects that despite such increase on credit costs, that the bank will be able to post good profitability ratios in time with its historic average.
The higher market delinquency in 2012 resulted in a significant deterioration of the bank's credit quality, which showed impaired loan ratio at 7.1% of the total in 2012, against the 3.3% recorded in 2011; while its 90 days past due loan ratio increased to 2% (0.7% in 2011). The deterioration was more intense than in other mid-size banks, despite being offset by higher margins and restrained by a portfolio reduction in lower-size companies. Given the good quality of the collateral and the effective workout of troubled loans; credit losses should be limited while its ample capital base and good profitability levels bodes well to help create additional loan loss provisions if required.
Daycoval has been also relatively successful in increasing and lengthening its funding base, as well as in reducing its cost, with special emphasis on the strong increase of 'letras financeiras' (Financial Bills) in 2012. Nevertheless, its funding remains concentrated per client and with wholesale characteristics. However, the bank's conservative administration of assets and liabilities and its strong cash position fairly mitigate the liquidity risk. As such, the ample liquidity cushion managed by the bank and the relative shorter term of their loans bodes well to match expected short term maturities on their funding.
Capitalization ratio (basically Tier 1) and Fitch core capital remain solid, due to the good profitability, in as well as the portfolio stability in 2012. As of December of 2012 the Fitch Core Capital ratio stood at an ample 17.2% roughly in line with the average of the last two years and above the average of banks with VR on the 'bbb' range. That current capital ratios may be underpinned not only with the internal capital generation of the bank, but also, thanks to the recent and expected conversion into capital of some previously issued convertible deposits certificates.
Given its current business model, with asset and liability concentrations inherent to its size, including the wholesale funding, further upgrades to Daycoval ratings are limited. Such positive changes will be contingent on significant reduction of the concentration in its funding and a successful diversification into recent market as loans to individual in a sustained manner.
The ratings could be negatively impacted by a continued asset quality deterioration which result in pressures on the bank's results (ROA below 2%) and on capital (Fitch core capital lower than 11%), which may be triggered by larger than expected asset quality deterioration and/or aggressive asset growth or cash dividend policy.
Originated in 1968, Daycoval is controlled by the Dayan family and has been listed on the Sao Paulo's exchange (BM&FBovespa) since 2007.
Additional information available at 'www.fitchratings.com' or at 'www.fitchratings.com.br'. 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:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012)
--'National Ratings Criteria' (Jan. 19, 2011)
Applicable Criteria and Related Research
Global Financial Institutions Rating Criteria
National Ratings Criteria