Banco de Desenvolvimento de Minas Gerais SA

FINANCIAL INSTITUTIONS
CREDIT OPINION
17 May 2016
Update
Banco de Desenvolvimento de Minas Gerais
S.A.
Update Following NSR Repositioning
Summary Rating Rationale
RATINGS
Banco de Desenvolvimento de Minas Gerais S.A.
Domicile
Belo Horizonte, Minas
Gerais, Brazil
Long Term Rating
Ba3
Type
LT Issuer Rating - Dom
Curr
Outlook
Negative
Moody's assigns a supported issuer rating of Ba3, which reflects (1) the ba3 baseline
credit assessment, lowered in February in line with the downgrade of the rating of its
government-shareholder , the state of Minas Gerais and (2) incorporation of support from
its regional local government, the State of Minas Gerais, which is rated Ba3. The outlook
on BDMG's rating is negative following the outlook on the rating of the state of Minas
Gerais. The ba3 BCA is constrained by the rating of the state of Minas Gerais and reflects
the strong economic and financial linkages between the regional development entity and its
government-shareholder.
Exhibit 1
Please see the ratings section at the end of this report
for more information.The ratings and outlook shown
reflect information as of the publication date.
Rating Scorecard - Key Financial Ratios
Analyst Contacts
Ceres Lisboa
55-11-3043-7317
Senior Vice President
[email protected]
Alexandre
55-11-3043-7356
Albuquerque
AVP-Analyst
[email protected]
Rafael B Amaral
55-11-3043-6065
Associate Analyst
[email protected]
Aaron Freedman
52-55-1253-5713
Associate Managing
Director
[email protected]
CLIENT SERVICES
Americas
1-212-553-1653
Asia Pacific
852-3551-3077
Japan
81-3-5408-4100
EMEA
44-20-7772-5454
Source: Moody's Financial Metrics.
The BCA also incorporates the weakened credit fundamentals over the past two years
that resulted from a hike in credit costs reflecting the impacts of the negative economic
environment in the bank's loan book. As the bank increased its exposure to SMEs over
the past two years, a strategic move towards diversification, the bank was able to reduce
concentration risk from historical levels, but at the same time entered a highly vulnerable
segment of suppliers of its largest clients, such as auto-part industry and cement, two
important sectors intrinsically vulnerable to the economic recession. Therefore, the
rating reflects risks related to sector concentration, intrinsically related to its geographic
limitation. The gradual decline of its capitalization over the past three years is also a negative
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
rating driver and results from the robust expansion (11% CAGR in the period), as well as the expansion of its operation with
municipalities, a portfolio that requires a capital detachment equal the size of the loans that totaled BRL804million in 2015.
Capitalization consistently deteriorated since 2013 from 24% in 2013 to 14% in 2015, and pressures on its replenishment ability will
continue in a scenario of climbing asset risks.
While to the support past expansion the bank has broadened its funding base by accessing institutional investors through the mediumterm issuance of local currency banknotes (letras financeiras) and lines from multilateral agencies, apart from BNDES onlendings,
the high cost of these resources, at the same time, pressured profitability, especially in times of declining business volumes and high
benchmark interest rates.
Moody's acknowledges BDMG's entrenched operation in its regional market and strong alignment of development policy of the state
of Minas Gerais, drivers of the Ba3 supported rating. We view support as high considering BDMG's public policy role and importance for
the regional development and long-term financing, as well as the demonstrated commitment by its shareholder to its operations.
On 11 May 2016, Moody's repositioned BDMG's long and short-term Brazilian national scale deposit ratings to A3.br/BR-2 from A2.br/
BR-1, following the recalibration of the national scale ratings (NSRs) mapping from the global scale ratings (GSRs) applied to Brazil, as
outlined in “Mapping National Scale Ratings to Global Scale Ratings” published on 9 May 2016. The change in NSR did not reflect a
change in the bank's credit quality, since its global scale ratings remained unchanged. The NSRs have no inherent absolute meaning in
terms of default risk or expected loss.
Credit Strengths
»
Key role in regional economic development program; wholly owned by the State of Minas Gerais
»
Historically BDMG's expansion has been supported by conservative dividend payout policy
Credit Challenges
»
Downgrade pressure on supported issuer ratings are related to risk correlation with the credit worthiness of its shareholder
»
Deterioration of asset quality and high-cost funding structure has weakened profitability over the past two years: loss-making bank
in 2015
»
Robust loan growth over the past 3 years in the SME segment and loans to municipalities reduced capitalization rapidly to lowest
historical levels
»
Borrower concentration increases asset quality volatility
Rating Outlook
BDMG's ratings have negative outlook in line with the negative outlook on the ratings assigned to the state of Minas Gerais.
Factors that Could Lead to an Upgrade
There are no upward pressure on the ratings at this moment as expressed by the negative outlook.
Factors that Could Lead to a Downgrade
The main negative pressure on the rating comes from the deterioration of BDMG's asset quality indicators resulting from the weak
economic environment and rising risks related to companies' repayment capacity. Downward risks would also arise from events that
reduce BDMG's regional importance, perhaps from intensified competition. These drivers would affect future earnings generation and
capital replenishment ability. Further downgrade of the ratings of the state of Minas Gerais could also trigger a downgrade of BDMG
given the entrenched business nature and limitation of its operations to its local market.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
2
17 May 2016
Banco de Desenvolvimento de Minas Gerais S.A.: Update Following NSR Repositioning
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Key Indicators
Exhibit 2
Banco de Desenvolvimento de Minas Gerais S.A. (Unconsolidated Financials) [1]
Total Assets (BRL billion)
Total Assets (USD billion)
Tangible Common Equity (BRL billion)
Tangible Common Equity (USD billion)
Problem Loans / Gross Loans (%)
Tangible Common Equity / Risk Weighted Assets (%)
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%)
Net Interest Margin (%)
PPI / Average RWA (%)
Net Income / Tangible Assets (%)
Cost / Income Ratio (%)
Market Funds / Tangible Banking Assets (%)
Liquid Banking Assets / Tangible Banking Assets (%)
12-152
12-142
12-132
12-123
12-113
Avg.
7.3
1.8
1.8
0.4
1.0
24.7
2.9
4.6
2.9
-0.3
54.7
69.7
13.4
6.5
2.4
1.8
0.7
1.1
27.4
2.9
5.3
3.2
0.9
51.3
65.5
11.6
4.9
2.1
1.8
0.7
0.3
34.5
0.6
6.6
4.6
2.6
38.6
57.3
9.7
3.7
1.8
1.4
0.7
0.1
43.0
0.3
8.8
5.8
2.1
44.3
47.8
15.0
2.8
1.5
1.1
0.6
0.2
43.2
0.3
8.7
5.0
2.9
53.9
45.5
19.4
26.64
4.94
12.44
-6.94
0.55
28.96
1.45
6.85
3.66
1.65
48.55
57.25
13.85
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP [3] Basel II; LOCAL GAAP [4] Compound Annual
Growth Rate based on LOCAL GAAP reporting periods [5] LOCAL GAAP reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in &
LOCAL GAAP reporting periods have been used for average calculation
Source: Moody's Financial Metrics
Detailed Rating Considerations
ASSET RISK DETERIORATION TO REFLECT CONCENTRATION RISK AND PAST YEARS' EXPANSION IN SMES BUSINESS
Since 2012, BDMG pursued a fast growth strategy focused on small and medium sized companies segment and loans to municipalities,
businesses that are in line with its policy mandate and complementary to its traditional business to large companies in the state of
Minas Gerais. If, from one side, this improves earnings recurrence and adds granularity to the portfolio, lending to SMEs also increases
vulnerability to economic downturns as companies are more susceptible to refinancing squeeze in a prolonged negative economy.
While the pace of disbursements declined since 2014, the 3-year CAGR of the loan book was 11%, pushed down by the deceleration
since the end of 2014. In December 2015, total loans reached BRL5.9 billion, an increase of 9% in 12 months, reflecting lowered
demand from companies and tighter credit underwriting policies imposed by the bank. The 90-day NPLs ratio increased to 2.40%
in September 2015, from 1.66% in previous year, when included past due loans over 90 days (principal and interests). Though still
below the industry average for the wholesale sector (3.92% in September 2015, we expect BDMG's delinquencies to continue to
increase in light of the declining industrial production and low investor confidence levels that reduces loan demand and increases
companies repayment capacity. BDMG maintains reserve buffer equivalent to 6.6% of total loans. We have concerns about BDMG's
exposure to some segments and related suppliers chains, that have been facing steep decline in revenues over the past year, such as the
automotive, sugar & ethanol, cement segments; important industries in the state of Minas Gerais.
Loans to municipalities accounted for 13.6% of loan book, up by 9% over the last 12 months ended December 2015. This exposure is
fully collateralized by tax receivables from the state government, a strong structure that mitigates risk. The bank has no delinquency in
this loan book.
CAPITALIZATION HAS RAPIDLY DECLINED BUT STILL ADEQUATE LOSS ABSORPTION CAPACITY
Historically, BDMG's capital ratios have been well above the local regulatory minimum of 11%. However, capitalization has declined
fast because of the robust loan growth over the past three years and also by the growing business with municipalities that by law
requires a capital segregation equivalent to the amount of the portfolio. In 2015, regulatory capital ratio lowered to 14.6% from
17.26% in 2014, though still above the local requirement, this level is the record low reported by BDMG over the past eight years.
3
17 May 2016
Banco de Desenvolvimento de Minas Gerais S.A.: Update Following NSR Repositioning
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Importantly, while the state government has traditionally reinvested dividends on an annual basis, providing additional capital when
necessary, we see that the current weak fiscal position of the state is a constraining factor for capital reinforcement at this point.
PROFITABILITY TO CONTINUE PRESSURE BY CREDIT COSTS, LOWER BUSINESS VOLUMES AND EXPENSIVE FUNDING
Bottom line results were negative in 2015 at BRL23.5 million and significantly impacted by (1) higher funding costs and the effect
of currency devaluation in USD borrowings, (2) the declined in disbursements in the period and (3) the strong increase of 190% in
provisioning expenses.
We continue to view future profitability as a negative driver in the rating assessment, as risk conditions continue to deterioration,
depressing risk appetite and reducing business volumes. Positive efforts made towards funding diversification has been an important
negative pressure to earings in an environment of currency devaluation.
FUNDING DIVERSIFICATION IS POSITIVE
In 2015, the bank's funding mix was 67.8% composed by on-lending from BNDES and other federal government onlendings, which
increased 14% in 12 months; 13.4% local currency bank notes expiring in 2016 and 2017 and 16.3% of medium-term USD borrowings
from multilateral agencies and international banks (IDB, BTMU, AFD and CAF). While diversification helps to enhance the lengthening
of its liability structure and reduces reliance on BNDES, key to support loan expansion, it also increases funding cost significantly,
impacting bottom line results especially in times of reduced business volumes.
Global Local Currency issuer Rating
Based on Moody's Government-Related Issuers methodology (October 2014), BDMG's Ba3 local currency issuer rating derives from 1)
the bank's baseline credit assessment (BCA) of ba3 in the global rating scale ; and 2) our assessment of a likely high degree of support
from its shareholder, the State of Minas Gerais (Ba3 negative). Moody's assessment of a high probability of support to BDMG is based
on its legal status as a development bank wholly-owned by the government of Minas Gerais. Moreover, although the dividend payout
ratio increased since 2012, the shareholder continues to prove support from frequent capital injections in amount about the dividend
received, confirming its commitment to BDMG.
The rating of the state of Minas Gerais is Ba3 and it was downgrade on 24 February 2016 following the downgrade of Brazil's bond
rating to Ba2, and taking into account the close macroeconomic and institutional linkages between the credit quality of the federal
government. The ongoing deterioration of Brazil's economy has had and will continue to have a direct impact on the operating
environment of Brazilian states and municipalities. In addition, the fiscal position of Brazilian states and municipalities weakened during
2015 and will remain pressured by lower tax revenues and expenditure rigidities in the near future.
National Scale Rating
The Brazilian national scale issuer ratings assigned to BDMG are A3.br for long-term and BR-2 for short-term. These ratings were
repositioned following the revision of the national scale ratings (NSRs) mapping from the global scale ratings (GSRs) applied to Brazil,
as outlined in “Mapping National Scale Ratings to Global Scale Ratings” published 9 May 2016. This repositioning reflects the negative
outlook on the bank's global scale issuer rating at Ba3.
Ratings
Exhibit 3
Category
BANCO DE DESENVOLVIMENTO DE MINAS GERAIS
S.A.
Outlook
Issuer Rating -Dom Curr
NSR Issuer Rating
ST Issuer Rating -Dom Curr
NSR ST Issuer Rating
Moody's Rating
Negative
Ba3
A3.br
NP
BR-2
PARENT: MINAS GERAIS, STATE OF
Outlook
Issuer Rating
Negative
Ba3
Source: Moody's Investors Service
4
17 May 2016
Banco de Desenvolvimento de Minas Gerais S.A.: Update Following NSR Repositioning
MOODY'S INVESTORS SERVICE
5
17 May 2016
FINANCIAL INSTITUTIONS
Banco de Desenvolvimento de Minas Gerais S.A.: Update Following NSR Repositioning
MOODY'S INVESTORS SERVICE
FINANCIAL INSTITUTIONS
© 2016 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ("MIS") ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT
RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S
PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE
SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY
ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET
VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL
FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED
BY MOODY'S ANALYTICS, INC. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT
RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT
RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS
AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND
EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY'S CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR
RETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS OR MOODY'S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT
YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW,
AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED
OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY
PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well
as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it
uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However,
MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody's Publications.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any
indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any
such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or
damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a
particular credit rating assigned by MOODY'S.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory
losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the
avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents,
representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH
RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including
corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any rating,
agreed to pay to Moody's Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain
policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and
rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at
www.moodys.com under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors
Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended
to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you
represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or
indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as
to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless
and inappropriate for retail investors to use MOODY'S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other
professional adviser.
Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's
Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally
Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an
entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered
with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred
stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees
ranging from JPY200,000 to approximately JPY350,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1022756
6
17 May 2016
Banco de Desenvolvimento de Minas Gerais S.A.: Update Following NSR Repositioning