Fitch Upgrades Banco Bonsucesso's IDR to 'B+' from 'B'; Outlook Stable

SAO PAULO & RIO DE JANEIRO--(BUSINESS WIRE)--

Fitch Ratings has taken the following rating actions on Banco Bonsucesso S.A. (Bonsucesso):

--Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) upgraded to 'B+' from 'B'; Outlook Stable;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B';

--Viability Rating upgraded to 'b+' from 'b';

--National Rating Long-Term Rating upgraded to 'BBB(bra)' from 'BBB-(bra)'; Outlook Stable;

--National Short-Term Rating affirmed at 'F3(bra)';

--Support Rating affirmed at '5';

--Support Rating Floor affirmed at 'NF'.

Bonsucesso's IDRs are driven by its VR.

KEY RATING DRIVERS - VR, IDRs AND NATIONAL SCALE RATINGS

The upgrade of Bonsucesso's IDRs and National Ratings reflects Fitch's belief that the bank will preserve its currently solid capital and liquidity position, while it continues to benefit from its strategic plan, gradually leading to better recurring profitability in the mid term. Bonsucesso is changing its business model to an asset light and less capital consuming structure, which will support the bank's loss absorption capacity. This has also enabled the bank to reduce its funding costs, which have eased profitability pressures. Bonsucesso is concentrating its efforts to become a service-oriented bank, while the growth of its lending operations will depend on the economic scenario.

The conclusion of the transfer of Bonsucesso's payroll deductible loan portfolio and the operational structure related to this portfolio in 2015 to its joint-venture (JV) with Banco Santander Brasil S.A. (Santander: Long-Term Local Currency IDR 'BBB-'/Outlook Negative) eased the pressures on the bank's funding, liquidity and cost base, and led to a significant improvement in the bank's capital adequacy ratios. This has paved the way for the exploration of new products, which, in Fitch's opinion, will support the key credit metrics of the bank. However, until Bonsucesso fully implements its new strategic plan, income from its JV with Santander, which it accounts via equity-income, is expected to remain its main source of earnings.

Bonsucesso strengthened its foreign exchange department by hiring well-known executives with long track records in the segment, and announced a partnership with Adyen, a global payment company, which will allow it to enter merchant acquiring operations. Results from recent investments should become a key contributor to overall earnings.

In the first-half 2016, the bank posted net income of BRL28 million, compared with BRL133 million in 2015 (operating profit/risk weighted assets were 5.54% and 6.40%, respectively). The bulk of the earnings in both periods were non-recurring related to the creation of the JV and credit sales made to the JV. Meanwhile, credit costs have remained low in 2015 and first half of 2016, following a number of challenging years when Bonsucesso had to constitute significant loan loss reserves in its small and midsize company loan portfolio, as it was one of banks that was severely affected by the credit problems arising from the very weak operating environment in the recent years. However, the proportion of impaired loans to gross loans rose to 18.69% at June 2016 (16.76% in 2015 and 10.06% in 2014), as gross loans fell significantly with the sale of payroll deductible loans and loans to small and medium-sized companies, which are of much higher risk, now make up the bulk of the loan portfolio.

Profitability should also continue to benefit from the bank's improved funding profile. Bonsucesso now has a reduced reliance on expensive funding sources, such as DPGE I and II, which decreased from 40% of total deposits in June 2015 to 23% in June 2016. Overall, the bank remains selective on new funding operations, because there is no expectation to grow its balance sheet in the short term.

Capitalization is solid, with a Fitch Core Capital (FCC) ratio of 23.12% as of June 2016 (19.84% in 2015 and 13.02% in 2014), and should remain comfortable since loan growth will remain modest until there is more visibility on the operating environment, and the bank's new products are generally not capital consuming.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

Bonsucesso's Support Rating and Support Rating Floor are affirmed at '5' and 'NF', respectively, in view of the bank's low systemic importance. In Fitch's view, external support cannot be relied upon.

RATING SENSITIVITIES

IDRs, VR AND NATIONAL RATINGS

Bonsucesso's ratings could be upgraded over the medium term, if the bank manages to post adequate and recurring profitability characterized by an operating profit/risk weighted assets ratio above 1.5%. An upgrade will also depend on the bank's ability to post improved asset-quality ratios and maintain its current robust capital profile. Any further positive rating action is heavily contingent as well on a material improvement of the economic environment.

Conversely, Bonsucesso's ratings could be downgraded if the transition is unsuccessful and/or the bank cannot consolidate its existing operations, or if the FCC ratio falls below 15%, or if there is major deterioration in credit quality.

SUPPORT RATING AND SUPPORT RATING FLOOR

A potential upgrade of Bonsucesso's Support Rating and Support Rating Floor is unlikely in the foreseeable future, since this would only arise from a material gain in systemic importance.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Global Bank Rating Criteria (pub. 25 Nov 2016)

https://www.fitchratings.com/site/re/891051

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/site/re/720082

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015804

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015804

Endorsement Policy

https://www.fitchratings.com/regulatory

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