Category: Banking

Banking

BNDES sells 9.9% Petrobras stake, allowing resource allocation to sustainable projects, a credit positive

AtlanticIS

Brazil, February 5, 2020 – Banco Nacional de Desenvolvimento Econômico e Social (BNDES, Ba2 stable, ba21) sold its 9.9% stake in oil giant Petróleo Brasileiro S.A. – Petrobras (Petrobras, Ba2 stable), raising BRL22 billion. The divestiture will reduce BNDES’ volatility in capital and earnings, a credit positive.
The sale does not include Petrobras preferred shares that BNDES and its investment subsidiary BNDES Participações – BNDESPar (Ba2 stable) hold. BNDES and BNDESPar also have BRL30.6 billion of voting and preferred Petrobras shares that it plans to divest within the next three years (Exhibit 1), subject to market conditions. BNDES could divest another BRL70 billion of other equity in the same time frame, depending on market conditions. To accommodate its goal, BNDES cut the value at risk limit for variable income securities in its equity portfolio to BRL600 million as of 2019 from BRL3 billion as of 2018.

Source: BNDES

Divestment proceeds will be primarily allocated to sustainable projects with relevant social and environmental impact. This strategy will support BNDES’ focus on smaller companies and having a key role within fintech and digital transformation, in addition to its preeminent position supporting infrastructure projects. Structuring and advising projects mainly related to the government’s agenda for privatizations and public-and-private partnerships also have traction in the bank’s business strategy.
A portion of the divestment proceeds will likely be used to pay additional dividends to the Government of Brazil (Ba2 stable) to alleviate the government deficit. This practice, used 2009-13, declined after a new dividend policy that limited dividend distribution to a maximum of 60% of adjusted net income. While the bank distributed a dividend equating to 25% of adjusted net income between 2017 and 2018, in 2019, it has already anticipated dividends of 60% of adjusted net income (Exhibit 2).

Source: BNDES

We estimate that the distribution of 60% of the net gains from the sale of its Petrobras stake will not have a material effect on the bank’s capitalization because BNDES’ (Moody’s-adjusted) tangible common equity2 to risk-weighted assets ratio (TCE to RWA) should decline to 15.8%, from 17% in June 2019. BNDES has improved its capitalization since 2016, with sharply lower dividend distributions to the Government of Brazil and steady loan contraction.

Source: BNDES

For B3 S.A. – Brasil, Bolsa, Balcao (Ba1 stable), Brazil`s stock market operator, the size of secondary offering is also credit positive given that the amount traded with it is approximately 19% of the total of initial and secondary offerings that occurred in 2019. The issuance of these Petrobras shares will enable B3 to gain additional trading and post trading revenues at a time when it continues to report record levels of earnings.

Credit Outlook: 10 February 2020. Pg. 34
Moodys

Banking

Banco Sabadell sells its asset management unit, a credit positive

AtlanticIS

Spain, January 21, 2020 – Banco Sabadell, S.A. (Baa2/Baa3 stable, ba2) announced that it had reached an agreement to sell its 100% interest in asset management unit Sabadell Asset Management, S.A. S.G.I.I.C., Sociedad Unipersonal (SabAM), to Amundi Asset Management for €430 million. As part of the agreement, Banco Sabadell and Amundi entered a 10-year partnership. The transaction is credit positive for Banco Sabadell because it will generate a capital gain of €351 million and will improve the bank’s regulatory capital metrics.
Upon the closing of the transaction, which the parties expect will occur in third-quarter 2020, Banco Sabadell estimates that its fully loaded Common Equity Tier 1 (CET1) ratio will increase 36 basis points (bps) from the pro forma fully loaded CET 1 ratio of 11.8% reported at the end of September 2019. Banco Sabadell expects an additional seven-basis-point increase related to specific guarantees in effect over the length of the distribution agreement that will be accrued proportionally over the next 10 years. This disposal is concurrent with Banco Sabadell’s strategy of divesting noncore assets and raising its fully loaded CET1 ratio to around 12%. (see exhibit)

The sale of this unit will have a relatively modest effect on the group’s profitability. Banco Sabadell disclosed that SabAM had an estimated net profit of €34 million as of year-end 2019, including, among other things, €65 million of net fee and commission income and €17 million of operating expenses. SabAM’s net profit constitutes around 4% of the bank’s annualized net income as of the end of September 2019 (net of the €135 million extraordinary gains from the Solvia disposal).

In the current environment of low interest rates and decelerating economic growth in Spain, the loss of this revenue source risks putting an additional strain on the bank’s earnings generation capacity. The sale of SabAM limits the potential growth of fee and commission income that could help ongoing challenges to Banco Sabadell’s net interest income. However, these downside risks should be broadly offset by cost savings derived from the de-risking of the bank’s balance sheet and the cost-efficiency plan, while the bank expects its subsidiary TSB Bank plc (Baa2 negative, baa2) to generate profit starting in 2020. Banco Sabadell also expects to benefit from increased distribution fees as a result of the partnership with Amundi.

Credit Outlook: 27 January 2020. Pg. 26
Moodys

Banking

Banco de Crédito e Inversiones’ continued appetite for real estate exposure is credit negative

AtlanticIS

Chile, September 27, 2019 – Chile-based Banco de Crédito e Inversiones (Bci, A2/A2 stable, baa11) announced that its South Florida-based subsidiary, City National Bank of Florida (CNB), plans to acquire Executive National Bank, a small Miami bank focused on real estate financing. The planned acquisition is credit negative for Bci because it reflects the bank’s willingness to further increase its exposure to the real estate market in Florida while maintaining a moderate ratio of tangible common equity (TCE) to risk weighted assets (RWA).
This acquisition follows the bank’s 2018 acquisitions of another Miami-based bank, TotalBank, and five of Walmart’s Chilean financial services subsidiaries. It also comes amid Bci’s ongoing effort to place itself in the forefront of Chile’s shifting credit card acquiring business, initiatives, which combined, risk straining the bank’s management.
Although Executive National Bank’s $455 million assets equal about 3% of CNB’s $15.1 billion of assets, it is CNB’s second acquisition in Miami in as many years and follows an aggressive organic expansion of that franchise. Bci’s 2015 acquisition of CNB increased Bci’s exposure to South Florida real estate to 120% of its TCE (see Exhibit 1). Bci’s South Florida real estate exposure has continued to increase since then as a result of organic growth of around 20% between 2015 and 2018, and Bci’s acquisition of TotalBank (about $3 billion in assets), which is also focused on real estate financing in the region.

Slower loan growth to more sustainable levels, would alleviate pressure building in Bci’s capitalization stemming from continued aggressive expansion in Florida real estate, a market that has historically proven to be unstable. We estimate that Bci’s South Florida real estate exposure will now equal approximately 170% of TCE, up from 116% in 2017.
Following its various acquisitions, Bci has committed to maintaining a stable Tier 1 ratio of at least 10%. However, our estimated ratio of Bci’s TCE to adjusted RWA of 9.5% as of June 2019 is moderate compared with the 15.1% median for global banks with similar credit risk. It is also below the 10.3% average for Banco Santander-Chile (A1/A1 stable, a3) and Banco de Chile (A1/A1 stable, a3), Bci’s main competitors in Chile.
Although CNB will acquire Executive National Bank for $75 million in a cash transaction, the acquisition will reduce Bci’s own TCE-to- RWA ratio by 10-12 basis points, which will further distance the bank’s capitalization from our expectation of a 10% capital ratio as a result of earnings retention and growth. Nevertheless, we do not expect a major deterioration of Bci’s other consolidated key metrics, given Executive National Bank’s adequate fundamentals (see Exhibit 2). Moreover, CNB has exhibited conservative underwriting standards despite its high growth. CNB’s loan-to-value ratio as of June averaged a low 52%. Over the next year, CNB also plans to moderate its loan growth to about 10%, which will partly mitigate asset risks associated with its higher exposure to real estate sector.

Bci’s management is also busy on other fronts. The bank is undergoing a major venture to establish itself at the forefront of the shifting payments business in Chile. In May, Bci established a 10-year joint venture with EVO Payments International, LLC (B2 negative), a payment technology and services provider, to complement the bank’s mobile payment solution MACH, which started in 2017 and provides peer-to-peer payments for over one million subscribers. Following a September 2018 ruling by the Tribunal for the Defense of Free Competition, the Chilean market is shifting from a business controlled by Transbank S.A. to one with multiple participants with increased product offerings for businesses and individuals, and more competition.
Bci also plans to jump start a new Peruvian bank, to be named Banco Bci Perú, which will begin operations following regulatory approvals in 2021 with a $60 million capital investment. In its announcement, Bci said its application for a branch license in Peru focused on commercial lending. Banco Bci Perú will cater to large Peruvian corporates and the substantial number of Chilean companies with operations in Peru. Nevertheless, Banco Bci Perú will remain small. Over the next 10 years, Banco Bci Perú will not exceed 5% of Bci’s $45.7 billion gross loans as of June 2019.

Credit Outlook: 30 September 2019. Pg. 10
Moodys

Banking

Facebook’s Libra puts big tech in fintech

AtlanticIS

United States, June 18, 2019 – Facebook and 27 other partner companies formally announced Libra, a form of digital currency powered by blockchain technology. Facebook will launch a new subsidiary, Calibra, in 2020 that will offer a digital wallet for Libra and be available in Facebook Messenger and WhatsApp, as well as through a standalone app. At launch, Calibra will focus on peer-to-peer (P2P) transfers of Libra, but could later introduce the digital currency as an alternative for consumer-to-business (C2B) payments.
We see the launch as supporting Facebook’s efforts to integrate more deeply with its 2.4 billion users beyond social media platforms and to potentially attract new users. The launch could also help the company tap new data sources, making its advertising more efficient and boosting overall advertising revenue.

From the payment processing industry’s perspective, the launch of an alternative payments platform by a technology leader as ubiquitous as Facebook is likely to accelerate electronic payments’ share gains from cash and checks. The key issue that remains unclear at this time is how Libra will tie into the rest of the world’s financial ecosystem. Visa and Mastercard appear to be more natural partners for Libra than national automated clearing house systems in light of the global nature of Facebook’s effort.

Still, Libra faces a range of regulatory hurdles. The announcement has already attracted the attention of financial regulators globally. Some US lawmakers have been quick to raise privacy concerns, while national authorities in Europe and Asia have raised concerns regarding the stability of digital currencies. The adoption of new forms of currency that fall outside of a country’s control raise a variety of issues for sovereign issuers, in that digital currencies can adversely affect national and regional central banks’ ability to implement monetary policy. Governor of the Bank of England (BoE) Mark Carney signaled the BoE’s intent to engage with tech companies to ensure consistent regulatory treatment and ultimately allow payment providers access to central bank overnight accounts – similar to
commercial banks.

For potential efficiencies to be realized, Facebook and its partners will need to overcome a number of hurdles, in particular, regulatory acceptance, which will be a key determinant of Libra’s path. In addition, for Libra to develop economic characteristics associated with currencies, a critical mass of users will need to trust it, its price and liquidity will have to be relatively stable and there will need to be a means to control supply. It is unclear what other ‘money-like’ applications Libra will ultimately be used for beyond the ability to make P2P transfers within a relatively contained context.
According to the Libra white paper, the currency will be backed by reserve assets consisting of bank deposits and short-term government securities (in a basket of so-called stable currencies) to minimize price volatility. The reserve feature of Libra makes it distinct from Bitcoin and most other cryptocurrencies. A wide range of firms, including online payment processors, telecom companies and major merchants, will govern the new currency through a new group known as the Libra Association, as shown in the exhibit.

Libra is positioned as a stable, real asset-backed currency built on a secure and stable open-source blockchain. One of its primary goals is to improve access to financial services for the global underbanked population, which is estimated at 1.7 billion people.

The significant issue that remains unclear at this time is which processing infrastructure the new digital currency will use. On the network side, Visa Inc. (Aa3 stable) and MasterCard Incorporated (A1 stable) appear to be more natural partners for Libra than national automated clearing house (ACH) systems in light of the global nature of Facebook’s effort. If Facebook were to launch a separate payment processing network, it would be credit negative for the card networks. On the merchant processing side, there will be a role for processors to handle transactions settled with Libra, as they handle transactions in national currencies today. With operational details not yet available and the launch for C2B payment applications some time away, we believe that the impact to the industry will be broadly positive, but it is too early to judge the magnitude and timing.
The widening application of digital distribution and product development in financial services is materially changing the basic terms of competition across banking business segments, including payments, lending, capital markets, and wealth management. In the fast-evolving digital ecosystem, the largest technology firms are poised to become formidable competitors in retail financial services, undercutting banks’ transaction fees. Facebook is certainly not the first company to launch a crypto payment solution; however, with its immense user base it would pose a threat to the banking industry should the initiative gain traction with consumers and businesses.
In particular, this new platform could effectively provide an alternative ecosystem for payments, bypassing existing players and obviating some of the roles banks traditionally play. Another key factor to watch as the product evolves is whether Calibra and other Libra wallets ultimately offer deposit-like products and other financial services and, if so, to what extent clients, including consumers and businesses, use them.
As big tech companies like Facebook position themselves as financial service providers, their success could allow them to control not only a significant portion of distribution and customer mindshare, but also to compete more directly with incumbents by manufacturing financial products, controlling the user experience and, ultimately, capturing a greater share of associated profit.

Credit Outlook: 24 June 2019. Pg. 11
Moodys

Banking

Banco de Chile’s Proposed HKD 372 Million Senior Unsecured Notes Rated ‘A’

AtlanticIS

SAO PAULO (S&P Global Ratings) July 29, 2019–S&P Global Ratings assigned its ‘A’ issue-level rating on Banco de Chile’s (A/Stable/A-1) proposed HKD372 million senior unsecured notes due July 29, 2031. The issuance is part of the bank’s $3 billion medium-term notes program. The bank will use the proceeds primarily for general corporate purposes.

Our rating on the notes reflects their pari passu ranking with the bank’s other senior unsecured debt obligations. As a result, the rating is the same as the long-term issuer credit rating on the bank. The notes constitute only about 0.1% of Banco de Chile’s total funding base. Therefore, this issuance doesn’t change our view of the bank’s funding profile and does not increment refinancing risk.

Banco de Chile has a well-established brand and diversified market access in the highly competitive Chilean banking system, factors that confer steady revenue flow. Moreover, the bank’s sound asset quality metrics and conservative underwriting standards continue to drive sound financial results, although pressured by lower inflation prospects in the country. Capital flexibility should improve after the bank repays the long-term subordinated obligations due to the central bank as part of the bailout following the economic and banking industry turmoil in 1982-1983. From now on, the bank would be better positioned to adopt new capital requirements that will come into force in the next few years. The ratings also reflect our view of a funding structure highly diversified across sources and counterparties and a high deposit base with a stable amount of retail deposits. Its liquidity position provides adequate cushion to cope with unexpected cash outflows over the next 12 months.