Fitch Ratings has affirmed the long-term foreign and local
currency Issuer Defaults Ratings (IDRs) and National Ratings of
Banco Daycoval S.A. (Daycoval) at 'BBB-'. Fitch has also affirmed
Daycoval's Viability Ratings (VR) at 'bbb-' and at 'bb-',
respectively. The Rating Outlook is Stable.
A full list of the rating actions on Daycoval is provided at the
end of this release.
KEY RATING DRIVERS
Daycoval's ratings reflect the bank's consistent track record of
performance, maintained through different cycles of the local
economy, higher business diversification when compared to other
medium-sized banks in the region, and comfortable liquidity and
capitalization positions. Its funding remains concentrated on
wholesale investors. However, conservative management of its assets
and liabilities, and a strong cash position considerably mitigate
liquidity risk.
Daycoval has been successful in expanding its credit operations
and maintaining adequate profitability over the last few years. In
view of the high delinquency rate in credits to small and
medium-sized enterprises (SMEs) 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.
Since 2014, the bank resumed the growth of its SME loan
portfolio in addition to another year of expansion for its payroll
loans. This resulted in overall loan growth higher than its peers
and the average of private banks. In Fitch's view the
diversification and short-term nature of its loan portfolio and
adequate management of collaterals, as well as Daycoval's expertise
in the sector allows it to rapidly adjust pricing of its portfolio
and reduce its risk appetite for the segment. Inasmuch as the SME
loan portfolio is more volatile and vulnerable to economic cycles,
Fitch does not expect the bank to suffer asset quality pressures
above those expected for the system as a whole due to the
challenging operating environment, as the bank's risk appetite and
pricing of new transactions already incorporate the negative
economic cycle and factor in the increased risks such a scenario
brings.
Historically, Daycoval has taken a conservative stance towards
balance-sheet leverage vs. other medium-size players, but
profitability remains resilient as the bank has been competent in
maintaining disciplined cost control and proved to be agile on
credit re-pricing if a more adverse macro environment is perceived.
Fitch expects a more challenging scenario for asset quality for
2015, but any increase in credit costs should be managed and
mitigated by improved margins on its higher-yield midsized
companies' portfolio, and is not expected to impair Daycoval's
ability to post good profitability ratios in line with similarly
rated banks.
Asset-quality risks stem from potential pressures arising from
the bank's exposure to the middle-market segment (clients with
sales up to R$300 million/year), which tend to be more at risk to
macroeconomic vulnerabilities. During 2013, deterioration in the
credit portfolio was more intense than in other mid-size banks,
when impaired loan ratios (local regulatory definition) peaked at
8.7% of the total in June 2013, while its 90-days past due loan
ratio grew to 2.8%. Still, Fitch considers asset quality metrics in
line with Daycoval's business profile as higher delinquency ratios
are being offset by higher margins and the bank's focus on the
lower-risk sectors such as payroll-loans, which also helps to
dilute concentration in single exposure. Also, given Daycoval's
ability to manage and execute 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 also been relatively successful in increasing and
lengthening its funding base, with longer instruments to better
match with its long-term payroll-portfolio, including local notes
(Letra Financeira) which already accounted for 28% of total funding
in December 2014. Nevertheless, its funding remains concentrated
per client. However, liquidity is robust as management has
historically adopted a much more conservative stance towards
leverage when compared to peers. Cash plus securities (excluding
Repurchase agreements) over total deposits remained above 220%
during the last eight quarters and plays a critical role in
mitigating the risks of wholesale funding vs long-term retail
loans.
Daycoval has a very comfortable capital position (17.6% Fitch
core Capital (FCC) and capital regulatory ratio of 17.8% in
December 2014). Most important, the bank has been standing out
among its peers because of its historical high liquidity and
capitalization levels, which have been enabling Daycoval to
sustaining the growth of its loan portfolio. Equity totaled BRL
2,522 million in December 2014 and is composed only of Level 1
capital (tier 1)
RATING SENSITIVITIES
Given its current business model, with asset and liability
concentrations inherent to its size, including its wholesale
funding nature, the potential for an upgrade to Daycoval's ratings
is limited.
The ratings could be negatively affected by continued asset
quality deterioration which leads to pressure on the bank's results
(operating income-to-average asset ratio below 2%) and on capital
(FCC ratio lower than 11%), which could be triggered by larger than
expected asset quality deterioration and/or aggressive asset growth
or cash dividend policy.
Fitch has affirmed the following ratings:
--Long-term foreign and local currency IDRs at 'BBB-', Outlook
Stable;
--Short-term foreign and local currency IDRs at 'F3';
--Viability rating at 'bbb-';
--Long-term national rating at 'AA(bra)', Outlook Stable;
--Short-term national rating at 'F1+(bra)';
--Support rating at '5';
--Support rating floor at 'NF';
--Senior unsecured USD notes due 2016 and 2019, foreign currency
rating at 'BBB-';
--Senior unsecured BRL letras financeiras due 2015, 2016 and
2017 at 'AA(bra)'.
Additional information available at 'www.fitchratings.com' or
'www.fitchratings.com.br'.
Applicable Criteria and Related Research:
--"Global Financial Institutions Rating Criteria" (Mar. 20,
2015);
--"National Scale Ratings Criteria" (Oct. 31, 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria - Effective from
31 January 2014 to 20 March 2015
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
National Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983751
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Fitch RatingsPrimary AnalystEduardo Ribas, +55-11
4504-2213DirectorFitch Ratings Brasil Ltda.Alameda Santos, 700 -
7th floorSao Paulo, BrazilorSecondary AnalystClaudio Gallina,
+55-11 4504-2216Senior DirectororCommittee ChairpersonFranklin
Santarelli, +1-212-908-0739Managing DirectororMedia
RelationsJaqueline Carvalho, Rio de Janeiro, +55 21 4503
2623jaqueline.carvalho@fitchratings.comElizabeth Fogerty, New York,
+1-212-908-0526elizabeth.fogerty@fitchratings.com