Fitch Ratings has revised Banco BMG S.A.'s (BMG) National Rating Outlook to Stable from Negative. In addition, Fitch has affirmed all International and National ratings of the issuer, including the Long-Term Issuer Default Ratings at 'B+'.
The Long-Term Foreign and Local Currency IDR Outlooks remains Stable, while the National Rating Outlook was revised to Stable from Negative.
The revision of the Outlook on BMG's National Rating to Stable primarily reflects that the negative impact from the coronavirus on BMG's business model was much less severe than initially expected. Back in April 2020, Fitch had revised the National Rating Outlook to Negative as the agency expected that the impact of the coronavirus on the economy to weigh on the bank's local relative creditworthiness among Brazilian issuers. However, as per the bank's YE 2020 results, the bank's low-risk appetite ensured that its asset quality remained satisfactory and its profitability improved. In addition, during the past twelve months, the bank took various strategic actions to diversify its business model and grow its franchise while ensuring comfortable levels of liquidity and capitalization. In 2021, it is clear that the potential negative impacts of the pandemic are far from over, but BMG's business model has shown, thus far, to be resilient.
KEY RATING DRIVERS
BMG's VR, IDRs and National ratings are driven primarily by the bank's company profile and its profitability metric. Other qualitative and quantitative metrics contribute to the rating and most have shown positive trends over the year and especially during 2020. These are expected to continue during 2021, subject to an unexpected worsening of the pandemic. However, despite the positive trends seen in 2020, BMG's ratings continue to be constrained by Brazil's Sovereign rating and the Operating Environment that are both on Negative Outlooks.
The bank's company profile has improved as BMG has been successful, on various fronts, to grow its traditional, lower risk, pension/payroll-backed (consignado) credit portfolio, which consists primarily of its payroll credit card product, followed by its payroll loan product, which together account for 71% of the total credit portfolio, of which 88% have the risk of the federal government. To diversify its sources of revenues, the bank has also enhanced a handful of other retail and wholesale products and invested heavily to grow its digital bank capabilities, which has already seen its number of active account holders reach 2.6 million. This number is nearly equal to the number of active client accounts at the physical BMG bank, for a total of 5.2 million active clients as of YE2020.
About 13% of the bank's credit portfolio is of a wholesale nature, which is also managed in line with a low risk appetite, which favors secured transactions. Despite a challenging operating environment in 2020, BMG saw no shortage of demand for its credit and non-interest generating products. As a result, the bank saw a total credit portfolio growth of 22.3%. Despite such growth, non-performing loans remained at satisfactory levels and the loan impairment (BACEN D-H) coverage remained satisfactory at nearly 83%.
Consistent, recurring operational profitability over the past few years has been a challenge for BMG. During 2020 the bank was able to show an adequate performance as Operating Profit/Risk Weighted Assets was nearly 2.2%, which was a good improvement over the 2019 result that was slightly above breakeven. This also was done while capitalization, liquidity and loan impairment provisioning were maintained at very comfortable levels despite the higher opportunity costs. The bank's return on average assets was adequate at 1.4%, as it was affected by relevant loan impairment charges.
BMG's impaired loans (BACEN D-H) to gross loan ratio has been on a positive trend over the past five years, reaching 6.2% at December 2020; although this ratio was aided by the relevant 22.3% loan portfolio growth. When looking at the non-performing loans over 90 days (BACEN E-H) the impairment ratio improves further to 5.7% and the loan loss coverage ratio is at a satisfactory 108%. This level was expected to improve as the bank continues to focus on secured lending, which usually has a lower level of impairments; for instance the impairment level of the payroll credit card product is 3.7%. It is also worth noting that some of the less representative unsecured credit products have, as expected by management, much higher average NPL ratios, but this is mitigated by premium pricing. The fact that approximately 88% of the payroll-backed credit product relates to federal government risk serves as a mitigation to asset quality deterioration.
BMG's capitalization ratios have been kept at very strong levels and compare well with its peers. As of Dec. 31, 2020, the bank's Common Equity Tier I ratio was slightly over 17% and the total capital ratio was 17.8%. Management expects this ratio to remain near these comfortable levels during most of 2021. The high level of excess capital was mostly the result of the bank's successful IPO of October 2019 where it raised nearly BRL 1.4 billion in new capital, which was partially used to reduce its funding costs and was slated to support further growth in the payroll-backed lending segment.
Even before the IPO, BMG has been operating with a comfortable liquidity position, which was partially enhanced by securitizations of receivables, funding from diversified customer deposits and the strategic downsizing of its commercial portfolios. The bank's adjusted Loan to Deposit ratio at Dec. 31, 2020 was at a conservative level of 82.8%. Also, the bank's liquid asset position was at a historical high of BRL 4.9 billion enabling a very comfortable LCR ratio of 875%. These levels are expected to retreat later this year to support credit growth.
BMG's Support Rating is based on Fitch's belief that the bank is not considered to be a significant financial institution locally because of the size of its market share. Thus, it is unlikely to receive external support from the Brazilian sovereign.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Weak financial performance (negative trend in operating profit-to-risk-weighted assets from current low levels);
A sustained deterioration in its asset quality (non-performing loans over 90 days remaining above 8%);
A deterioration in capitalization (CET I ratio falling below 9%).
Factors that could, individually or collectively, lead to a positive rating action/upgrade:
Positive trends in its credit metrics (notably asset quality and operational profits) could result in IDR and National Rating Outlook revisions to Positive within the next 12 to 18 months;
A consolidation of the bank's business model, including a relevant and sustained improvement in its operating profitability, especially if coupled with further and sustained declines in its impaired loan ratio (D-H) to below 5% of total loans, without deteriorating charge-offs and foreclosed assets;
Maintenance of CET 1 ratio above 12%.
SUPPORT RATING AND SUPPORT RATING FLOOR
A potential upgrade of BMG's Support Rating and/or Support Rating Floor is unlikely in the foreseeable future, since this would arise only from a material gain in systemic importance.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
Banco BMG S.A. LT IDR B+ Affirmed B+
ST IDR B Affirmed B
LC LT IDR B+ Affirmed B+
LC ST IDR B Affirmed B
Natl LT A(bra) Affirmed A(bra)
Natl ST F1(bra) Affirmed F1(bra)
Viability b+ Affirmed b+
Support 5 Affirmed 5
Support Floor NF Affirmed NF
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
BANCO BMG S.A. 
