Fitch Ratings has affirmed Banco BOCOM BBM S.A.'s Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BB+', Long-Term Local Currency IDR at 'BBB-' and Long-Term National Rating at 'AAA(bra)'.

Fitch has also upgraded BOCOM BBM's Viability Rating (VR) to 'bb' from 'bb-'. The Rating Outlook on the long-term ratings is Stable.

The VR was upgraded due to an improved financial profile, higher profitability metrics, sustained asset quality ratios and high capitalization ratios in an improved 'bb' rated Operating Environment. The VR upgrade reflects BOCOM BBM's strengthened Business Profile, which now boasts a more diversified revenue stream and higher operating income. This improvement is partly due to expanded customer and product access as the bank is now part of a larger group.

Key Rating Drivers

IDRs, National Ratings and Shareholder Support Rating

Moderate Probability of Support: Banco BOCOM BBM S.A.'s IDRs, National Ratings and Shareholder Support Rating (SSR) reflect support from its ultimate parent, Bank of Communications Co., Ltd. (BOCOM; A/Negative), a Chinese bank. BOCOM's Viability Rating (VR) is 'bb+'.

BOCOM BBM's Long-Term Foreign Currency IDR is five notches below BOCOM's rating and constrained by Brazil's 'BB+' Country Ceiling. The Long-Term Local Currency IDR is two notches above Brazil's Local Currency sovereign rating (BB/Stable), as Fitch does not usually assign a bank's Local Currency IDR more than one notch above its Foreign Currency IDR. This reflects Fitch's view that BOCOM's ability to provide support to its subsidiary's senior creditors is linked to Brazilian sovereign risk and might be reduced in case of extreme sovereign stress, despite the group's strategic commitment to the country.

Strategically Important: The support assessment incorporates Fitch's view that BOCOM BBM's activities in Brazil are strategically important for the parent. This was demonstrated by the group's efforts to deepen commercial activity with ordinary support in terms of funding and capital and BOCOM BBM's efforts to increase synergies and operational integration with its parent in recent years.

BOCOM owns 80% of BOCOM BBM, and the parent's IDRs are driven by the Chinese state's ownership in the bank and its systemic importance. Under Fitch's assessment, Chinese state support to BOCOM would flow through to BOCOM BBM should the need arise. BOCOM has a strong ability to provide support, as BOCOM BBM's modest size relative to the overall group is unlikely to represent a constraint.

Viability Rating

Cooler but Steady Growth: Fitch expects Brazil's economic growth to moderate to 1.5% in 2024 from 3.0% in 2023. However, banking sector performance is expected to remain broadly stable over the year. Impaired loan formation will be less intense after high inflows in a challenging 2023, while business volumes could gradually recover over the medium term amid less restrictive domestic monetary policy and a resilient labor market. This underpins Fitch's stable outlook on Brazil's 'bb' operating environment score, which is in line with the implied score for the 'bb' category.

Strengthened Business Profile: Fitch upgraded BOCOM BBM' business profile score to 'bb' from 'bb-', recognizing its advancements as a medium-sized foreign commercial bank with a core focus on corporate lending. Its market presence, in terms of total loans, is relatively modest on a national scale. However, Fitch recognizes the bank's enhanced banking franchise, which has seen a notable upturn in recent years. This progress is evidenced by the bank's successful expansion of its revenue streams over the last four years.

Conservative Risk Profile: BOCOM BBM maintains conservative underwriting standards, a reflection of the bank's cautious approach and appropriate risk-based pricing strategy. Credit risk is the main source of asset quality risk for BOCOM BBM. The bank's expanded credit risk, including corporate loan and off-balance guarantees were BRL16.3 billion at the end of March 2024 (BRL13.8 billion in March 2023 and 10.2 billion in March 2022), representing 61% of the bank's assets.

Resilient Asset Quality: Fitch upgraded BOCOM BBM's asset quality score to 'bb+' from 'bb'. BOCOM BBM has maintained better asset quality in recent years than domestic peers due to its conservative risk profile, which provides space to absorb expected deterioration from higher interest rates and Brazil's still low economic growth. The Impaired Loan average in that last four-years ended (2023-2020) was low 0.7%, and 0.9% in March 2024.

Strong Profitability: Fitch upgraded BOCOM BBM's earnings and profitability score to 'bb' from 'bb-'. Over the four years spanning 2020 to 2023, the average of operating profit to risk-weighted assets ratio was 3.2%. Core earnings have steadily strengthened in recent years, helped by growing business volumes, improving revenue mix and cost optimization measures. Fitch expects the bank will keep its profitability ratios stable for the next two years.

Adequate Capitalization: Fitch upgraded BOCOM BBM's capital and leverage score to 'bb-' from 'b+'. Capitalization levels are adequate considering BOCOM BBM's credit risk profile, well managed market risks, good capital flexibility and ordinary support from the parent. As of March 2024, the bank's Common Equity Tier 1 (CET1) Capital ratio stood at 9.7% and Basel Ratio of 16.0%. Fitch's capital assessment also considers BOCOM BBM's low capital encumbrance from unreserved impaired loans.

Stable Funding: Fitch's assessment of BOCOM BBM's funding and liquidity profile incorporates the benefits it derives from being part of BOCOM. The bank's liquidity buffers are adequate given limited forthcoming maturities.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

IDRs, SSR and National Ratings

BOCOM BBM's IDRs, National Ratings and SSR could be downgraded if BOCOM's IDRs, from which they are notched, are downgraded by multiple-notches. However, BOCOM BBM's Long-Term IDR would not be downgraded to a level below its VR.

VR

The VR could be downgraded if the recovery of the Brazilian economy suffers a severe setback, causing a material weakening of the operating environment. In this scenario, pressure could stem from rapidly rising private-sector indebtedness and permanent erosion of business prospects.

The VR could also be downgraded if, contrary to expectations, BOCOM BBM's impaired loan ratio deteriorates above 5%, resulting in earnings deterioration.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

IDRs, SSR and National Ratings

BOCOM BBM's IDRs could be upgraded if Brazil's sovereign rating is upgraded, provided BOCOM BBM remains strategically important to BOCOM.

VR

There is limited rating upside at the current level of Brazil's sovereign rating.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Ex-Government Support Ratings

Key Rating Drivers

BOCOM BBM's Long-Term Foreign and Local Currency IDRs ex-government support (xgs) have been affirmed at 'BB(xgs)' and are one notch below its parent's Long-Term IDR (xgs) of 'BB+(xgs)'.The Short-Term Foreign and Local Currency IDRs (xgs) have been affirmed at 'B(xgs)' and is mapped from its Long-Term IDR (xgs). The ex-government support ratings exclude assumptions of extraordinary government support from the underlying ratings.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Sensitivities

BOCOM BBM's IDRs (xgs) are sensitive to changes in BOCOM's IDRs (xgs).

VR ADJUSTMENTS

The Business Profile score of 'bb' was assigned above the implied 'b' score due to the following adjustment reason: group benefits and risks (positive);

The Asset Quality score of 'bb+' was assigned below the implied 'bbb' score due to the following adjustment reason: concentrations (negative);

The Capitalization & Leverage score has been assigned above the implied score due to the following adjustment reason(s): Capital Flexibility and Ordinary Support (positive).

The Funding & Liquidity score of 'bb-' was assigned above the implied 'b' score due to the following adjustment reason: non-deposit funding (positive).

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.

Public Ratings with Credit Linkage to other ratings

BOCOM BBM's IDRs and National Ratings are driven by support from the Bank of Communications Co, Ltd. (BOCOM; Long-Term Foreign Currency IDR A/Stable and VR bb-), which owns 80% of BOCOM BBM.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/topics/esg/products#esg-relevance-scores.

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