Banco do Estado do Pará Global Scale `BB/B` And

Research Update:
Banco do Estado do Pará Global Scale
'BB/B' And National Scale
'brAA-/brA-1' Ratings Affirmed,
Outlook Still Stable
Primary Credit Analyst:
Vitor Garcia, Sao Paulo (55) 11-3039-9725; [email protected]
Secondary Contact:
Cynthia Cohen Freue, Buenos Aires (54) 114-891-2161; [email protected]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Ratings Score Snapshot
Related Criteria And Research
Ratings List
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Research Update:
Banco do Estado do Pará Global Scale 'BB/B' And
National Scale 'brAA-/brA-1' Ratings Affirmed,
Outlook Still Stable
Overview
• The Brazilian commercial bank, Banpará, continues playing the role of
financial agent in the state of Paráy and focuses on payroll-deductible
and consumer lending.
• We are affirming our 'BB/B' global scale and 'brAA-/brA-1' national scale
ratings on the bank.
• The stable outlook reflects our opinion that the bank will continue
expanding its core activities in the state with sound asset quality and
strong capital levels, while it struggles to diversify its business lines.
Rating Action
On Sept. 4, 2014, Standard & Poor's Ratings Services affirmed its 'BB/B'
global scale and 'brAA-/brA-1' Brazilian national scale ratings on Banco do
Estado do Pará S.A. (Banpará). The bank's stand-alone credit profile (SACP)
is'bb'. The outlook remains stable.
Rationale
The ratings on Banpará reflect its "weak" business position, "adequate"
capital and earnings, "moderate" risk position, "above average" funding and
"strong" liquidity. Under our bank criteria, we use our BICRA's economic and
industry risk scores to determine a bank's anchor, the starting point in
assigning an issuer credit rating. Our anchor for a commercial bank operating
only in Brazil is 'bbb-', based on the banking sector's economic risk score of
'6' and industry risk score of '5'. The economic risk reflects Brazil's low
GDP per capita levels and only modest growth prospects that limit household
credit capacity and the country's ability to withstand economic downturns. It
also considers our view that economic imbalances have increased as a result of
rapid credit expansion amid a slowly growing economy, which isn't likely to
pick up for the next two years, further increasing the household debt burden.
In addition, we expect Brazil's external vulnerability to rise somewhat over
the next several years, which also contributes to our "high risk" assessment
for economic imbalances. However, the Brazilian corporate sector's moderate
leverage and the absence of high-risk loans somewhat mitigate the higher risk
factors in our economic risk assessment.
Our industry risk score of '5' reflects our belief that the industry risks in
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Research Update: Banco do Estado do Pará Global Scale 'BB/B' And National Scale 'brAA-/brA-1' Ratings
Affirmed, Outlook Still Stable
Brazil's banking sector continued to increase. In our view, there are growing
market distortions due to an increasing market share of loans from publicly
owned banks during the past two years and an increasing spread differential
between public and private banks, which have reduced the sector's
profitability. Extensive coverage, effective supervision of the financial
system, and an adequate and stable deposit base support our industry risk
assessment.
The bank's business position is "weak" given its small size and market share
and its concentrated customer base. Nevertheless, the bank's revenues are
stable due to its ownership and role as financial agent of the state. Banpará
is the 40th-largest financial institution in Brazil, according the central
bank's March 2014 data, accounting for less than 1% of the financial system's
assets. As of December 2013 it had R$4.6 billion in assets, R$2.7 billion in
loans, and 44 branches in the state of Pará. The bank was founded in 1959 to
expand banking services to the population of the state that has very isolated
municipalities, some only accessible by boat, while generating profitability
for the shareholder. In 1998, the bank adopted the PROES program in which the
federal government liquidated, sold to the private sector, or restructured the
state-owned banks to reduce their market share. Banpará was one of the
state-owned banks that was not sold because private banks had a negligible
presence in the state. The bank also received a capital injection of R$195
million and is 99.98% owned by the state of Pará. The credit penetration in
the state is lower than the system average, underscoring a big potential for
the bank's expansion. However, the bank's customer base and loan portfolio are
currently concentrated in the employees and retirees of state-owned companies,
and the payroll-deductible lending and consumer financing segments account for
69% and 19% of the bank's total loans. Banpará also has concentrated revenues
sources, resulting from small cross-selling of products and few business
lines, as more than 60% of 2013 revenues came from payroll and consumer
lending. Banpará has opened 11 new branches in 2013, 10 of which were in
non-covered municipalities, contributing 26% of loan growth during 2013. In,
2014, the executive board approved a project to open more than 40 new branches
to extend its presence to 100 of 144 state municipalities. We expect the bank
to decrease the small to medium enterprise (SME) and corporate lending share
of its total portfolio, due to some asset quality deterioration during the
year. Payroll and consumer financing will remain the bank's core activities.
Banpará's capital and earnings assessment is "adequate" given the bank's
adequate capital base and historically sound profitability. The bank's
capital, measured by our risk-adjusted capital framework, was about 9%, as of
December 2013 and we expect it to be slightly below 8% on average for the next
couple of years, which supports our "adequate" capital assessment. The bank's
relatively strong loan growth is due to sound profitability and internal
capital generation. In 2013, despite a small decrease in net interest margin,
return on assets (ROA), when measured by our core earnings methodology,
reached 3.2% and averaged 3.7% in the last five years. Such solid bottom-line
results and a dividend payout ratio of around 40% should prevent significant
capital deterioration, even amid loan growth of 20%.
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Research Update: Banco do Estado do Pará Global Scale 'BB/B' And National Scale 'brAA-/brA-1' Ratings
Affirmed, Outlook Still Stable
The overall "moderate" risk position is based on the bank's historical asset
quality and conservative risk management and pulverized credit operations,
which are partially offset by strong growth appetite and geographic
concentration. Banpará's loan portfolio expanded 26.1%, down from the 40.5%
growth in 2012, mainly in its payroll and consumer financing segments. For the
next couple of years we expect credit growth to remain strong, between 15% and
20%, but still focused on the bank's core businesses. We believe there is
still significant potential for credit growth on the state of Pará and that
the bank will remain focused on the state in the medium term. On the other
hand, Banpará has a fragmented customer base that reflects in low loan
single-name concentration, with the 20 largest debtors representing only 2.3%
of total loans as of December 2013 in light of its retail focus. The bank has
sound asset quality given that the majority of its loan portfolio consists of
payroll-deductible lending with nonperforming loans (NPLs) of 1.96%.
Nevertheless, NPLs have spiked by around 60 basis points last year mainly due
to rising credit card delinquency and deterioration of the bank's corporate
portfolio, resulting in more credit loss provisioning, although profitability
remained sound. We expect small asset quality deterioration if the bank's SME
portfolio growth resumes.
The bank has "above average" funding profile and "strong" liquidity. Banpará's
funding base is very particular when compared to other banks in Brazil and
enjoys relative stability. The base consists of time deposits and retail
deposits, from both its retail clients and related parties, in this case the
government of the state of Pará, municipalities, and the judiciary. As of
December 2013, related parties funding represented 47% of total funding base,
the executive 30%, and the judiciary 17%. The latter are deposits that the
government receives from ongoing judicial process and trials and then invests
in the bank. They are likely to be withdrawn only when the process is over and
one of the parties involved is to receive the funds. In Brazil, these
processes take many years, even decades to be solved, giving this type of
deposit a very long-term nature. The other portion of the related parties'
deposits, 30% of total funding base, are resources from state-owned companies,
according to a state decree, must have their current accounts and investments
in Banpará and from the executive government itself. The retail
deposits--demand, 10%, savings, 16% and time, 3%--also enjoy
better-than-average stability, given that a state law guarantees that the
payroll of all the employees and suppliers of the state must be in Banpará. A
governor's decision and state legislature vote are necessary to change these
characteristics, which is unlikely because the state is the only shareholder
and receives dividends from the bank. The bank's available stable funding was
about 133% as of December 2013. That shows that Banpará, which depends on core
deposits as its main source of funding, has its funding needs, basically
loans, strongly covered by these deposits. The bank also enjoys a very
comfortable liquidity position, meaning that it has a large volume of liquid
assets when compared to its short-term sources of funding, coverage of more
than 7x as of December 2013.
We classify Banpará as a government-related entity (GRE) with a "moderate"
likelihood of government support, given its "limited importance" to the
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Research Update: Banco do Estado do Pará Global Scale 'BB/B' And National Scale 'brAA-/brA-1' Ratings
Affirmed, Outlook Still Stable
government and its "strong" link with government. This assessment is based on
the state government's majority control and influence in the bank's strategy,
but also on the fact that the services it provides could eventually be
replaced by another entity.
Outlook
The stable outlook reflect our view that the bank will continue to expand its
lending activities in the state of Pará amid sound asset quality and strong
capital levels, while it struggles to diversify its business lines. A positive
rating action would depend on the bank gaining significant scale and market
share, as well as diversifying its business lines and revenues sources. On the
other hand, the rating could be lowered if the bank does not generate internal
capital to keep RAC ratio above 7%. However, we don't see it as a likely
scenario on the coming 18 months.
Ratings Score Snapshot
Issuer Credit Rating
BB/Stable/B
brAA-/Stable/brA-1
SACP
Anchor
Business Position
Capital and Earnings
Risk Position
Funding and Liquidity
bb
bbbWeak (-2)
Adequate (0)
Moderate (-1)
Above Average and Strong (+1)
Support
GRE Support
Group Support
Sovereign Support
0
0
0
0
Additional Factors
0
Related Criteria And Research
Related Criteria
• Criteria - Financial Institutions - Banks: Banks: Rating Methodology And
Assumptions, Nov. 9, 2011
• Criteria - Financial Institutions - Banks: Banking Industry Country Risk
Assessment Methodology And Assumptions, Nov. 9, 2011
• General Criteria: Rating Government-Related Entities: Methodology And
Assumptions, Dec. 9, 2010
• Criteria - Financial Institutions - Banks: Bank Capital Methodology And
Assumptions, Dec. 6, 2010
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Research Update: Banco do Estado do Pará Global Scale 'BB/B' And National Scale 'brAA-/brA-1' Ratings
Affirmed, Outlook Still Stable
Ratings List
Banco do Estado do Para S.A.
Counterparty Credit Rating
Foreign and Local Currency
Brazil National Scale
BB/Stable/B
brAA-/Stable/brA-1
Complete ratings information is available to subscribers of RatingsDirect at
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this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
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