Bradesco's Ratings Unaffected by HSBC Brazil's Acquisition
SAO PAULO & NEW YORK--(BUSINESS WIRE)-- Fitch Ratings considers the announced acquisition of HSBC Bank Brasil S.A. - Banco Multiplo (HSBC Brazil) by Banco Bradesco S.A. (Bradesco) as neutral to Bradesco's ratings.
On Aug. 3, 2015, Bradesco announced it entered into a Share Purchase and Sale Agreement to acquire 100% of HSBC Brazil, taking over all operations of HSBC in Brazil. The completion of the acquisition is subject to regulatory approvals, which are expected within the next four to six months. The acquisition price is USD 5.2 billion and will be adjusted based on HSBC Brazil's asset variation until the completion of the transaction.
HSBC Brazil is the sixth largest commercial bank in Brazil and has a market share of 3% of system deposits. As the seventh largest asset manager in the country, HSBC Brazil has a 3.4% market share. The bank has around 5 million clients and a significant foothold among high-end individuals. The transaction will result in an expansion of around 16% of Bradesco's assets. Given the lower current profitability of HSBC Brazil and the challenging operating environment in Brazil, Fitch expects some initial reduction of the overall profitability, of the resulting entity on the first and maybe second years following the completion of the acquisition, in terms of operational ROAA. This lower profitability level would still be consistent with Bradesco's current ratings and ample enough to foster further internal capital generation. Also, Fitch is not expecting any deterioration on Bradesco's overall asset quality due to the acquisition.
Fitch believes the HSBC Brazil acquisition has good complementarity with Bradesco's business model and should help the bank expand its high-end retail banking client base, asset management franchise and corporate banking platform. With this acquisition Bradesco will be closing the gap with its closest competitor, Itau Unibanco S.A. by reducing the distance in terms of total assets, total deposits and total loans.
The acquisition will be fully paid in cash and result in a sizable goodwill, bringing Bradesco's Fitch Core Capital ratio (FCC) down to slightly below 7% from the current 8.9%, as of June 2015. This ratio is expected to recover to levels above 8% after one year following the completion of the acquisition assuming historical dividend pay-out ratios and moderate asset growth. Fitch will continue to monitor the evolution of Bradesco's capitalization, focusing on its FCC.
Banks in Brazil are currently migrating to BIS III capital guidelines and the proposed transaction may result in a more substantial drop of the current regulatory capital ratios given the phase in of new deductions in the next 12 months. In any case, Fitch's FCC fully deducts goodwill, intangible, tax credits and capital deployed to insurance subsidiaries, and hence would not be affected by the aforementioned phase in period.
The proposed transaction will not come without challenges, as any other M&A transaction, regulatory approval, IT and business model integration will be key. The preservation of talent and the ability to exploit synergies presented with the transaction will require significant efforts considering the current challenges of the operating environment in Brazil. While Bradesco expects to increase the level of revenues per client of HSBC's current retail and private banking clients, retention of this client base is another challenge that Fitch will monitor. Bradesco strong management execution and past history managing similar transactions should help to navigate through those challenges.
Fitch currently rates Bradesco as follows:
--Long-term foreign currency IDR 'BBB+', Outlook Negative;
--Long-term local currency IDR 'BBB+', Outlook Negative;
--Short-term local currency IDR 'F2';
--Short-term foreign currency IDR 'F2';
--National long-term rating 'AAA(bra)', Outlook Stable;
--National short-term rating 'F1+(bra)';
--Support rating '2';
--Support rating floor 'BBB-';
--Subordinated notes due 2019, 2021 and 2022 'BBB-';
--Viability rating 'bbb+'.
Additional information is available on www.fitchratings.com
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
View source version on businesswire.com: http://www.businesswire.com/news/home/20150807005764/en/
Fitch Ratings
Primary Analyst
Eduardo Ribas
Director
+55
11 4504-2213
Fitch Rating Brasil Ltda.
Alameda Santos 700
Sao
Paulo, Brazil
or
Secondary Analyst
Robert Stoll
Director
+1-212-908-9155
or
Media
Relations:
Sandro Scenga, +1 212-908-0278
[email protected]
Source: Fitch Ratings
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