Fitch: New Risk Weights Raise Leverage on Brazilian Co-Op Banks

SAO PAULO--(BUSINESS WIRE)-- The material easing of risk weightings on loans originated by Brazilian cooperative banks for their associated cooperatives is a negative as it raises the co-op banks' underlying leverage, says Fitch Ratings.

In November 2014, the Brazilian Central Bank (Bacen) announced several rule revisions and proposals applicable to the country's credit cooperatives, including lowering loan risk weightings on loans to 20% from 50% and authorizing the issuance of subordinated debt instruments via Letras Financeiras Subordinadas (LFS). Despite the changes to the loan risk weightings, Brazil's two largest credit cooperative systems remained well capitalized as of year-end 2014. Cooperative systems consist of groups of cooperative members and an associated cooperative bank. The two Brazilian cooperative banks rated by Fitch were not affected by the new regulations.

Bacen reduced risk weightings on cooperative loans with the aim to lower operating costs and stimulate loan growth, although there was no discernable change in the actual risk profiles of these types of loans. The change had the effect of lowering the risk-weighted assets of the two cooperative banks by roughly 7% in 2014, after rising by 27% in 2013. The drop last year averaged 21%, despite the still-strong loan growth over the period. Loans grew by 29% in 2013.

The impact of lower risk weightings and capital injections in both cooperative banks in 2014 resulted in an increase in average regulatory capital ratios to 19% in December 2014 from approximately 13% in December 2013. Fitch's average Core Capital ratio for the two banks rose to 18% from 12%. Nonetheless, average leverage (total assets/equity) remained at a high 28.0x in December 2014 (30.0x in 2013). Cooperative banks aim to optimize their capital by maintaining their excess capital in the cooperative system, which benefits from lower tax rates.

Fitch believes a better indicator of capitalization would be to calculate capital ratios in consideration of the combined figures of the whole cooperative system, as the system's capital is fungible. This would reflect much lower leverage ratios (average leverage of 5.4x in December 2014 in the two largest Brazilian cooperative systems: Sicoob and Sicredi). However, Fitch also believes that the individual indicators for each cooperative should be maintained to avoid distortion and/or faults in the individual assessment of these entities.

Bacen has also allowed credit cooperatives to issue LFS, aiming to allow credit cooperatives to enhance their capitalization and foster loan growth within their cooperative system. Brazil's two largest cooperative systems (including bank and credit cooperatives) are well capitalized.

Also included in the November proposals for credit cooperatives was the allowance to set up audit entities that would be able to perform external audits over credit cooperatives. Even though the measure could improve internal audit procedures and standardize the level of service as regards to auditing the credit cooperatives, it also creates a conflict of interest for external audit services as it would be possible that auditors could have a direct relationship with the cooperatives they are auditing. Audit entity details remain open to public debate before finalization.

Sicoob and Sicredi, ranked eighth and ninth, respectively, in the local financial market in terms of total deposits and 13th and 14th, respectively, by assets in December 2014. In total, the two cooperative systems held more than 5.7 million members and around 3,500 service stations in the country, which is shaped to a large customer base and distribution of products and services.

Fitch maintains ratings on two existing cooperative banks in Brazil, controlled by the Sicoob and Sicredi systems described above: Banco Cooperativo do Brasil S.A. (Bancoob) ('A- (bra)') and Banco Cooperativo Sicredi S.A. ('A (bra)') respectively. Both banks benefit from their sizable business scale, strong revenue generation and high volume of deposits, stemming from their close relation with their respective cooperative systems.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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.

Fitch Ratings
Pedro Gomes
Director
+ 55-11-4504-2604
Fitch Ratings Brazil Ltda.
Alameda Santos, 700, 7th floor, Cerqueira Cesar
Sao Paulo - SP - CEP: 01418-100
or
Eduardo Ribas
Director
+ 55-11-4504-2213
or
Claudio Gallina
Senior Director
+ 55-11-4504-2216
or
Matthew Noll, CFA
Senior Director
Financial Institutions Fitch Wire
+1 212 908-0652
33 Whitehall Street
New York, NY
or
Media Relations
Jaqueline Carvalho, Rio de Janeiro, +55 21 4503 2623
[email protected]
Elizabeth Fogerty, New York, +1 212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Definium Therapeutics to Discuss Topline Results from Phase 3 Panorama Study in Generalized Anxiety Disorder on September 14, 2026
• LBank Exchange Listed AXT(AXIONstep)
• SES’s Final Three O3b mPOWER Satellites Successfully Launched