Investing.com -- Moody’s Ratings has confirmed all ratings and assessments for Banco BMG S.A. (BMG), including its B1 long-term local and foreign currency bank deposit ratings and Ba3 long-term local and foreign currency Counterparty Risk Ratings. The Baseline Credit Assessment (BCA) and adjusted BCA of b1, the long and short-term Counterparty Risk Assessments of Ba3(cr) and Not Prime(cr), respectively, were also reaffirmed. The short-term local and foreign currency bank deposit ratings and Counterparty Risk Ratings of Not Prime were maintained. The outlook for the long-term deposit ratings has been changed from negative to stable.

This change in BMG’s rating outlook to stable is a reflection of the bank’s increased profitability. This improvement has been facilitated by a strategic shift that started in early 2023. In 2024, the bank’s performance was boosted by a decision to increase origination related to payroll lending and insurance products, which are the bank’s main products. At the same time, the bank divested from riskier businesses that negatively impacted asset quality and efficiency metrics between 2021 and 2023, including the operational cost structure. This strategic reassessment allowed the bank to increase its earnings generation, which will enhance its future capital replenishment ability, a key rating constraint.

In 2024, BMG reported increased profitability with net income to tangible assets at 1.0%, compared to an average of 0.6% over the last three years. This improvement was due to cuts in operating costs, lower loan loss provision expenses, and higher business volume origination. These positive factors offset high funding costs and regulatory cap cuts that pushed margins on pensioners’ payroll loans to record lows in 2024. The recent improvement in earnings generation has also helped capitalization, with Moody’s Ratings adjusted tangible common equity in relation to risk-weighted assets (TCE ratio) increasing slightly by 20 bps to 3.9% in December 2024, after a decline over four consecutive years. Additionally, the bank’s regulatory Tier 1 capital ratio rose to 10.1% at the end of 2024, up from 9.8% a year earlier.

In affirming BMG’s b1 BCA, Moody’s also reflected its expectation of stable asset quality indicators. This is supported by BMG’s focus on payroll lending and improved underwriting standards for the riskier unsecured consumer loans portfolio, which accounted for just 6.5% of the credit portfolio in December 2024 and is expected to continue growing in proportion over the next 12 months. The potential sale or reduction of the bank’s exposure to the US payroll loans, which accounted for 16.5% of its loan book in 2024, would be positive for asset risks because this portfolio has a high delinquency level of 11.5% compared to 4.4% of the bank’s total loan book as of December 2024.

Furthermore, the affirmation of the B1 ratings assigned to BMG acknowledges its ongoing efforts in diversifying and lengthening the duration of its funding base over the past two years. This helps mitigate the dependence on highly market-sensitive institutional resources and brokered deposits, especially in times of global volatility. While BMG has increased the usage of securitization instruments as a funding alternative over the last two years, as the bank seeks capital optimization, this strategy is dependent on supportive market conditions.

Upward pressure on BMG’s BCA could result from a substantial and sustainable improvement in the bank’s core capitalization and profitability levels. On the other hand, BMG’s ratings could be downgraded if there is a sudden fall in profitability and deterioration to asset quality metrics, or if its liquidity position were to reduce significantly compared to historic levels. Changes in the regulatory framework for its core business or an acceleration in growth to address margin compression could result in adverse selection and a sharp deterioration in its financial metrics, thereby straining the ratings.

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