Fitch Ratings has affirmed Banco da Amazonia SA's (BASA) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-'.
The Rating Outlook is Stable. In addition, Fitch has affirmed BASA's Long-Term National Rating at 'AA(bra)'/Stable. A full list of rating actions follows at the end of this rating action commentary.
Key Rating Drivers
Ratings Equalized with Sovereign: BASA's 'BB-' Long-Term IDRs and 'bb-' Government Support Rating (GSR) are equalized with those of Brazil, reflecting a moderate probability of support from the Brazilian government. This considers Brazil's high propensity to support BASA, but its moderate ability to do so. The Brazilian government's high propensity to support the bank reflects BASA's important policy role and majority state ownership.
The sovereign's ability to provide support is moderate as reflected in its 'BB-' Long-Term IDRs. As is the case for development banks, Fitch does not assign BASA a Viability Rating. This is because its business model is strongly influenced by its role as one of the government's main regional policy banks that implements its development plans and countercyclical policies in the Northern Region of Brazil.
BASA's 'AA(bra)' Long-Term National Rating is based on potential support and reflects the bank's creditworthiness relative to other issuers in Brazil.
Key Regional Policy Bank: BASA is a federal owned bank with a clear mandate to execute Brazil's government policy in the Amazon Region by channeling credit for economic and social development. At end-March 2023, BASA had total assets of BRL38.1 billion, but its policy role is further reinforced by its status as the exclusive agent of Constitutional Fund of the North (FNO). FNO is the main financial instrument for the economic development of the Northern region consisting of public funds and lending assets of BRL26.1 billion at end-March 2023.
FNO Agent: BASA is the sole manager of FNO, one of the bank's largest funding sources and a key revenue contributor for the entity. As fund administrator, BASA receives a monthly fee based on the fund's equity in addition to a del-credere fee for assuming partial or full risks on operations carried-out with FNO resources. These amounted to around 53% of the bank's operating income in 2022.
Risk Profile Sensitive to Policy Role: Given its policy role, BASA's risk profile is more sensitive to economic downturns than local commercial banks. This is a consequence of the bank's role in financing emerging sectors and industries, as well as customer segments that are underserved by commercial banks and the long-term nature of its lending. Although there has not been any structural change in the bank's overall strategy thus far, Fitch will continue to monitor the potential for political interference from the federal government that could materially affect BASA's role and financial metrics.
High Loan Expansion: BASA's impaired loans ratio of 5.6% at end-2022 materially improved from the four-year average between 2018-2022, reflecting the active management of vulnerable exposures, as well as strong loan expansion. The ratio is likely to weaken over the next two years as higher interest rates and inflation reduce the borrowers' debt-service capacity. Enforcing loan collections remains one of the bank's top priorities to reduce charge-off levels and support revenues.
Strong Profitability: BASA's performance over the past two years has materially improved from historical levels reflecting primarily increased business volumes, high yields on government bonds and well-controlled expenses stemming from the implementation of cost efficiency measures. The bank's operating profit/risk-weighted assets ratio reached 5.0% in 2022 (2021: 3.7%; 2020: 1.5%). Fitch expects loan impairment charges to continue to increase in 2023 and 2024 as asset-quality pressures materialize. However, the operating profit/risk-weighted assets ratio will remain close to 4% in 2023, driven by the high interest rates and growth environment.
Moderate Capital Buffers: BASA's regulatory capital ratios are adequate, as indicated by its common equity Tier 1 (CET1) ratio of 12.8% at end-March 2023. BASA managed to improve its CET1 ratio by 70bps since end-2020 despite high balance-sheet expansion, reflecting the bank's stronger internal capital generation and prudent dividend distribution.
BASA also managed to negotiate a capital injection of BRL1.0 billion from Brazil's federal government, approved in September 2022. This had a neutral impact on capital, as it was accompanied by the repayment of hybrid notes held by the treasury, but adds to greater predictability of the bank's capital structure. BASA aims to maintain regulatory capital ratios in line with current levels, which Fitch considers prudent in view of its risk profile. Fitch is also monitoring the potential risk of capital pressures due to an impending court ruling, which will require BASA to provision the actuarial deficit of its proprietary pension plan for employees.
Stable Funding profile: BASA's funding profile benefits from the ample and longer-term sources of FNO (63% of total funding at end-2022), underpinned by a fairly resilient and granular customer deposit base (34%, including letras), in addition to BNDES on-lending funding. These funding sources were more than enough to cover BASA's gross loan book of BRL19.7 billion.
BASA's liquid assets is ample, as indicated by its adjusted loan to deposit ratios (adjusted for FNO funds) of 76% at end-22. Unencumbered sovereign securities amounted BRL8.3 billion, or 24% of total assets, all accounted at their fair value and adequate duration in light of BASA's funding needs.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
BASA's Long-term IDRs and GSR would be downgraded if Brazil's sovereign rating is downgraded, though this is not Fitch's base case given the Stable Outlook on Brazil's Long-Term IDRs;
BASA's ratings are also sensitive to a reduced propensity of the authorities to support the bank. This could be indicated by an adverse change in BASA's policy role or a material reduction in government ownership, which Fitch views as unlikely;
BASA's National Long-Term Rating is sensitive to a negative change in Fitch's opinion of the bank's creditworthiness relative to other Brazilian issuers. A downgrade of the National Short-term Rating is not likely as this would require a downgrade of the National Long-Term Rating to at least 'A(bra)'.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of the Long-Term IDRs would require a sovereign upgrade;
BASA's National Long-Term Rating is at the highest level on Fitch's Brazilian national rating scale for entities with international ratings equalized with the sovereign and therefore cannot be upgraded.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
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
BASA's ratings are equalized with Brazil's sovereign rating.
ESG Considerations
Banco da Amazonia SA has an ESG Relevance Score for Governance Structure (GGV) of '4'. A GGV score of '3' is the standard score assigned to all banks rated by Fitch. Given BASA's ownership and a track record of the Brazilian federal government's ability to influence and interfere in the policies of the banks it controls, Fitch believes that an increase of government influence in the bank's management and strategy could negatively affect creditors' rights. This has a moderately negative effect on the bank's rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
BANCO DA AMAZÔNIA S.A. 
