Moody's on Oct. 16 upgraded Caixa Econômica Federal's stand-alone baseline credit assessment and adjusted baseline credit assessment to "ba3" from "b1," reflecting its improved capitalization and profitability metrics.
Caixa was able to ease pressures on its capitalization by reducing the size of its balance sheet through prioritizing less-capital-intensive assets, Moody's said. A decline in loan originations also helped lessen the strain on the bank's capitalization, driven by high loan growth in the past years.
The assessment also considers the stable recovery of the Brazilian development bank's capital position in the last three years, with its tangible common equity to risk-weighted assets ratio rising to 9.64% in the second quarter of 2019 from 5.5% in the second quarter of 2016.
Although Moody's expects the ratio to temporarily drop over the next quarters due to the bank's hybrid debt obligations owed to the federal government, a commitment to boost its capital structure while bolstering capitalization through internal earnings generation is a credit positive development, Moody's said.
The bank has also posted continuously increasing profitability in the past eight quarters, with an average ratio of net income to tangible assets above 1%, which is in line with other large local retail banks. However, Caixa's net interest income prospects still face pressure from growing competition and still-low volumes, Moody's said.
In addition, Caixa exhibited improved earnings generation, stable core deposit base and high liquidity, Moody's said. The assessment is also anchored on the strong interlinkages between Caixa's asset risk profile and the ongoing economic recovery, which will help in stabilizing delinquencies between 2.5% and 3%.
Aside from the upgrade, Moody's also affirmed the bank's long- and short-term global local currency deposit ratings of Ba2 and Not-Prime, long- and short-term foreign currency deposit ratings of Ba3 and Not Prime and foreign currency senior unsecured debt rating of Ba2. Its long- and short-term Brazilian national scale deposit ratings of Aa1.br and BR-1 were also affirmed. The outlook is stable.