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Moody's: Streamlining plans at Banco do Brasil, Caixa are credit positive

Operational streamlining plans announced by the new CEOs of state-run Brazilian lenders Caixa Econômica Federal and Banco do Brasil SA are credit positive because they sharpen the banks' focus on business segments that are highly relevant to earnings, according to Moody's.

The plans include the disposal of noncore assets, the repayment of debt owed to Brazil's national treasury and a strengthening of cost controls. The measures will improve the banks' capital positions by deleveraging their balance sheets and optimizing the composition of their risk-weighted assets, the rating agency said in a Jan. 10 report.

The sale of noncore assets announced by new Caixa CEO Pedro Guimarães and new Banco do Brasil chief Rubem Novaes will be credit positive for profitability as they will "convert activities that have low synergies with core activities into revenue, while assets that account for a significant volume of earnings will be preserved," Moody's said.

Shrinking the banks' balance sheets is a theme that both new CEOs have mentioned.

Furthermore, the strategy reinforces the new government's goal of reducing state banks' share of Brazil's credit market and consequently diminishing subsidized lending, which was largely promoted by the federal government between 2009 and 2014.

Moody's noted that Banco do Brasil's Tier 1 capital ratio improved to 13.2% in September 2018 from 11.6% in the third quarter of 2015, while Caixa's ratio increased to 13.3% from 10.1% over the same period. However, their profitability remains below that of large private commercial banks.