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Moody's upgrades Banco Modal after pivot to digital investments

Moody's on Dec. 23 upgraded Banco Modal SA's Brazilian national scale deposit ratings, citing improvements in asset quality driven by a change in the bank's business model.

The rating agency raised the bank's long- and short-term national scale deposit ratings to Baa1.br and BR-2 from Baa2.br and BR-3, respectively.

It also upgraded the company's long-term national scale counterparty risk rating to A1.br from A2.br, while affirming the lender's B1/Not Prime local and foreign currency deposit ratings, "b1" baseline credit assessment and Ba3 long-term counterparty risk ratings.

The outlook on all ratings remains stable.

The upgrade reflects "improvements in asset quality metrics resulting from the run-off of legacy corporate problem loans as the bank gradually shifts its operations to focus on digital investments and brokerage service from commercial lending," Moody's said.

It added that higher generation of noninterest income through digital platform ModalMais, which was previously a retail broker platform, has benefited the bank's profitability and also supports the upgrade of the national scale ratings.

Although the rating agency expects Banco Modal's capitalization to improve in 2020 alongside increased earnings generation and lower risk weighted assets, the company's new business model will face challenges posed by stronger competition from banks and financial technology firms, many of which are also investing in digital distribution channels.