Fitch Ratings has affirmed Banco BOCOM BBM S.A.'s (BOCOM BBM) Long-Term (LT) Foreign Currency (FC) Issuer Default Rating (IDR) at 'BB+', LT Local Currency (LC) IDR at 'BBB-' and LT National Rating at 'AAA(bra)'.

The Rating Outlook on the long-term ratings is Stable. A full list of rating actions is below.

Key Rating Drivers

IDRs, NATIONAL RATINGS AND SHAREHOLDER SUPPORT RATING

Moderate Probability of Support: BOCOM BBM's IDRs, National Ratings and Shareholder Support Rating (SSR) reflect support from its ultimate parent, Bank of Communications Co, Ltd. (BOCOM; LT FC IDR A/Stable and Viability Rating [VR] bb+), a Chinese bank.

BOCOM BBM's LT FC IDR is rated five notches below that of BOCOM's and is constrained by Brazil's 'BB+' Country Ceiling, while its LT LC IDR is currently two notches above Brazil's LC sovereign rating (BB/Stable) as we do not usually assign a bank's LC IDR more than one notch above its FC IDR. This reflects Fitch's view that BOCOM's ability to provide support to its subsidiary's senior creditors is linked to Brazilian sovereign risk, and might be reduced in case of extreme sovereign stress, despite the group's strategic commitment to the country.

Strategically Important: The support assessment incorporates Fitch's view that BOCOM BBM's activities in Brazil are strategically important for the parent. This is demonstrated by the group's efforts to deepen commercial activity with ordinary support in terms of funding and capital and BOCOM BBM's efforts to increase synergies and operational integration within its parent in recent years.

BOCOM owns 80% of BOCOM BBM and the parent's IDRs are driven by the Chinese state's ownership in the bank and its systemic importance. Under Fitch's assessment, Chinese state support to BOCOM would flow through to BOCOM BBM, should the need arise. BOCOM has a strong ability to provide support, if needed, as BOCOM BBM's modest size relative to the overall group is unlikely to represent a constraint.

VIABILITY RATING

Strengthened Business Profile: BOCOM BBM is a medium-sized commercial bank focused primarily on corporate lending. The bank's market share by total loans is small on a national basis, but Fitch's assessment of BOCOM BBM's business profile highlights the bank's improved banking franchise in recent years that has translated into incremental revenue generation over the past four years despite a more challenging and highly competitive operating environment. The bank's management team has successfully executed its business-expansion plans on the bank's core corporate lending franchise, while strengthening fee-based business units to support revenue diversification. Intra-group benefits from being part of the Chinese BOCOM group supported this plan.

Conservative Risk Profile: BOCOM BBM's credit standards, in general, are conservative. This is due to the bank's prudent stance and adequate risk-based pricing. Credit risk is the main source of asset quality risks for BOCOM BBM. The bank's expanded credit risk, including corporate debt and off-balance guarantees, amounted to BRL13.8 billion at the end of March 2023 (67% of assets). Lending tickets are typically targeted toward corporates and large corporates with good risk profiles in the domestic market and sectorial distribution privileges sectors that have records of resilience across cycles and typically outperform the domestic average.

Resilient Asset Quality: BOCOM BBM has maintained better asset quality in recent years than domestic peers due to its conservative risk profile, which provides space to absorb expected deterioration from higher interest rates and Brazil's still low economic growth. At YE 2022, its impaired loan ratio (which includes impaired loans from D-H under local resolution) was 0.8%, and the four YE average was 0.7%.

Strong Profitability: Core earnings have steadily strengthened in recent years helped by growing business volumes, improving revenue mix and cost optimization measures. BOCOM BBM's operating profit-to-RWAs ratio was 3.3% in FY22 and averaged 3.0% over the past four years, supported by sound revenue performance. Fitch expectation is that the bank will keep its profitability ratios stable for the next two years.

Adequate Capitalization: Capitalization levels are adequate considering BOCOM BBM's credit risk profile, well managed market risks and ordinary support from the parent. BOCOM BBM's CET1 ratio of 8.4%, Tier 1 ratio of 10.1% and Regulatory Capital ratio of 14.7% at the end of 2022 are below its peer average and reflect its parent, BOCOM, largely managing the subsidiary's capitalization on a need-cost optimization basis. Fitch expects capitalization to remain below its peers and ordinary support to remain available for business growth, should it be needed.

Stable Funding: Fitch's assessment of BOCOM BBM's funding and liquidity profile incorporates the benefits it derives from being part of BOCOM. Intragroup funding accounted for 34% of BOCOM BBM's funding base at the end of March 2023. BOCOM BBM also funds its loan book with a mix of customer deposits and deposit like instruments. The bank's liquidity buffers are adequate given limited forthcoming maturities.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

BOCOM BBM's IDRs, National Ratings and SSR could be downgraded if BOCOM's IDRs, from which they are notched, are downgraded by multiple-notches. However, BOCOM BBM's LT IDR would not be downgraded to a level below that of its VR.

The VR could be downgraded if the recovery of the Brazilian economy suffers a severe setback causing a material weakening of the operating environment. In this scenario, pressure could stem from rapidly rising private-sector indebtedness and permanent erosion of business prospects.

The VR could also be downgraded if contrary to expectations, BOCOM BBM's impaired loan ratio deteriorates durably above 5% that results in deterioration of its earnings.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

BOCOM'S IDRs could be upgraded if the rating on the Brazilian sovereign is also upgraded, provided that BOCOM BBM remains strategically important to BOCOM.

The VR could be upgraded if BOCOM BBM's can sustain a CET1 ratio above 12% and an increase in the operating profit/RWAs ratio to above 4%, while maintaining its current core asset quality metric and reducing loan concentration.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Ex-Government Support Ratings

BOCOM BBM's FC and LC LT IDR (xgs) of 'BB(xgs)' is one notch below its parents' LT IDR (xgs) of 'BB+(xgs)'.The Short-Term IDR (xgs) of 'B(xgs)' is mapped from its LT IDR (xgs). The ex-government support ratings exclude assumptions of extraordinary government support from the underlying ratings.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Ex-Government Support Ratings

BOCOM BBM's IDRs (xgs) are sensitive to changes in BOCOM's IDRs (xgs).

VR ADJUSTMENTS

The Business Profile 'bb-' has been assigned above the implied 'b' Business Profile Score due to the following adjustment reason: Group benefits and risks (positive).

The Asset Quality 'bb' gas been assigned below the implied 'bbb' Asset Quality Score due to the following adjustment reason: Concentrations (negative).

The Funding & Liquidity of 'bb-' has been assigned above the implied 'b' Funding & Liquidity Score due to the following adjustment reason: Non-deposit funding (positive).

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

BOCOM BBM's IDRs and National Ratings are driven by support from the Bank of Communications Co, Ltd. (BOCOM; LT FC IDR A/Stable and VR bb-), which owns 80% of BOCOM BBM.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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