Banco de Desenvolvimento de Minas Gerais Upgraded To 'B' From 'B-' On Lower Intervention Risk From State Of Minas Gerais

  • Although the state of Minas Gerais, BDMG's controlling shareholder, faces deepening financial stress, we haven't seen any evidence of the state's negative intervention in the bank. We believe the country's regulatory framework, the Fiscal Responsibility Act, and the State-Owned Company Act have successfully protected the bank from extraordinary negative interventions.
  • We now consider the negative intervention risk from the state to be lower than we previously expected. As a result, we're raising our global scale rating on BDMG to 'B' from 'B-' and our national scale rating to 'brA-' from 'brBBB-'.
  • Still, we continue to believe that further worsening of the state of Minas Gerais' challenging economic conditions may affect BDMG's asset quality and bottom-line results going forward.
SAO PAULO (S&P Global Ratings) Dec. 6, 2018--S&P Global Ratings raised its 
global scale issuer credit rating on Brazilian development bank Banco de 
Desenvolvimento de Minas Gerais S.A. - BDMG (BDMG) to 'B' from 'B-'. We also 
raised our national scale issuer credit rating on the bank to 'brA-' from 
'brBBB-'. At the same time, we lowered the bank's stand-alone credit profile 
(SACP) to 'b' from 'b+'. The outlook on the ratings is negative.

The upgrade of BDMG reflects our reassessment of the negative intervention 
risk from the state of Minas Gerais (CCC-/Negative/--), its controlling and 
sole shareholder. We now believe that the state's ability to impair the bank's 
credit quality is lower than we anticipated.

Although the state of Minas Gerais has faced expanding financial stress since 
2016, we have had no evidence of extraordinary negative intervention in the 
bank. In our view, the state hasn't drained BDMG's resources through dividends 
or taxes, or reduced the bank's financial flexibility in any other way. We 
believe the country's regulatory framework, the Fiscal Responsibility Act, and 
the State-Owned Company Act have been successful in protecting the bank and 
other government-related entities from extraordinary negative interventions. 
Therefore, we believe the negative intervention risk is lower than we 
previously expected and the cap imposed on the ratings on BDMG by those on the 
state of Minas Gerais no longer applies.

Still, we believe that the state's financial constraints could pressure the 
local economy, affecting the bank's asset quality. As the state's economic 
conditions have worsened, the bank's nonperforming loans (NPLs) and net 
charge-offs have increased materially, reaching 4.5% and 7.4%, respectively, 
of the loan portfolio in September 2018, against an average of 2.1% and 0.9% 
in the past five years. Given that the bank's operations are highly 
concentrated in the state of Minas Gerais, and renegotiated loans and the top 
20 clients represent around 18% and 32%, respectively, of the credit 
portfolio, we believe the bank's credit losses could sharply increase if the 
regional economy weakens further. As a result, we revised our SACP on the bank 
to 'b' from 'b+' to account for the higher asset risk in the region where BDMG 
operates.