KBRA Affirms Ratings for Bradesco Bank

KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term debt and deposit ratings of K2 for Coral Gables, Florida based Bradesco Bank (“Bradesco”) (“the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by the bank’s peer-leading capital ratios, including a CET1 ratio of 18.0% at the end of 4Q23. The $190 million capital infusion provided by the bank’s parent, Banco Bradesco, S.A. (NYSE:BBD), a multi-national financial group based in Brazil with roughly $392 billion in total assets at year-end 2023, was in support of growth which is projected to remain robust in 2024 (low double-digit loan growth). Moreover, KBRA considers the transaction to be indicative of the bank's overall importance to BBD, providing a presence within the Unites States for the parent, with additional support available should the need arise. Importantly, Bradesco intends to continue to manage its capital at above-peer levels (+12% leverage ratio). Therefore, while KBRA recognizes the elevated risk stemming from the bank’s concentrated loan portfolio (over 50% of total loans were 1-4 family in Florida) as well as sovereign and single name risks associated with its C&IB portfolio, we consider these risks partially mitigated by the higher capital levels as well as its robust risk management practices, reflected by its strong credit performance over a multi-year period (Bradesco has reported a net recovery for each of the last three years).

Earnings have tracked below peer averages, though have been relatively consistent, with ROA ranging from 0.5% - 0.7% since 2020. The higher interest rate environment has created material headwinds to earnings growth, particularly given the bank’s significantly elevated funding costs (3.8% for 2023), though the short nature of its loan portfolio has enabled the bank to more effectively reprice its loan portfolio (up 140 bps since 4Q22 as compared to rated peer average of 80 bps). The bank’s unique operating model, with deposits generally sourced through its private banking/wealth management and C&IB business lines, lends itself to a greater reliance on higher cost funding, with brokered deposits comprising 21% of total deposits at year-end 2023.

A key driver to the bank's stable earnings, in addition to minimal credit costs, has been growth in fee income, driven by its wealth management business line. Bradesco reported organic growth of 38% in its wealth management AUC ($3.0 billion at 4Q23), a leading driver of its +50% increase in fee income in 2023, which comprised 24% of total revenues (0.8% of average assets).

Rating Sensitivities

The Stable Outlook reflects our view that a rating upgrade is not expected over the medium term. However, continued diversification of the bank’s loan portfolio and its revenue mix, with fee income tracking more in line with higher rated peers (on an average asset basis), coupled with an improved funding profile with less reliance on more volatile sources of funding, stable asset quality, and continued management of above-average capital ratios, could result in positive rating momentum over time. Should the bank experience the material degradation of credit or its funding profile, or change to a more aggressive capital management strategy, rating pressure could result.

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Methodologies