S&P worsens outlook for Brazilian banks
April 8, 2020
Rating agency also cuts aircraft manufacturer Embraer to BBB- on expectations of delayed deliveries during coronavirus outbreak
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S&P Global Ratings revised its outlook for 14 Brazilian banks after changing its perspective for the sovereign issuer to stable from positive following the coronavirus outbreak, it said on Tuesday.
"The rating action reflects our view that we expect Brazil's GDP growth and fiscal performance to suffer in 2020 due to the COVID-19 pandemic and extraordinary government spending, before gradual economic recovery and fiscal consolidation resumes," S&P said in a report.
The Brazilian government has limited room to combat the health crisis without a "significant rise" in debt, but it can count on "large international reserves, low external debt, proactive monetary policy, floating exchange rate and favorable sovereign debt composition" to help make it through the outbreak, S&P said.
S&P, in turn, lowered the outlook to stable from positive for 15 banks in Brazil, including the state-owned lenders Banco do Brasil, BNDES and Caixa Econômica Federal and major commercial banks Bradesco and Itaú Unibanco. The revised outlook also affected the local branches of international banks Citi, Santander, ABC and China Construction Bank, among others.
The other financial institutions with lowered outlooks are Banco do Nordeste (BNB), Banco Safra, BV and Haitong's investment banking subsidiary in Brazil, S&P said.
In a separate report on Monday, S&P downgraded Brazilian aircraft manufacturer Embraer by one notch to BBB- on the expectation that many airlines will delay new deliveries at least until the end of the third quarter this year.
S&P kept its negative outlook on Embraer's ratings, saying the proposed tie-up with Boeing will "considerably weaken" the Brazilian company's position in the market and its credit quality. The European Union (EU) is expected to finish its review of the potential joint venture between Embraer and Boeing in the third quarter this year.
In the meantime, Embraer will likely decrease production and deliver fewer planes, which could increase its leverage ratio to above 2.5 times EBITDA from 2.2 times in 2019, S&P said.
"We assume the situation will gradually normalize toward the end of the year, with Embraer returning to its regular operations starting in third quarter 2020," S&P said, adding that the Brazilian manufacturer has a "comfortable cash position" to get it through the year.