Really, BofA?

Here is an excerpt from a recent BofA ML’s note on BANVOR:

Valuation is attractive post-capitalization; upgrading bonds  

Banco Votorantim S.A. (BANVOR) is expected to post weak operational results in  2012 due to (i) auto finance delinquency (2010/2011 vintages), (ii) lack of credit  assignments (accounting change), and (iii) lower origination volumes (better underwriting standards). However, given strong and proven shareholder support  (recent USD1bn capitalization) as well as current valuation, we upgrade BANVOR  bonds to OW-30% (senior) and OW-70% (subordinated Tier 2).

Continued weak results in 2H12 as auto loan cleansed

We expect BANVOR to post weak operational results in 2H12 as the auto loan portfolio continues to be charged-off and provisioned. In 2Q12, provisioning reached BRL1.4bn (up +71% YoY but down 9% QoQ) as asset quality went up 450bp YoY for a 7.7% NPL ratio. The bulk of the NPLs came from the bank’s auto finance portfolio (53% of total loans). Charge-offs reached BRL1.1bn (up +254% YoY and +56% QoQ) and is a positive indication that the loan portfolio is being cleansed, rather than renegotiating loans (down 42% YoY).

Improved underwriting to lead recovery

BANVOR’s new management team has implemented several changes over the  last year, focusing on improved loan underwriting and multi-brand auto financing. As a result, auto loan-to-value has reduced from 65% in 2Q11 to 57% in 2Q12. Auto loan tenor also decreased, capped to 60 months. In addition, 90-day NPL ratio, after four months, has fallen from 2.2% in 2Q11 to 0.6% in 2Q12. We expect slow but steady improvement in asset quality by year-end 2012.

Strong shareholder support as per recent capitalization

Despite continued weak results, BANVOR has strong shareholder support. On 6/25/12, Banco do Brasil (BANBRA) and Grupo Votorantim injected BRL1bn each in BANVOR. Post capitalization, the bank’s BIS ratio increased 250bp to 15.5%. We expect shareholder support to continue, which includes a 13.0% minimum BIS ratio and a committed funding facility from BANBRA of up to 100% of BANVOR’s equity base. 

Upgrading senior/sub. bonds to OW-30%/OW-70%, respectively

Although BANVOR bonds have recently outperformed, we believe they remain attractive particularly on a relative value basis versus LatAm and EM bank peers. From a historical spread perspective, the Tier 2 bonds (2020) are  trading wider than the senior bonds (2016). In addition, we see low probability of future Tier 2 issuance in 2012 since BANVOR’s Tier 2 capital is already at its 50%  limit of its Tier 1 capital. We therefore upgrade the senior 2016 bonds from UW- 30% to OW-30% and the sub. 2020 bonds from UW-70% to OW-70%, due to current valuation and strong shareholder support.

Source: BofA ML

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