BANCO_BMG_SA：WEAK_3Q12;_MAINTAIN_BUY_ON_LONG_TERM_POSITIVE_PROSPECTS-2012-12-28.ppt

,credit,globalmarketsresearch,emergingmarkets,5.6%,2.0%,3q12,global emerging markets brazil 27 december 2012,banco bmg sa weak 3q12; maintain buy on long term positive prospects as expected, bmg reported weak 3q12 results reflecting the banks accounting transition to resolution 3533. while bmg should continue to report weak figures in the next few quarters, we maintain our buy recommendation based on our long term positive view of the credit on the back of bmgs association with itau (please refer to page 2 for risks disclosures related to our recommendation).,company update research team natalia corfield research analyst (+1) 212 2506135 denis parisien research analyst (+1) 212 250-7568 own credit portfolio breakdown 10.1% 0.8% 6.4%,bmg reported another set of weak results in line with our expectations as expected, bmgs 3q12 results have continued to be negatively impacted by the introduction of resolution 3533 as well as by non-recurrent losses derived from the m-t-m of the banks hedge against interest mismatches. as a result, bmg reported a loss of nearly brl152m (usd75m) in the quarter and of brl431m ytd (usd213m). in addition, during 3q12, bmg also registered an increase in provision levels of 20.8% reflecting higher npls - mainly on the banks auto financing and sme portfolios - which increased to 3.6% from 2.7% in 2q12 (overdue by more than 90 days). the banks total npl ratio, nonetheless, remained low at 1.6% reflecting bmgs focus on payroll loans (payroll loans made up 89.4% of bmgs total loan portfolio on and off balance sheet in 3q12). also of note is the drop of bmgs cash position, which should be reverted in 4q12, and a decline of the banks capital adequacy ratio (car) to 12.7% from 13.1% in 2q12 reflecting the growth of the banks loan portfolio. despite the weak results, some positive highlights in the quarter include: (1) bmgs on-balance sheet loan portfolio grew 12.9% qoq to brl16.2bn (usd8.0bn), helping to increase the banks earnings recurrence; (2) the off balance-sheet loan portfolio decreased 15.9% qoq to brl11.3bn (usd5.6bn) paving the way for bmgs full transition to resolution 3533; (3) the banks loan origination increased to brl496m (usd245m) from brl388m (usd191m) in 2q12.,pdls pdl credi t ca rd pers onal credit npls over 90 days 2.0% 1.7% 12.9 11.2 11.1 3q11 4q11 1q12 own credi t portfolio (brlbn) basel index 14.5% 13.2%,77.0% cdc vehi cl es + l easing 1.8% 14.4 2q12 npls 90 days 13.1%,commerci a l 1.6% 16.2,2013 should be difficult, but the jv impact should be more evident in 2h13 for 4q12, bmg should continue to report weak figures, but we expect modest improvements of the banks npl ratio due to the better vintage of its auto financing portfolio, reduced provisions as well as a higher cash position. according to managements guidance, total on-balance sheet portfolio is expected to reach brl17.5bn (usd8.6bn) in 4q12 and the banks car should be flat in relation to 3q12 as the recent capital injection of brl150m (usd75m) should be offset by the continuing expansion of bmgs lending activities.,12.6% 3q11,4q11,1q12 ba s el index,2q12,12.7% 3q12,for 2013, we expect a difficult first half of the year on the back of the continuing transition to resolution 3533, followed by gradual improvements in the second half as the effects of the jv become more evident and bmg advances in the accounting transition. we note that the jv should not generate profits in its first operational year, but its effects on bmgs funding, profitability and car should gradually materialize throughout 2013 as bmg utilizes itaus brl300m (usd148m) monthly credit line and transfers part of its cost structure to the jv. deutsche bank securities inc. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012.,27 december 2012,financials banco bmg sa,positive management change might have been prompted by the mensalao scandal bmg announced at the end of november that mr. alcides tapias and mr. antonio herman assumed the positions of president of board of directors and ceo replacing mr. flavio guimaraes and his son ricardo guimaraes, respectively. this marks a shift from a family run management style to a more professional one and is largely positive in our view. we believe the recent indictment of mr. flavio guimaraes and mr. ricardo guimaraes due to the mensalao scandal might have been the main catalyst for the management change as bmg seeks to secure business continuity in case the final outcome is negative for the guimaraes family. both mr. tapias and mr. herman are seasoned professionals with many years of experience in brazils banking industry. delayed downgrade by moodys should not trigger more rating actions at this stage bmgs one notch downgrade by moodys on december 14 took us by surprise as presently our expectations are more for positive rather than negative rating actions. that said, taking into account that moodys still rated bmg in the ba category, we believe the rating agencys move simply reflected a late adjustment to the b category in line with peers fitch and s&p. as such, we do not expect more negative rating actions following moodys downgrade and believe any other move by rating agencies should only materialize after 1h13 unless there is a significant deterioration of bmgs results prior to that and/or moodys decides for another adjustment since the rating agencys ratings remain one notch higher than fitch and s&p. we maintain our buy recommendation despite the possibility of more volatility bmgs notes have underperformed the market in the past month on the back of headlines related to the mensalao scandal, the markets misinterpretation of the management change as well as the general negative sentiment towards mid-sized banks in brazil following two cases of fraud in less than two years. given that the banks results will remain weak for the most part of 2013 and that the negative sentiment towards mid-sized banks might persist, we anticipate more volatility, but maintain our buy recommendation based on our long term positive view of the credit on the back of bmgs association with itau. figure 1: banco bmg outstanding issues table,issue bcobmg 6.5% 14 bcobmg 9.15% 16 bcobmg 9.625% 17 bcobmg 8% 18 bcobmg 9.95% 19 bcobmg 8.875% 20,maturity 2014 2016 2017 2018 2019 2020,amount o/s usd300m usd240m usd150m usd300m usd300m usd250m,mdys/s&p/fitch b1/na/na b1/b/na b1/na/na b1/b/na b2/na/ccc b2/na/ccc,mid price 96.12 98.38 95.75 88.88 83.50 76.50,mid yield 9.96% 10.34% 10.88% 11.35% 13.73% 13.98%,z spread 960 989 1020 1062 1260 1273,source: deutsche bank risks to our recommendation include (but are not limited to): execution risks related to the jv with itau; further headlines related to the mensalao scandal; negative headlines related to the mid-sized banking industry in general, and deterioration of bmgs results beyond our expectations,page 2,deutsche bank securities inc.,27 december 2012,financials banco bmg sa,figure 2: liquid assets evolution (brlbn),figure 3: credit portfolio evolution (brlbn),6.7%,26.3,29.1,28.8,27.8,27.5,3.8%,4.3%,4.3%,16.7,18.0,15.9,13.4,11.3,1.2,0.6,0.9,0.9,1.8% 0.4,9.6,11.1,12.9,14.4,16.2,3q11,4q11,1q12,2q12,3q12,3q11,4q11,1q12,2q12,3q12,li qui d assets (brlbn),li qui d a ssets/total assets (%),own l oan portfolio (brlbn),credi t as signments (brlbn),source: deutsche bank, company data figure 4: funding structure evolution (brlbn),source: deutsche bank, company data figure 5: nii (brlbn) and nim (%) evolution,29.1 4.0,29.6 4.4,30.2 4.4,29.8 5.1,28.9 5.0,26.0%,26.3%,16.7%,16.5% 11.7%,15.6,16.7,17.0,16.2,16.3,584.4,659.2,411.7,449.5,9.5,8.6,8.8,8.5,7.6,241.1,3q11,4q11,1q12,2q12,3q12,3q11,4q11,1q12,2q12,3q12,deposits (brlbn),credi t a s signment (brlbn),other (brlbn),net i nterest income (brlm),net i nterest margin,source: deutsche bank, company data deutsche bank securities inc.,source: deutsche bank, company data,page 3,dec-11,aug-12,may-12,mar-12,nov-12,dec-12,feb-12,apr-12,sep-12,oct-12,jan-12,jun-12,jul-12,nov-12,dec-12,sep-12,oct-12,feb-12,apr-12,dec-11,mar-12,sep-12,jun-12,jul-12,aug-12,may-12,nov-12,dec-12,oct-12,jan-12,sep-12,nov-12,dec-12,oct-12,27 december 2012,financials banco bmg sa valuation trends,figure 6: bmg sr. notes 1yr yield evolution 30 25 20 15 10 5,figure 7: bmg sr. notes 3m yield evolution 12 11 10 9 8 7 6,bmg 9.15% 16,bmg 8% 18,bmg 6.5% 14,bmg 9.625% 17,bmg 9.15% 16,bmg 8% 18,bmg 6.5% 14,bmg 9.625% 17,source: deutsche bank figure 8: bmg sub. notes 1yr yield evolution 21,source: deutsche bank figure 9: bmg sub. notes 3m yield evolution 15,14 17 13,13 9,12 11 10,bmg 9.95% 19,bmg 8.875% 20,bmg 9.95% 19,bmg 8.875% 20,source: deutsche bank page 4,source: deutsche bank,deutsche bank securities inc.,sep-12,nov-12,dec-12,oct-12,sep-12,nov-12,dec-12,oct-12,yield,yield,6,8,4,6,27 december 2012,financials banco bmg sa,figure 10: bmg sr. notes and peers 3m yield evolution 12 10 8 6 4,figure 11: bmg sub. notes and peers 3m yield evolution 15 13 11 9 7,2 5,bmg 9.15% 16,bmg 8% 18,bmg 6.5% 14,bmg 9.95% 19,bmg 8.875% 20,abc 7.875% 20,bmg 9.625% 17,bcopan 5.5% 15,bic 5.25% 15,daycov 6.25% 16,daycov 6.5% 15,bic 8.5% 20,bcopan 8.5% 20,bmebmz 9.625% 20,source: deutsche bank figure 12: bmg sr. notes and peers yield vs duration 12 bmg 8% 18,source: deutsche bank figure 13: bmg sub. notes and peers yield vs duration 16,10,bmg 9.15% 16 bmg 6.5% 14,bmg 9.625% 17,14,bmg 9.95% 19,bmg 8.875% 20,12 8,bic 5.25% 15,10,bmebmz 9.625% 20,bic 8.5% 20,2,daycov 6.5% 15,bcopan 5.5% 15,daycov 6.25% 16,4,abc 7.875% 20 bcopan 8.5% 20,1,1.5,2,2.5,3,3.5,4.4,4.6,4.8,5,5.2,5.4,5.6,source: deutsche bank deutsche bank securities inc.,duration,source: deutsche bank,duration,page 5,27 december 2012,financials banco bmg sa,summary financials figure 14: banco bmg summary financials (brlm),income statement (brlm) net interest income net non-interest income operating expense pre-provision operating income (ppi) loan loss provisions expenses (llpe) - incl. loan write-offs net income balance sheet (brlm) cash & equivalent interbank assets securities portfolio gross loans w loan assignments loans to customers (lp) other assets total assets (ta) bank borrowings securities issued customer deposits other borrowings total liabilities (tl) shareholders equity profitability analysis reported return on average assets reported return on average equity reported net interest margin cost/income ratio loan portfolio quality problem loans (%) gross loans prob. loans (%) net income loan loss prov. (%) prob. loans loan loss provisions (%) ppi capitalization equity (%) ta total car (bis, per company filings) statutory total capital adequacy min liquidityratios gross loans (%) cust. dep. liquid assets (%) ta,3q11 584.4 38.8 (617.6) 163.8 (158.2) (95.4) 392.6 3q11 17.1 544.2 2.5 28,438.7 10,437.2 5,433.0 17,887.3 9.1 0.0 9,138.7 2,028.3 14,283.6 3,603.6 3q11 10.8% 64.0% 26.0% 79.0% 3q11 2.0% 42.1% 340.2% 96.6% 3q11 20.1% 12.6% 11.0% 3q11 122.4% 6.7%,4q11 659.2 51.4 (732.3) 144.0 (165.7) (129.8) 169.2 4q11 34.1 875.4 (0.3) 29,087.1 10,260.1 5,002.1 17,190.6 0.5 0.0 8,805.4 1,601.3 13,555.3 3,635.3 4q11 4.0% 20.8% 26.3% 83.6% 4q11 2.0% 37.9% 375.9% 115.1% 4q11 21.1% 14.5% 11.0% 4q11 126.0% 3.8%,1q12 411.7 53.3 (568.2) (104.9) 1.7 90.8 (69.2) 1q12 33.7 1,251.6 0.1 28,772.5 12,203.2 5,139.4 19,730.8 4.2 0.1 8,807.0 4,237.0 16,297.6 3,433.2 1q12 -1.5% -7.6% 11.7% 122.6% 1q12 1.7% 46.6% 323.0% 1.6% 1q12 17.4% 13.2% 11.0% 1q12 146.6% 4.3%,2q12 241.1 28.3 (620.9) (150.5) (201.0) (300.0) (210.0) 2q12 65.1 367.4 0.0 27,781.6 13,585.9 6,501.1 21,652.0 3.5 0.2 8,522.1 6,136.2 18,446.8 3,205.2 2q12 -4.0% -23.0% 16.7% 132.0% 2q12 1.8% 89.5% 303.3% -133.6% 2q12 14.8% 13.1% 11.0% 2q12 168.4% 4.3%,3q12 449.5 72.6 (762.5) 2.4 (242.8) (191.7) (151.6) 3q12 36.7 815.4 0.1 27,424.5 15,366.0 5,905.8 23,325.3 6.1 0.0 7,656.4 8,746.7 20,267.4 3,057.9 3q12 -2.7% -18.2% 16.5% 99.7% 3q12 1.6% -99.4% 324.6% 10206.0% 3q12 13.1% 12.7% 11.0% 3q12 211.7% 1.8%,qoq 86.4% 156.6% 22.8% -101.6% 20.8% -36.1% -27.8% qoq -43.7% 122.0% 126.4% -1.3% 13.1% -9.2% 7.7% 75.0% -90.5% -10.2% 42.5% 9.9% -4.6% qoq bps 130 480 -20 -3230 qoq bps -16 -18886 2135 1033955 qoq bps -169 -40 0 qoq bps 4330 -249,yoy -23.1% 87.2% 23.5% -98.5% 53.5% 100.9% -138.6% yoy 114.8% 49.8% -97.6% -3.6% 47.2% 8.7% 30.4% -33.0% -61.3% -16.2% 331.2% 41.9% -15.1% yoy bps -1350 -8220 -950 2065 yoy bps -36 -14153 -1552 1010939 yoy bps -704 10 0 yoy bps 8933 -491,2010 2,564.2 75.9 (1,638.1) 1,466.1 (464.0) (484.4) 605.7 2010 85.6 361.0 (0.1) 24,494.5 7,731.4 2,382.5 11,212.2 1.1 (0.5) 5,238.7 1,648.9 8,966.1 2,246.1 2010 5.7% 27.7% 32.6% 52.8% 2010 1.3% 17.7% 413.6% 31.6% 2010 20.0% 15.6% 11.0% 2010 156.1% 8.8%,2011 1,837.2 132.0 (1,930.7) 581.8 (543.3) (407.3) 583.5 2011 34.1 875.4 0.6 29,078.0 10,260.1 5,002.1 17,190.6 0.5 0.7 8,805.4 1,601.3 13,555.3 3,635.3 2011 4.2% 21.3% 20.4% 76.8% 2011 2.0% 37.9% 375.9% 93.4% 2011 21.1% 14.5% 11.0% 2011 126.0% 3.8%,ltm 1,761.5 205.6 (2,683.9) (109.0) (607.8) (530.6) (261.7) ltm 36.7 815.4 0.1 27,424.5 15,366.0 5,905.8 23,325.3 6.1 0.0 7,656.4 8,746.7 20,267.4 3,057.9 ltm -2.7% -18.2% 16.5% 104.2% ltm 1.6% -99.4% 324.6% -557.7% ltm 13.1% 12.7% 11.0% ltm 211.7% 1.8%,profitability indicators,loans by sector,3q12,funding 3q12,75% 60% 45% 30%,personal credit loans to individuals cdc - vehicles commercial portfolio,78.2% 0.0% 3.8% 5.8%,external funding 8%,subordinat ed debt 4%,other 0%,deposits 26%,15% 0%,leasing assigned credit operations,0.2% 12.1%,-15% -30%,3q11,4q11,1q12,2q12,3q12,credit assignmen t,fidcs 5%,nim,roaa,roae,57%,source: deutsche bank, company data,page 6,deutsche bank securities inc.,27 december 2012,financials banco bmg sa,figure 15: banco bmg summary financials (usdm),income statement (usdm) net interest income net non-interest income operating expense pre-provision operating income (ppi) loan loss provisions expenses (llpe) - incl. loan write-offs net income balance sheet (usdm) cash & equivalent interbank assets securities portfolio gross loans w loan assignments loans to customers (lp) other assets total assets (ta) bank borrowings securities issued customer deposits other borrowings total liabilities (tl) shareholders equity profitability analysis reported return on average assets reported return on average equity reported net interest margin cost/income ratio loan portfolio quality problem loans (%) gross loans prob. loans (%) net income loan loss prov. (%) prob. loans loan loss provisions (%) ppi capitalization equity (%) ta total car (bis, per company filings) statutory total capital adequacy min liquidityratios gross loans (%) cust. dep. liquid assets (%) ta,3q11 357.3 23.7 (377.6) 100.2 (96.7) (58.3) 240.1 3q11 9.1 289.6 774.7 15,131.8 5,553.5 2,890.8 9,517.6 4.9 1,060.0 4,862.6 1,079.2 7,600.1 1,917.4 3q11 10.8% 64.0% 26.0% 79.0% 3q11 2.0% 37.1% 340.2% 96.6% 3q11 20.1% 12.6% 11.0% 3q11 122.4% 6.7%,4q11 365.8 28.5 (406.4) 79.9 (92.0) (72.0) 93.9 4q11 18.3 468.9 545.8 15,581.3 5,496.1 2,679.5 9,208.6 0.3 1,083.2 4,716.8 857.8 7,261.3 1,947.3 4q11 4.0% 20.8% 26.3% 83.6% 4q11 2.0% 34.2% 375.9% 115.1% 4q11 21.1% 14.5% 11.0% 4q11 126.0% 3.8%,1q12 232.8 30.1 (321.2) (59.3) 1.0 51.3 (39.1) 1q12 18.4 685.1 603.8 15,750.2 6,680.1 2,813.3 10,800.7 2.3 1,190.4 4,821.0 2,319.4 8,921.4 1,879.3 1q12 -1.5% -7.6% 11.7% 122.6% 1q12 1.7% 42.7% 323.0% 1.6% 1q12 17.4% 13.2% 11.0% 1q12 146.6% 4.3%,2q12 122.7 14.4 (315.8) (76.5) (102.2) (152.6) (106.8) 2q12 32.4 182.8 563.6 13,825.8 6,761.2 3,235.3 10,775.4 1.7 1,290.4 4,241.1 3,053.7 9,180.3 1,595.1 2q12 -4.0% -23.0% 16.7% 132.0% 2q12 1.8% 66.9% 303.3% -133.6% 2q12 14.8% 13.1% 11.0% 2q12 168.4% 4.3%,3q12 221.6 35.8 (376.0) 1.2 (119.7) (94.5) (74.7) 3q12 18.1 402.4 592.9 13,533.6 7,582.9 2,914.4 11,510.7 3.0 1,302.9 3,778.3 4,316.4 10,001.7 1,509.0 3q12 -2.7% -18.2% 16.5% 99.7% 3q12 1.6% -101.2% 324.6% 10206.0% 3q12 13.1% 12.7% 11.0% 3q12 211.7% 1.8%,qoq 80.7% 148.7% 19.1% -101.5% 17.1% -38.1% -30.0% qoq -44.1% 120.1% 5.2% -2.1% 12.2% -9.9% 6.8% 73.5% 1.0% -10.9% 41.3% 8.9% -5.4% qoq bps 130 480 -20 -3230 qoq bps -16 -16810 2135 1033955 qoq bps -169 -40 0 qoq bps 4330 -249,yoy -38.0% 50.9% -0.4% -98.8% 23.8% 62.0% -131.1% yoy 99.2% 39.0% -23.5% -10.6% 36.5% 0.8% 20.9% -37.9% 22.9% -22.3% 300.0% 31.6% -21.3% yoy bps -1350 -8220 -950 2065 yoy bps -36 -13824 -1552 1010939 yoy bps -704 10 0 yoy bps 8933 -491,2010 1,457.5 43.2 (931.1) 833.3 (263.7) (275.3) 344.3 2010 51.5 217.3 392.3 14,744.2 4,653.8 1,434.1 6,749.1 0.7 699.1 3,153.4 992.5 5,397.0 1,352.0 2010 5.7% 27.7% 32.6% 52.8% 2010 1.3% 18.8% 413.6% 31.6% 2010 20.0% 15.6% 11.0% 2010 156.1% 8.8%,2011 1,097.4 78.9 (1,153.3) 347.5 (324.5) (243.3) 348.6 2011 18.3 468.9 545.8 15,576.4 5,496.1 2,679.5 9,208.6 0.3 1,083.2 4,716.8 857.8 7,261.3 1,947.3 2011 4.2% 21.3% 20.4% 76.8% 2011 2.0% 34.0% 375.9% 93.4% 2011 21.1% 14.5% 11.0% 2011 126.0% 3.8%,ltm 942.9 108.8 (1,419.5) (54.8) (313.0) (267.8) (126.8) ltm 18.1 402.4 592.9 13,533.6 7,582.9 2,914.4 11,510.7 3.0 1,302.9 3,778.3 4,316.4 10,001.7 1,509.0 ltm -2.7% -18.2% 16.5% 104.0% ltm 1.6% -101.2% 324.6% -571.6% ltm 13.1% 12.7% 11.0% ltm 211.7% 1.8%,profitability indicators,loans by sector,3q12,funding 3q12,75% 60% 45% 30%,personal credit loans to individuals cdc - vehicles commercial portfolio,78.2% 0.0% 3.8% 5.8%,external funding 8%,subordinat ed debt 4%,other 0%,deposits 26%,15% 0%,leasing assigned credit operations,0.2% 12.1%,-15% -30%,3q11,4q11,1q12,2q12,3q12,credit assignmen t,fidcs 5%,nim,roaa,roae,57%,source: deutsche bank, company data,deutsche bank securities inc.,page 7,27 december 2012,financials banco bmg sa,appendix 1 important disclosures additional information available upon request disclosure checklist,company banco bmg sa,disclosure na,*prices are sourced from local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subject companies. for disclosures pe