Brazilian bank Banco Sofisa's main challenges for success in its strategy of refocusing on corporate loans and away from consumer lending will be dealing with modest profitability, restricted potential for asset growth in the SME segment and tougher competition, Ricardo Kovacs, VP and senior analyst at Moody's, told BNamericas.
While Kovacs views Sofisa's decision as a positive ratings development, given its proven track record, its sizable legacy consumer loan book to manage will demand additional provisioning and attention, with negative implications for its operating performance.
Sofisa has historically been a very successful bank for SMEs. It expanded its banking business into the consumer credit segment in 2006 by taking advantage of its presence in vehicle finance, but in March 2010 the bank sold that unit to Banco Fibra.
Sofisa's consumer portfolio - which today is equivalent to about 23% of total loans - is on liquidation basis.
The bank predicts that the consumer portfolio should fall to 480mn reais (US$258mn) at year-end, to 230mn reais one year later, and to 70mn reais as of end-2013 as it collects and writes off all of it in 2014.
Last week, Moody's cut Sofisa's rating to Ba1 due to less favorable credit conditions and the expectation that profitability will remain modest as management repositions the lender's franchise and amends its operations and funding sources to its business strategy.
"All in all, the bank will have challenging times ahead, but it has had a successful performance in the SME sector, adequately supported by ample capital ratios," Kovacs said.
The bank's SME loan book represented 77% of its lending portfolio as of end-September. Kovacs said the lender's new strategy will allow this segment to gradually expand 15% next year and 20% in 2013.
São Paulo-based Banco Sofisa had total assets of some 4.07bn reais and equity of 758mn reais as of September 30.