TEXT - S&P cuts Banco Rural rating to 'B-'

(The following statement was released by the rating agency)

Overview
-- Brazilian bank Banco Rural keeps struggling to stabilize its business
and faces significant losses due to asset quality deterioration, new
regulations, and high administrative costs.
-- We are lowering our issuer credit ratings on the bank to 'B-' from 'B'
on global scale and to 'brB' from 'brBB+' on national scale.
-- The negative outlook reflects at least a one-in-three probability that
we could lower the ratings in the next few months.

Rating Action
On Dec. 11, 2012, Standard & Poor's Ratings Services lowered its issuer credit
rating on Banco Rural S.A. (Rural) to 'B-' from 'B' on global scale and to
'brB' from 'brBB+' on national scale. The outlook is negative.

Rationale
Standard & Poor's bases its ratings on Rural on its "weak" business position,
"weak" capital and earnings, "moderate" risk position, "below average"
funding, and "moderate" liquidity. The stand-alone credit profile (SACP) is
'b-'.

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA)
economic risk and industry risk scores to determine a bank's anchor, the
starting point in assigning an issuer credit rating. Our anchor for a
commercial bank operating only in Brazil is 'bbb'. The indicative BICRA group
for Brazil is '4', according to our criteria. One factor we base the BICRA
group on is our evaluation of economic risk. In our opinion, economic
improvements and cautious fiscal and monetary policies have added to the
Brazilian economic authorities' flexibility to manage significant external
shocks and potential distortions arising from the current economic expansion
in Brazil. We believe these potential risks remain manageable, and the central
bank's proactive stance has contained them. With regard to industry risk,
sound regulation, the regulators' good track record, and a high and stable
share of core deposits support the Brazilian banking industry. We also
consider the banking sector's moderate risk appetite as a positive factor in
our assessment.

We continue to view Rural's business position as "weak" given its small market
share, concentrated business lines, while it exits the payroll deductible
lending segment and focuses on lending to small to medium enterprises (SMEs).
Rural is the 47th-largest financial institution in the country as of September
2012, representing less than 1% of the system's total assets. The bank decided
to exit the payroll deductible segment in 2011, in which it made the last loan
in August of that year, following the management's that decision that this
product was no longer viable and profitable for the bank. Under the new
regulations, revenues from ceded loans must be accrued during the term of this
loan, as opposed to the revenues recognized upfront. Also, ceded loans with
co-obligation must be provisioned. Furthermore, increasing competition from
the large retail banks (many actively winning payroll auctions), a shifting
base of loan originators, and their increasing commissions convinced Rural to
discontinue this business, which should be completed by 2014. Until then, the
bank's results suffer from this loan portfolio. As of September 2012, 85% of
the bank's loans were to SMEs and the remainder (including the ceded loans
with co-obligation) was payroll deductible loans.

In our opinion, Rural's capital and earnings is "weak" given its small capital
level and historical low profitability, with significant losses in the last
couple of years. The bank's capital, forecasted by our risk-adjusted capital
framework, will average below 4% for the next 18 months, which we view as
weak. The forecast considers a capital injection of R$100 million in 2012 and
our growth expectation for the next couple of years. Recently, the Central
Bank required Rural to adjust its exposures twice to comply with regulatory
requirements. The first, in December 2011, required Rural to adjust its
balance sheet by R$181 million, which it did so through deleveraging,
recognition of losses, and a capital injection of R$65 million. The second, in
mid-2012, required a capital injection of R$100 million (R$13 million in June
and the remainder in September). In addition, Rural's results sharply weakened
following credit portfolio deleveraging, exit of the payroll deductible
segment, asset quality deterioration, and increasing loan loss provisioning.
In 2011, the bank posted a R$83 million loss, while for the first six months
of 2012, it was R$33 million. As a result, return on assets (measured by our
core earnings methodology) was negative 2.04% and 1.24%, respectively, for
both periods.

Rural's risk position is "moderate" due to the asset quality deterioration,
shifting risks resulting from the exit of the payroll segment, and
reputational risks Rural is subject to. In 2011, the bank's nonperforming
assets spiked to 2% from 0.94% in 2010, while it rose to 3.3% in June 212. The
continuing asset quality deterioration required more loan loss provisioning,
which weakened the bank's results further, and this trend will continue in the
next few months. However, the bank doesn't have client concentration.

We view Rural's funding as "below average" and liquidity as "moderate." The
bank depends on time deposits to fund its activities, as is the case for most
of the small Brazilian banks that don't have a branch network to capture
retail deposits, especially demand and savings deposits, which are cheaper and
more stable than time deposits. However, 62% of the bank's funding is
comprised of time deposits, 23% of ceded loans. Among the time deposits 48%
correspond to DPGE--special deposits guaranteed by the national deposit
insurance agency up to R$20 million, which can't be withdrawn before their
maturity date) and 39% from regular CD's. The bank has been trying to
diversify its funding sources through the use of financial and agricultural
bills that accounted for 10% as of September 12. The bank's reliance on
corporate and institutional investors for its deposits makes up 80% of total
funding base. As of June 2012, around 53% of the time deposits had liquidity
condition, higher than for its peers. Rural's liquid assets covered 22.8% of
total deposits as of June 2012 and 55% of the time deposits with liquidity
condition.

Outlook
The negative outlook reflects our opinion that Rural will keep focusing on the
SMEs segment, while it's exiting the payroll deductible lending segment and
implements its growth strategy. We believe that its capital will remain weak,
with losses hampering internal capital generation for future growth. We could
revise the outlook to positive if the bank receives a capital injection and
achieves a sustainable capital base that would lead our forecasted RAC ratio
above 4%. On the other hand, a further capital level decrease, asset quality
deterioration, or liquidity downfalls could result in a negative rating action.

Ratings Score Snapshot

Issuer Credit Rating B-/Negative/--

SACP b-
Anchor bbb
Business Position Weak (-2)
Capital and Earnings Weak (-3)
Risk Position Moderate (-1)
Funding and Liquidity Below Average and Moderate (-1)

Support 0
GRE Support 0
Group Support 0
Sovereign Support 0

Additional Factors 0

(Caryn Trokie, New York Ratings Unit)