TEXT-Fitch affirms Banrisul's ratings

Mon Jan 14, 2013 9:17am EST

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(The following statement was released by the rating agency)

Jan 14 - Fitch Ratings has today affirmed the ratings of Banco do Estado do Rio Grande do Sul (Banrisul) as follows:

--Foreign and local currency Long-term Issuer Default Ratings (IDRs) at 'BB+'; Outlook Stable;

--Foreign and local currency Short-term IDRs at 'B';

--Support Rating at '4';

--Support Rating Floor at 'B';

--National long-term rating at 'AA- (bra)'; Outlook Stable;

--National short-term rating at 'F1+ (bra)';

--Viability Rating at 'bb+';

--Tier II USD Subordinated Notes 'BB-'.

RATING ACTION RATIONALE

Banrisul's IDRs are based on its viability rating (VR). The VR reflects its regional importance, its sound profitability and liquidity levels that are compatible with its retail profile as well as its stable funding structure. The ratings also consider the bank's modest market share nationwide, fierce competition with large Brazilian banks, and focus on the state of Rio Grande do Sul (RS), the fourth largest Brazilian economy.

Fitch does not rate RS and does not consider its support. Nevertheless, Fitch believes that under a stress scenario, federal government support would be possible, but limited, considering Banrisul's economic relevance to RS and its stature as the seventh largest Brazilian bank in terms of total deposits. The support rating also reflects the absence of any explicit guarantees of a potential support from the federal government.

Banrisul holds a 33% market share stake in time deposits within the state being present in 84.5% of the state's municipalities. The acquisition of Bem-Vindo Promotora de Vendas e Servicos in December 2011 has allowed for the generation of payroll-deductible loans and financial products and services nationwide. As of September 2012, roughly 27% of credit operations were related to clients outside the state of RS.

Impaired loans greater than 60 days past due deteriorated to 3% of total credit operations (2.8% in December 2011 and 2.5% in December 2010), with a low volume of renegotiated loans (2.1%) and charge-offs (1.5%). This compared fairly well with large Brazilian retail peers. Credits classified from 'D' to 'H' are worse than peers, reaching 11.1% of loans. Fitch does not expect further credit deterioration following improving economic conditions, even considering the fact that the economic performance of the region is highly correlated with the performance of the agriculture sector and the relatively fast pace of credit growth.

Following the subordinated issuance amounting to BRL926 million (Tier 2 capital) in April 2012 with a re-opening amounting to USD 302.1 million in December 2012, liquidity increased, covering 50% of total deposits. The Fitch core capital (FCC) Ratio was satisfactory at 14.8% considering its worsened asset quality and retail portfolio.

KEY RATING DRIVERS AND SENSITIVITIES

The bank's VR is sensitive to a change in Fitch's assumptions regarding exposure to regional risk, minimum Fitch core capital and profitability. Although Fitch believes that there is no near-term upside, the VR could benefit over the medium term provided that its FCC ratio is equal or higher than 15%, its ROA is above 2% along with the maintenance of current credit quality metrics. It could be downgraded if capital weakens and/or credit deteriorates.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Banrisul subordinated notes due January 2022 are rated 'BB-'. The notes rank at least equally with similar subordinated debt and carry a cumulative coupon deferral mechanism that can be exercised. This deferral would only occur if Banrisul is in noncompliance with its regulatory capital requirement.

As per Fitch's rating criteria, the rating of this Tier II subordinated debt is two notches below Banrisul's Viability Rating (VR) of 'bb+', one notch reflecting loss severity features and its subordinated status and one notch due to the moderate risk of non-performance.

Controlled by the State of Rio Grande do Sul, Banrisul is the largest bank within the state with substantial market share in credits and deposits. With 469 branches, Banrisul operates as a retail bank, focusing primarily on individuals.

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