Fitch Downgrades and Withdraws Banco Fibra's Ratings

Fri May 2, 2014 3:18pm EDT

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(The following statement was released by the rating agency) RIO DE JANEIRO/NEW YORK, May 02 (Fitch) Fitch Ratings has downgraded the National Ratings of Banco Fibra S.A. (Fibra). In the same action Fitch has withdrawn the ratings as Fibra has chosen to stop participating in the rating process. Accordingly, Fitch will no longer provide ratings or analytical coverage for Fibra. The Rating Outlook for the long-term ratings remains Negative. KEY RATING DRIVERS Fibra's downgrade considers the significant challenges in terms of profitability and asset quality imposed by the market repositioning plan commenced by the bank in 2012. The plan includes the run-off of its retail lending portfolio and a focus on traditional lending operations with wholesale companies with shorter deadlines and more robust guarantees, for which it had hired experienced executives from the market. The plan also focuses on achieving significant operational cost savings in the short- and medium-term. The plan, along with the environment of slower economic activity and volatile interest rates in Brazil, resulted in significant operating losses in 2013, despite the effective reduction in operating expenses. During 2013, operating losses amounted to 6.2% of average assets while net losses amounted to 36% of Fibra's equity. Conversely, operating expenses were down by 20% during the year. According to Fibra's management, the bank recognized BRL149 million of extraordinary expenses due to the bank's new strategy. In addition, the bank reduced other operating expenses by BRL107.9 million from 2012 to 2013. In terms of asset quality trends, the mix of a smaller than average portfolio (due to the aforementioned loan portfolio run-off) and the increase in past-due loans (on-balance sheet and charged-off) keep pressuring asset quality metrics, although loan loss coverage has improved. Given the size of the portfolio expected to be run off and the current sluggish economic activity in Brazil, Fitch expects asset quality to remain under pressure. Fibra's shareholders have remained highly committed to the bank and injected significant new capital to cover the accrued losses since 2010 (BRL1,158 billion; of which, BRL550 billion was injected in 2013). This allowed the bank to enhance its Fitch Core Capital ratio from a low 5.3% in 2010 up to 10.55% at the end of December 2013. Even when Fitch's does not consider institutional support in its rating of Fibra, it does recognize the significant efforts made toward keeping the bank well-capitalized despite its operational losses. Fibra's management has also been successful in improving its funding base during these challenging years although their average cost has increased. Expanding its funding sources (which are not as diversified as other midsize banks in Brazil) and achieving longer average maturities bodes well for supporting the period of changes in its loan portfolio. In Fitch view, the Negative Outlook on the long-term rating remains due to the aforementioned asset quality pressures and also given the uncertainty around any repositioning plan, especially in times when the operating environment and competition may impose additional hurdles. Founded in 1988, Fibra is 96.5 % controlled by Steinbruch family, active in the textile, steel and real estate industries. Until April 2014, the International Finance Corporation (IFC) held a 3.5% stake in the bank, which was acquired by Elizabeth S.A. Industria Textil, a company which was part of the Vicunha group, Fibra's controller. The bank started its business as the financial arm of the group and was transformed into an independent business unit in 1993. Fitch has downgraded and withdrawn the following ratings: --National Long-term rating to 'BBB-(bra)' from 'BBB+(bra)', Negative Outlook; --National Short-term rating to 'F3(bra)' from 'F2(bra)'. Contact: Primary Analyst Luiz Claudio Vieira Associate Director +55-21 4503-2617 Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20 - room 401 B Rio de Janeiro - RJ CEP: 20010-010 Secondary Analyst Claudio Gallina Director +55-11 4504-2216 Committee Chairperson: Franklin Santarelli Managing Director +1 212 908-0739 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'. Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Jan. 31, 2013); --'National Rating Criteria' (Oct. 30, 2013). Applicable Criteria and Related Research: National Scale Ratings Criteria here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828615 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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