December 11, 2012 / 8:11 PM / in 5 years

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

(The following statement was released by the rating agency)
     -- 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. 

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 

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 

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)
0 : 0
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