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Rating Action:

Moody's affirms Banco Sofisa's ratings; stable outlook

28 Sep 2015

New York, September 28, 2015 -- Moody's Investors Service has today affirmed the long- and short-term local- and foreign-currency deposit ratings of Banco Sofisa S.A. (Sofisa) at Ba2 and Not Prime, respectively. Moody's also affirmed Sofisa's long- and short-term Brazilian national scale deposit ratings at Aa3.br and BR-1, and the long-term foreign currency senior unsecured debt rating on the GMTN Program of (P)Ba2. At the same time, Moody's affirmed Sofisa's baseline credit assessment (BCA) and adjusted BCA at ba2, and its long- and short-term Counterparty Risk Assessments (CRA) at Ba1(cr) and Not Prime(cr). The outlook on all ratings remains stable.

The following ratings and assessments of Banco Sofisa were affirmed:

Long-term global local-currency deposit rating of Ba2, with stable outlook;

Short-term global local-currency deposit rating of Not Prime;

Long-term global foreign-currency deposit rating of Ba2, with stable outlook;

Short-term global foreign-currency deposit rating of Not Prime;

Long-term foreign-currency senior unsecured debt rating, assigned to GMTN Program, of (P)Ba2, with stable outlook;

Long-term Brazilian national scale deposit rating of Aa3.br;

Short-term Brazilian national scale deposit rating of BR-1;

Baseline credit assessment of ba2;

Adjusted baseline credit assessment of ba2;

Long-term counterparty risk assessment of Ba1(cr);

Short-term counterparty risk assessment of Not Prime(cr).

RATINGS RATIONALE

The affirmation of Sofisa's standalone BCA at ba2 reflects the bank's heavy focus on loans to small and medium-sized companies (SMEs) and significant borrower and depositor concentration as well as modest profitability, offset by low delinquency ratios, strong loss absorption capacity, and ample liquidity. The SME segment, which represents 98% of the bank's loan book, is exposed significantly to the current downturn in economic activity in Brazil. While the bank's delinquency ratios have remained below 1.6% since December 2013 thanks to Sofisa's emphasis on short-term, highly collateralized lending, there is some risk that they could rise in the next 12 to 18 months.

As a wholesale bank, Sofisa also exhibits a high level of borrower concentration compared to retail banks, as its 20 largest borrowers represented 53.2% of the bank's tangible common equity (TCE), while its largest segment exposure accounted for 56.9% of TCE in June 2015. However, the bank compares well in this regard to its closest peers. Management's efforts to mitigate asset risk include requiring high levels of collateral and maintaining diligent control on credit limits to individual borrowers.

In addition to high borrower concentration, Sofisa also exhibits a high level of depositor concentration, with the 20 largest investors accounting for 37% of deposits, as well as strong reliance on wholesale funding, at roughly 75% of total funding. Efforts to offset liquidity risks, such as potential volatility should any of its larger depositors decide to withdraw their funds, include maintaining a free cash balance equivalent to 62.5% of deposits.

The ratings also consider Sofisa's profitability, which went up in June 2015 due to increased loan revenues, but also because of gains from securities trading and foreign exchange operations. Despite that, Moody's expects profitability to remain modest in the near-term owing to the weak performance of SMEs in the current economic environment.

Sofisa's credit challenges are somewhat mitigated by the bank's ample loan loss reserves and capitalization, which provide a significant cushion against an increase in non-performing loans. Loan loss reserves equaled nearly three times non-performing loans as of June 2015, while the bank's ratio of tangible common equity to risk-weighted assets was 17.95%.

Sofisa's ratings do not benefit from any uplift from either affiliate or government support. Moody's assesses a low likelihood of government support for the bank, reflecting its small deposit market share.

WHAT COULD CHANGE THE RATINGS

The ratings could move down if asset quality weakens significantly, profitability deteriorates, and/or capitalization declines. Positive pressure on the bank's ratings is limited in the near-to-medium term owing to the recent decline in Sofisa's business volumes and the challenging operating environment. In the long run, however, the ratings could benefit from stronger profitability indicators, a more balanced funding structure, and a more diversified loan portfolio, while maintaining current low delinquency ratios.

LAST RATING ACTION

Moody's took its last rating action on Banco Sofisa S.A. on 12 June 2015, when the rating agency assigned Counterparty Risk Assessments (CR Assessments) of Ba1(cr) and Not Prime(cr), long- and short-term, respectively, to Sofisa. All other assessments and ratings remained unchanged.

METHODOLOGY USED

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

Banco Sofisa S.A. is headquartered in São Paulo, Brazil, and had total assets of BRL3.8 billion ($1.23 billion) and total equity of BRL680 million ($219 million) as of 30 June 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alexandre Albuquerque
Asst Vice President - Analyst
Financial Institutions Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

M. Celina Vansetti
MD - Banking
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Banco Sofisa's ratings; stable outlook
No Related Data.
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