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Rating Action:

Moody's changes to negative outlook on four Brazilian banks' ratings; affirms deposit and debt ratings

 The document has been translated in other languages

27 Oct 2015

New York, October 27, 2015 -- Moody's Investors Service has today changed to negative from stable the outlook on the ratings of four Brazilian banks, namely Banco ABC Brasil S.A. (BAB), Banco Alfa de Investimento S.A. (Alfa), Banco BBM S.A. (BBM) and Banco Daycoval S.A. (Daycoval), including their long-term global local- and foreign-currency deposit ratings, and their senior unsecured debt ratings. At the same time, Moody's affirmed all global ratings, including the baseline credit assessments (BCA) of four banks.

The following ratings and assessments assigned to Banco ABC Brasil S.A. were affirmed:

Baseline credit assessment of baa3

Adjusted baseline credit assessment of baa3

Long-term global local currency deposit rating: Baa3, negative outlook

Short-term global local currency deposit rating: Prime-3

Long-term foreign currency deposit rating: Baa3, negative outlook

Short-term foreign currency deposit rating: Prime -3

Long-term foreign currency subordinated debt rating: Ba1

Long-term local currency senior unsecured debt rating: Baa3, negative outlook

Long-term foreign currency senior unsecured rating assigned to the MTN Program: (P)Baa3

Short-term foreign currency senior unsecured rating assigned to the MTN Program: (P)Prime -3

Long-term Brazilian national scale deposit rating: Aa1.br

Short-term Brazilian national scale deposit rating: BR-1

Long-term counterparty risk assessment of Baa2(cr)

Short-term counterparty risk assessment of Prime-2(cr)

The following ratings and assessments assigned to Banco Alfa de Investimento S.A. were affirmed:

Baseline credit assessment of baa3

Adjusted baseline credit assessment of baa3

Long-term global local currency deposit rating: Baa3, negative outlook

Short-term global local currency deposit rating: Prime-3

Long-term foreign currency deposit rating: Baa3, negative outlook

Short-term foreign currency deposit rating: Prime -3

Short-term Brazilian national scale deposit rating: BR-1

Long-term counterparty risk assessment of Baa2(cr)

Short-term counterparty risk assessment of Prime-2(cr)

The following rating assigned to Banco Alfa de Investimento S.A. was downgraded:

Long-term Brazilian national scale deposit rating: to Aa1.br, from Aaa.br

The following ratings and assessments assigned to Banco BBM S.A. were affirmed:

Baseline credit assessment of baa3

Adjusted baseline credit assessment of baa3

Long-term global local currency deposit rating: Baa3, negative outlook

Short-term global local currency deposit rating: Prime-3

Long-term foreign currency deposit rating: Baa3, negative outlook

Short-term foreign currency deposit rating: Prime -3

Long-term Brazilian national scale deposit rating: Aa1.br

Short-term Brazilian national scale deposit rating: BR-1

Long-term counterparty risk assessment of Baa2(cr)

Short-term counterparty risk assessment of Prime-2(cr)

The following ratings and assessments assigned to Banco Daycoval S.A. were affirmed:

Baseline credit assessment of baa3

Adjusted baseline credit assessment of baa3

Long-term global local currency deposit rating: Baa3, negative outlook

Short-term global local currency deposit rating: Prime-3

Long-term foreign currency deposit rating: Baa3, negative outlook

Short-term foreign currency deposit rating: Prime-3

Long-term foreign currency senior unsecured debt rating: Baa3, negative outlook

Long-term foreign currency senior unsecured rating assigned to the MTN Program: (P)Baa3

Long-term Brazilian national scale deposit rating: Aa1.br

Short-term Brazilian national scale deposit rating: BR-1

Long-term counterparty risk assessment of Baa2(cr)

Short-term counterparty risk assessment of Prime-2(cr)

RATINGS RATIONALE

In changing the rating outlook to negative from stable, Moody's acknowledges that the ongoing economic recession poses downside risks to these banks' financial performance, and especially to their asset quality and profitability, because their loan books and revenue streams are less diversified than similarly rated Brazilian universal banks. The deterioration of the operating environment, in line with Moody's expectation of economic contraction until 2016, creates lingering pressures on companies and households repayment capacity, and reduces confidence and business volumes. In this context, risks are skewed to the downside, and may lead to a higher and faster-than-expected strain on these banks' financial profiles.

The negative outlook on the banks' ratings incorporates the degree of sector and borrower concentration in their loan books, which increases their susceptibility to asset risk volatility, particularly in the current economic recession. While efforts by these banks to lend selectively and improve collateralization help mitigate risks, an increase in loan renegotiations reflect the generalized weak conditions facing corporations, their main business target. Declining credit quality will continue to demand higher provisions, and will pressure profitability in an environment of more limited business volumes, despite rising credit spreads.

In affirming these banks' investment grade ratings, Moody's acknowledges the relative stability of their business models, yielding consistent profitability, and conservative risk management, which is evidenced by the relatively contained level of loan losses through past credit cycles. These banks also report capitalization ratios well above the regulatory minimum and above similarly rated banks in Brazil, which, along with conservative level of reserves, provide important cushion against loan losses. These banks have a defensive liquidity management, with (1) appropriate assets and liabilities management; (2) a diversified, though largely market-based, funding mix; and (3) an appropriate amount of liquid assets.

SPECIFIC ANALYTICAL FACTORS RELATED TO THE FOUR BANKS

BANCO ABC BRASIL

The affirmation of BAB's BCA at baa3 acknowledges the bank's consistent performance and disciplined risk guidelines that have supported its performance through economic cycles.

However, Moody's notes the recent increase in non-performing loans since the end of 2014, doubling to 1.3% in June 2015, and its lower-than peers capital ratio, measured by its 10.6% tangible common equity ratio. The bank reported significant increment of renegotiated loans in the period that accounted for 3.9% of total loans. In addition, the negative outlook considers the higher-than-peers borrower concentrations, particularly if credit exposures are adjusted to include risks related to guarantees issued, off balance sheet items.

Moody's also affirmed BAB's Baa3 supported deposit and senior debt ratings that map directly from its baa3 BCA. Although the likelihood of support, if necessary, from parent Arab Banking Corporation (ABC, Ba1 positive, ba2 BCA) is high, BAB's ratings are currently higher than its parent's. The Ba1 subordinated debt rating and Brazilian long-term and short-term national scale deposit ratings of Aa1.br and BR-1 respectively were also affirmed.

WHAT COULD MAKE THE RATING GO UP

At this juncture, there is no upward rating pressure on BAB's Baa3 deposit ratings given the negative outlook and that current ratings are already in line with Brazil's sovereign bond rating of Baa3.

WHAT COULD MAKE THE RATING GO DOWN

For BAB, capital is a key driver for the rating. Rating pressures could result from a sharp deterioration in asset risk metrics, triggered by both borrower concentration and rising delinquencies, combined with a significant reduction in earnings generation that could arise from a long period of low business volumes, and/or increasing credit costs. BAB's rating would also be downgraded if Brazil's sovereign bond rating were to be downgraded.

BANCO ALFA DE INVESTIMENTO

The affirmation of Alfa's BCA at baa3 reflects its steady earnings recurrence, stable asset quality metrics, and comfortable capitalization relative to peers, as evidenced by Moody's ratio of tangible common equity to risk weighted assets of 17.3% as of June 2015. The volume of renegotiated loans accounted for 2% of total loans, while the bank reported non-performing loan ratio of 0.53% in the period.

Despite stable financial indicators, Alfa reports high borrowers concentration relative to capital and a funding structure that is predominantly market-based, both of which pressure asset quality and profitability in a prolonged period of weak economic activity.

As a result, Alfa compares unfavorably with other banks in Brazil at the same rating category in the global scale and stable outlook. The downgrade of the national scale deposit rating to Aa1.br reflects the negative outlook on the global deposit rating.

WHAT COULD MAKE THE RATING GO UP

At this juncture, there is no upward rating pressure on Alfa's Baa3 deposit ratings given the negative outlook and that current ratings are already in line with Brazil's sovereign bond rating of Baa3.

WHAT COULD MAKE THE RATING GO DOWN

Alfa's ratings could be downgraded if financial fundamentals, specifically asset quality and profitability, deteriorate as a result of the persistently lackluster macroeconomic environment. The failure of single large borrowers could also result in credit losses and capital pressures.

BANCO BBM

The affirmation of BBM's baa3 BCA acknowledges the effectiveness in credit risk management, as evidenced by its reduced charge-offs through the cycles. BBM's disciplined leverage target, which does not exceed three times its shareholders' equity, reduces the potential impact of loan losses in its capitalization, which is currently strong relative to peers', with a tangible common equity to risk-weighted assets of 18.6% in June 2015. Nevertheless, loan concentration in risky economic sectors and the deteriorating operating environment have led NPLs to increase to 2.1% in June 2015, up from 0.5%. The bank' structural reliance on market funding is offset by high liquidity.

On 19 May 2015, Bank of Communications Co., Ltd. (BoCom, A2 stable, baa3) announced the acquisition of an 80% stake in BBM. Upon the conclusion of this deal, which is subject to approval of authorities in Brazil and China, Moody's will incorporate into BBM's ratings an assessment of affiliate support from BoCom. At the same time, Moody's will reassess BBM's financial profile, which may be positively or negatively affected by potential shifts in its strategy and risk appetite under new ownership.

WHAT COULD MAKE THE RATING GO UP

At this juncture, there is no upward rating pressure on BBM's Baa3 deposit ratings. The stabilization of BBM's outlook could derive from its ability to keep adequate asset risk and profitability, despite the weak economic environment, coupled with the maintenance of strong capitalization.

WHAT COULD MAKE THE RATING GO DOWN

Negative pressures on BBM's BCA and ratings would derive from a significant deterioration in its asset risk that results in a meaningful profitability reduction, or a relevant deterioration in its liquidity management standards.

Also, a downgrade (or upgrade) of BBM's BCA and ratings could derive from the completion of its acquisition by BoCom.

BANCO DAYCOVAL

In affirming Daycoval's ratings, Moody's acknowledges (1) the bank's low leveraged operation compared to similar rated peers; as well as (2) conservative risk management and strong collateral structures. Daycoval high quality capital base compares favorably to similarly rated banks. In June 2015, the bank had a reported Tier 1 equity ratio of 18.7% and a sizable cash liquidity position equivalent to almost 70% of total deposits.

Reflecting management's expectation for deteriorating risk conditions over the next quarters, Daycoval reported much higher provisions which reduced recurring net income by 23.3% quarter over quarter in June 2015.

WHAT COULD MAKE THE RATING GO UP

At this juncture, there is no upward rating pressure on Daycoval's Baa3 deposit ratings given the negative outlook and that current ratings are already in line with Brazil's sovereign bond rating of Baa3.

WHAT COULD MAKE THE RATING GO DOWN

Negative rating pressures could result from a deterioration in asset quality combined with a significant reduction in earnings that could arise from rapid deterioration in its small and medium-sized enterprise loan book, or from increasing borrower's concentration risk. A material loan growth that could particularly compromise its capital structure and asset quality indicators -- whose preservation is key at this rating level -- could also affect ratings negatively.

LAST RATING ACTION & USED METHODOLOGIES

The last rating action on BAB was on 12 June 2015, when Moody's affirmed its baseline credit assessment (BCA) of baa3; the global local- and foreign-currency deposit ratings of Baa3; the long-term foreign currency senior unsecured debt rating of Baa3; the short-term local- and foreign-currency deposit ratings of P-3; the long-term foreign currency subordinated debt rating of Ba1; the long-term Brazilian national scale deposit rating of Aa1.br; and the short-term Brazilian national scale deposit rating of BR-1. The outlook on all ratings remained stable.

The last rating action on Alfa was on 12 August 2015, when Moody's downgraded its BCA to baa3 from baa2, and its global local- and foreign currency deposit ratings to Baa3 from Baa2. Moody's also affirmed Alfa's short-term local- and foreign-currency deposit ratings of P-3. The outlook on all ratings was changed to stable from negative. This rating action followed the downgrade to Baa3 from Baa2 of Brazil's government bond rating.

The last rating action on BBM was on 11 May 2015 when Moody's upgraded its BCA to baa3 from ba1; the long-term global local- and foreign-currency deposit ratings to Baa3 from Ba1; the short-term local- and foreign-currency deposit ratings to P-3 from NP; and the long-term Brazilian national scale deposit rating to Aa1.br from Aa2.br. The outlook assigned to all ratings was stable.

The last rating action on Daycoval was on 12 August 2014, when Moody's assigned a Baa3 global local currency debt rating and a Aa1.br national scale debt rating to Daycoval's proposed BRL400 million local currency senior unsecured banknotes (letras financeiras). The outlook on the debt rating was stable. All other rating remained unchanged

The principal methodology used in hese 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".

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.

Ceres Lisboa
Senior Vice President
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:
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes to negative outlook on four Brazilian banks' ratings; affirms deposit and debt ratings
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