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Rating Action:

Moody's downgrades BNDES and CEF's local currency ratings

 The document has been translated in other languages

15 Oct 2009

New York, October 15, 2009 -- Moody's Investors Service downgraded the global long- and short-term local- currency deposit ratings of Caixa Econômica Federal (CEF) to A3/Prime-2 from A1/Prime-1, respectively. Moody's also lowered the issuer rating of Banco Nacional de Desenvolvimento Econômico e Social (BNDES) to A3 / Prime-2 from A1 / Prime-1. At the same time, Moody's downgraded the long-term local currency debt ratings assigned to BNDES Participações S.A. (BNDESPar) to A3 from A1, as well as its long-term local currency issuer rating to A3 from A1. These ratings now have a stable outlook.

The downgrades were driven by the rating agency's global reassessment of the ability of governments to support their countries' banks during a protracted systemic crisis. The likelihood of such support is an important part of Moody's credit analysis, and it provides uplift to the ratings above that which would be implied by the banks' own financial strength. For the Brazilian banks, the downgrades bring the ratings closer in line with that of the government's own rating of Baa3.

The rating agency noted that this rating action is not related to the intrinsic strength or operating performance of the banks; accordingly, the D+ bank financial strength rating and Baa3 unsupported baseline credit assessment (BCA) of CEF as well as the Baa3 BCA of BNDES were unaffected and remain with stable outlooks. The banks' A3 local currency ratings reflect the very high probability of support assumed by Moody's for the banks' local currency obligations, which adds three notches of uplift to their baseline credit assessments of Baa3.

The banks' Baa3 foreign currency deposit ratings and the Baa2 foreign currency debt rating assigned to debt issued by BNDES were also not affected by this action and remain constrained by Brazil's foreign currency deposit and debt ceilings, which have positive outlook. All national scale ratings assigned to CEF, BNDES and BNDESPar, presently at Aaa.br and BR-1, also remain unchanged.

DEPOSIT-RATING CHANGE REFLECTS REVISED APPROACH TO SYSTEMIC SUPPORT

Moody's has refined its assessment of systemic support for the Brazilian banks to better reflect the capacity of the government to support the banking system as a whole in the event of a systemic crisis. The agency continues to believe that most governments are likely to support their banking systems to avoid a meltdown of the local payment system in such an event.

Nevertheless, Moody's also views the capacity of a country and its central bank to support the nation's banks to be more closely aligned with the government's own creditworthiness. The revised approach to systemic support is outlined in the special report entitled "Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries", published in May 2009.

Moody's said that the new systemic support indicator for Brazil has been established at A3, thus replacing the A1 local-currency deposit ceiling as the systemic support input for bank ratings. The A3 systemic support indicator nevertheless reflects three notches of uplift from the government's Baa3 local currency bond rating.

The three-notch difference reflects Moody's assessment of the Brazilian government's strong ability and willingness to support the banking system, including a broad array of financial and non-financial tools, as well as the intrinsic strength of the banking system demonstrated during the recent global crisis. This view is underpinned by the following:

(1) Swift actions during the current and past crises are indicative of the high priority the government places on the stability of the financial system. The authorities promptly and efficiently assisted the liquidity needs of all financial institutions, using a modest part of the sizable pool of reserve requirements (equivalent to 8% of GDP) as a powerful tool that has proven to be an important counter-cyclical measure to support the banking system. Despite the banks' low reliance on external funding (representing only 8.6% of total liabilities), the Brazilian authorities also made available to the banks part of the country's US$ 230 billion in international reserves -- largely through trade finance lines, spot USD, and swaps -- as liquidity dried up in foreign markets.

(2) Banking institutions' largely domestic funding allowed the system to manage the current financial crisis, despite some pressure on credit fundamentals as a result of the economic contraction in Brazil. The Brazilian banking system has experienced a limited level of stress despite a riskier global environment. Notwithstanding the marked decline in loan and transaction volumes, the system's asset quality has been supported by low interest rates, high capital levels (18% average system BIS ratio in 2008), and ample loan loss reserves.

(3) The relatively modest size of the Brazilian banking system, with credit assets equal to 45% of GDP as of June 2009, suggest that the risk of crystallization of banking losses on the government's balance sheet should be relatively moderate.

Moody's also points out that the Brazilian banking system has shown signs of a gradual return to growth since June 2009 on the track of a positive credit cycle as labor markets stabilize and as the national economy rebounds in an environment of historically low interest rates and supportive domestic demand. The banks' sound capitalization has largely withstood increased delinquencies through the downturn and these remain at comfortable levels to support future credit growth.

PREVIOUS RATING ACTIONS AND PRINCIPAL METHODOLOGIES

The last rating action on Caixa Econômica Federal was on September 22, 2009, when Moody's upgraded the long-term foreign currency deposit rating to Baa3, with positive outlook, from Ba2, following the conclusion of the review of Brazil's foreign currency deposit ceiling.

The last rating actions on BNDES were on September 22, 2009, when Moody's upgraded the long-term foreign currency deposit rating to Baa3, with positive outlook, from Ba2 and the foreign currency senior unsecured debt rating to Baa2, with positive outlook, from Baa3, following the conclusion of the review of Brazil's foreign currency deposit and debt ceilings.

The last rating action on BNDESPar was on July 7, 2009, when Moody's placed on review for possible downgrade its long-term local currency debt and issuer ratings of A1 as part of the global reassessment of systemic support for bank ratings.

The principal methodologies used in rating CEF and BNDES were Moody's "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", published in February and March 2007 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

The following ratings were downgraded:

Caixa Econômica Federal:

- Long- term local currency deposits: to A3 from A1, with stable outlook

- Short- term local currency deposits: to Prime-2 from Prime-1

Banco de Desenvolvimento Econômico e Social (BNDES):

- Long- term local currency issuer: to A3 from A1, with stable outlook

- Short- term local currency issuer: to Prime-2 from Prime-1

BNDES Participações (BNDESPar):

- Long- term local currency senior debt: to A3 from A1, with stable outlook

- Long- term local currency issuer: to A3 from A1, with stable outlook

New York
Alexandre Albuquerque
Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
M. Celina Vansetti
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades BNDES and CEF's local currency ratings
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