August 21, 2017 / 7:00 PM / a year ago

Fitch Affirms Banestes at 'BB-/A+(bra)'

(The following statement was released by the rating agency) RIO DE JANEIRO, August 21 (Fitch) Fitch Ratings has affirmed the ratings of Banestes SA Banco do Estado do Espirito Santo (Banestes). A complete list of rating actions follows at the end of this release. KEY RATING DRIVERS VR, IDRs and NATIONAL RATINGS Banestes' Issuer Default Ratings (IDRs) are driven by its 'bb-' Viability Rating (VR), which mainly reflects the high influence of the operating environment on the bank's performance and prospects since it primarily operates in the State of Espirito Santo and due to its regional importance. The ratings also consider the bank's regional franchise and its adequate financial profile which positively compare to those of the subnational-owned peers. Fitch considers the bank's stable liquidity, relatively strong capitalization and adequate sources of funding. The quality of the bank's assets began to stabilize in early 2017. The Rating Outlook for the bank's Long-Term IDR is Negative, reflecting that, as a retail bank, its VR could be impacted by any further deterioration in the operating environment. Additionally, any change in Fitch's opinion of the creditworthiness of its main shareholder, State of Espirito Santo, could impact the bank's VR, since Fitch believes there is little room to position Banestes' VR much above that of State of Espirito Santo. Banestes' business model relies on lower-cost retail funding, provided by its branch network, mainly in the State of Espirito Santo. Furthermore, the bank has reasonably well-diversified products, which makes it less dependent on revenues linked to credit than its peers. Banestes focuses its operations in the state of Espirito Santo, where it maintains a good participation in deposits and credit operations. As a state bank, a relevant part of its strategy includes providing services and granting credit to state and municipal public servants, as well as to companies that intend to invest in the state. Through agreements and partnerships with municipalities and the state government itself, the bank also manages the financial resources of these entities, increasing the capacity to expand its customer base. Underwriting standards are in line with the practices of the leading banks in the banking industry. Credit risk is the one that consumes the most capital. The quality of credit remained acceptable, indicators of NPLs of more than 90 days in the first half of 2017 totaled 3% until June 2017 (3.6% in 2016, 4.8% in 2015 and 5.3% in 2014). As of March 2017, securities classified as 'D-H' stood at 15.6% of the portfolio and 15.5% in December 2016, which show some deterioration from previous years (12.3% in December 2015 and 10.1% in December 2014). The bank shows good profitability, without great oscillations. Operating profit on average assets was 1% as of the 1Q17, presenting stability in recent years. Banestes has optimized costs, implemented operational efficiency targets and has reviewed all of its fixed cost contracts. Fitch believes capitalization metrics are relatively strong and positively compare to its closest peers. By management's policy, the regulatory capitalization index must be at least 14%. In March 2017, it was 18.5%. The credit leverage was approximately 2.9 times the shareholders' equity in March 2017 (3.0 times in December 2016 and 3.4 times in December 2015). Fitch deducted the insurer's equity to calculate the Fitch Capital Core, which was still at comfortable 16.4% in March 2017 (16.6% in December 2016, 17.3% in December 2015) and better on average than its peers. Banestes presents a granular and low cost deposit base given its retail profile. The bank holds about a third of the Espirito Santo market. The concentration of the 20 largest depositors was about 20% of total in March 2017. The moderate percentage is explained by the state's investments or by entities linked to it, as a large part of governmental funds (and of its companies) is deposited in Banestes. Fitch views Banestes' liquidity as adequate and its minimum cash policy as conservative. The most liquid assets accounted for about 50% of total deposits and comprised mainly federal government securities. SUPPORT RATING The '4' Support Rating reflects the moderate probability of support from its controlling shareholder, the State of Espirito Santo. In Fitch's opinion, Banestes is strategically important to the state, as it acts as the state's financial agent. In addition, the bank provides services to public entities and grants credit to their suppliers, as well as payroll deductible loans to public employees, which together make up an important part of the bank's business. RATING SENSITIVITIES VR, IDRs and National Ratings Banestes' VR is sensitive to any change in Fitch's assumptions regarding exposure to regional risk, capitalization and credit quality. The VR may be downgraded if Banestes' NPL's (overdue for more than 90 days) increase to more than 6% and / or if the FCC falls to less than 10%. Fitch's internal analysis of the state of Espirito Santo may affect the bank's ratings. Thus, its ratings could be impacted by any change in the financial profile of that state. SUPPORT RATING SR could be modified from any change on the strategic importance of the bank or the propensity of support of the state of Espirito Santo. FULL LIST OF RATING ACTIONS: Fitch has affirmed the following ratings: Banestes S.A. - Bank of the State of Espirito Santo: --Long-term IDRs in Foreign and Local Currencies at 'BB-'; Outlook Negative; --Short-term IDRs in Foreign and Local Currencies at 'B'; --National Long-Term Rating at 'A + (bra)', Stable Outlook; --National short-term rating at 'F1 (bra)'; --Support Rating at '4'. --Viability Rating at 'bb-'. Contact: Primary Analyst Jean Lopes Director +55 21 4503-2617 Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20 - sala 401 B - Centro Rio de Janeiro -RJ CEP: 20010-010 Secondary Analyst Paulo Fugulin Director +55 11 4504-2206 Committee Chairperson Veronica Chau Senior Director +52 81 8399-9169 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:; Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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