June 28, 2017 / 7:19 PM / 9 months ago

Fitch Places Banco Original S.A. on Rating Watch Negative

(The following statement was released by the rating agency) SAO PAULO, June 28 (Fitch) Fitch Ratings has placed Banco Original S.A.'s (Original) Issuer Default Ratings (IDRs), National Ratings and Viability Rating (VR) on Rating Watch Negative (RWN). A full list of the actions taken is detailed at the end of this release. KEY RATING DRIVERS- IDRS, VR, NATIONAL RATINGS The RWN reflects the potential risks that Original could face over the short- and medium-term, as a result of recent and upcoming developments regarding the ongoing investigations of its related parties, which could have material negative implications for Original, although Fitch acknowledges this has not happened so far. These possibilities could put pressure on the bank's liquidity over the next few months and gradually increase its debt-refinancing risk, which continues to be well managed as of today. While not immediately impacted, continued negative developments from the investigations at its affiliates could also lead to gradual pressure on the bank's company profile and business model. The RWN also highlights downside risks in the event of Original being involved in the aforementioned investigations, although the bank has not been officially notified of any misconduct or wrongdoing thus far. Despite Original's sound and tested asset-liability management, currently strong cash position and relative operational independence from the group's activities, Fitch believes that the events surrounding its related parties could potentially hamper its ability to execute its strategic plans and meet its previously stated business goals, the cornerstone of which is the ramp-up of its digital retail franchise. Original is ultimately wholly owned by a holding company named J&F Investimentos S.A., which also controls its shareholders' other companies, including JBS S.A. (JBS; Long-Term IDR 'BB'/RWN). Last month, it was disclosed that some of JBS's executives had signed a plea bargain with the Brazilian Federal Public Prosecutor's Office, which included admitting payments of bribes to various politicians. Fitch reiterates that Original's liquidity so far has remained stable and has been adequately managed. The short-term profile of its loan portfolio, the relatively low proportion of funding with daily liquidity clauses (less than 10%), and the diversified retail portion of Original's funding distribution agreements (covered by FGC) have been critical and sufficient, so far, to ease potential pressures on Original's financial profile. However, concentration per broker/distributor remains high, which could add vulnerability to Original's refinancing ability, if part of these distributors decides to reduce their exposure to Original, or even cancel the ongoing agreements. The top-5 largest investors (all agreements with local securities companies, which, in turn, distribute Original's funding instruments), represented roughly 57% of the bank's funding base as of December 2016. Fitch also expects the bank's strategy execution to be further tested in the future. It is likely that funding costs will gradually increase and revenue generation could be hurt, as lending activity should also be cautiously managed until there is a clearer view of its funding stability. So far, there has been no major reputational impact of the affiliates' events on Original's retail brand. Yet, Fitch understands that the bank could still become increasingly exposed to the developments of the investigations. Should investor confidence worsen, the bank's implementation of its initial business goals and achieving breakeven in 2019 would likely be delayed. These additional challenges arose in a moment when the bank was still aiming to further consolidate its overall franchise, and improve profitability, which remains weak due to its significant investments in the digital banking segment. As of December 2016, the bank's operating loss amounted to BRL331.4 million or -3.6% of its Risk Weighted Assets (positive 1.1% in 2015), while its relative capital cushion has continued declining on the back of sustained growth and weak performance, although still remains adequate, in Fitch's view. Support Rating and Support Rating Floor Original's SR and SRF were affirmed at '5' and 'NF', respectively, in view of the bank's low systemic importance. In Fitch's view, external support cannot be relied upon. RATING SENSITIVITIES IDRS, VR AND NATIONAL RATINGS Original's ratings could be downgraded if the current negative pressures surrounding its business and financial profile drive a significant weakening of the bank's liquidity and funding profile, refinancing risk is increases materially very soon, or its profitability and capital adequacy metrics further weaken substantially. The direct involvement of the bank in the scope of the ongoing investigations may also result in a downgrade, a scenario in which the rating downside potential could eventually be multi-notch. The ratings could be affirmed and removed from RWN in the following months if Fitch is comfortable that refinancing risks are considerably reduced and that any potentially negative implications arising from the investigations on its related parties are comfortably absorbed without material negative implications for Original. In such a scenario, the resulting Rating Outlook will depend on Fitch's assessment of the medium-term prospects for the bank's business and financial profile. SR and SRF A potential upgrade of Original's Support Rating and Support Rating Floor is unlikely in the foreseeable future, since this would arise from a material gain in systemic importance. Fitch has placed the following ratings on Rating Watch Negative: --Long-Term Foreign and Local Currency IDRs 'B+'; --Short-Term Foreign and Local Currency IDRs 'B'; --Viability Rating 'b+'; --National Long-Term Rating 'BBB+(bra)'; --National Short-Term Rating 'F2(bra)'. The following ratings were affirmed: --Support Rating at '5'; --Support Rating Floor at 'NF'. Contact: Primary Analyst Raphael Nascimento Associate Director +55-11 3957-3664 Fitch Ratings Brasil Ltda., Alameda Santos, 700 - 7th floor, Sao Paulo, SP, Brazil Secondary Analyst Esin Celasun Director +55-21 4503-2626 Committee Chairperson Alejandro Garcia, CFA Managing Director +1-212-908-9137 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com 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#solicitation 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. 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