Fitch Affirms Banco do Estado do Rio Grande do Sul’s Ratings; Outlook Revised to Positive

Fitch Ratings has revised the Rating Outlook to Positive from Stable on the Long-Term Issuer Default Ratings (IDR) and National Long-Term Rating of Banco do Estado do Rio Grande do Sul S.A. (Banrisul).

Fitch also affirmed Banrisul's ratings as follows:

--Long-term Foreign and Local currency IDRs at 'BB +'; Outlook to Positive from Stable;

--Short-term Local and Foreign Currency IDR at 'B';

--Viability Rating at 'bb+';

--Support rating at '4';

--Support Rating Floor at 'B';

--National Long Term rating at 'AA-(bra)'; Positive Outlook;

--National Short-Term rating at 'F1+(bra)';

--First Issuance of Senior Unsecured Letras Financeiras at 'AA- (bra)';

--Tier II Subordinated notes due Feb 2022 at 'BB-'.

KEY RATING DRIVERS

The Positive Outlook reflects Banrisul's consistent performance compared to local and international peers in addition to Fitch's expectation that the bank will preserve both asset quality and profitability metrics going forward. The ratings factor in the bank's regional importance, its stable retail funding base, resilient profitability and liquidity ratios, compatible with its retail profile. On the other hand, the ratings are balanced by the bank's modest national presence and the fiercer competition with larger Brazilian banks.

Fitch does not assign ratings to the state of Rio Grande do Sul (RS) and, therefore, does not credit this support to the bank. The Support Rating '4' and the Support Rating Floor 'B' reflect the agency's opinion that in a stress scenario, a limited support from the Federal Government would be possible given Banrisul's relative importance to the state. The Support Rating also reflects the absence of any explicit guarantee from the Federal Government to the entity.

Pursuant to this strategy, Banrisul also engages on secured personal loans, benefited by the recent acquisition of Promotora de Vendas Bem Vindo that allows the origination of payroll deductible loans and financial products nationwide. In September 2013, about 27 percent of total loans were originated for clients domiciled outside of RS relatively stable in relation to 2012. Bem Vindo should also offer other products such as insurance and credit cards.

Following market practices, Banrisul created a company to consolidate its credit card activities in October. This decision is still pending some approvals from the State's House of Representatives and exemplifies the political influences Banrisul is subjected when implementing its commercial strategies. This can constitute a competitive challenge when compared to private peers.

As per 3Q13, the bank's nonperforming loans (NPL) above 90 days and its reserve coverage ratio were 3.7 percent and 165 percent, respectively, showing a slight worsening trend(2.8 percent and 239 percent in 2012). Nevertheless, the agency expects that the weaker economic performance expected would not translate into further credit deterioration and margin compression in 2014. The reduction on provision reserves along 2013 was mainly driven by the revision of the bank's provisioning policies. Despite this measure, Fitch notes that Banrisul's reserves still remains above minimum required by the local regulator and compare well with regional peers.

Benefited by resources from the subordinated debt issued in 2012 (total outstanding at BRL1.8 bn in September 2013), liquid investments covered a high 50 percent of the bank's total short- term obligations in September 2013. In addition, Fitch Core Capital reached a satisfactory 14.6 percent, compatible with its retail activities.

Banrisul is the seventh largest bank in the financial system by total deposits and the largest in the state, provides payroll services to various entities in RS and holds a historically stable deposit base equivalent to almost 35 percent of the region's total deposits. With 461 branches and controlled by the state of RS, Banrisul is present in 85 percent of the municipalities. As a retail bank, it focuses primarily on individuals and middle market companies.

Banrisul Debt

Letras Financeiras: Banrisul's senior unsecured domestic issuances rank equal with its other senior unsecured debt, and its ratings are aligned to the bank long-term national ratings.

USD Tier 2 Subordinated Notes: Banrisul's 'BB-' rated subordinated notes due January 2022 are rated two notches below the VR 'bb+' of the bank (one notch for loss severity characteristics and subordinated status and one notch for its moderate risk of failure in performance). These notes will rank pari passu to the bank's subordinated debt and have a cumulative coupon deferral mechanism that can be exercised if the minimum regulatory capital is breached.

Rating Sensitivities

Banrisul VR and IDRs

The IDRs and National Scale Ratings are on Positive Outlook. The ability of the bank to preserve their current capital levels and profitability jointly with its good asset quality ratios (with 90 days NPLs around 3 percent with more than 150 percent loan loss reserve coverage and contained loan charge offs) would result in an upgrade. Conversely, an unexpected deterioration of its asset quality and profitability may result in the Outlook to come back to stable.

Negative Factors: Banrisul may be downgraded if asset quality ratios show a significant deterioration (90 days past due loan ratio above 5 percent and weaker loan loss coverage) and/or its Fitch Capital Ratio (FCC) comes below 12 percent in a continued manner.

Any change of Banrisul's ratings may lead to a review of ratings assigned to its issuances.

Additional information is available at 'fitchratings.com':

'fitchratings.com.br'.

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