OREANDA-NEWS. Fitch Ratings has today affirmed Banco Safra S. A.'s (Safra) ratings, including its Long-Term Foreign - and Local-Currency Issuer Default Ratings (IDRs) at 'BB'. The Rating Outlook is Negative. Fitch has also affirmed Safra Leasing S. A.'s - Arrendamento Mercantil (Safra Leasing) National Ratings at 'AA+(bra)'/Stable Outlook. A complete list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

Safra's Long-Term Foreign - and Local-Currency IDR are driven by the bank's 'bb' Viability Rating (VR) and reflects the bank's solid franchise and consistent performance through challenging economic cycles. The bank's conservative risk policies illustrate Safra's ability to manage risks and preserve strong asset quality ratios while improving its liquidity and asset liability management. The ratings also reflect the preservation of strong efficiency ratios and controlled margins resulting in a profitability level that adequately generates internal capital.

Safra's VR is constrained by the operating environment and has recently moved in tandem with the sovereign rating of Brazil. As a result Safra's VR was downgraded to 'bb' from 'bb+' in May 2016. The Negative Rating Outlook on Safra's IDRs reflects the Negative Outlook of the sovereign rating. Per Fitch's methodology, in light of the bank's wholesale funding structure, Safra's rating cannot exceed that of the sovereign at the current scenario, despite the bank's resilient performance along economic cycles. Thus, if the sovereign rating is downgraded, Safra's rating would likely follow.

Safra's Fitch Sovereign-based Support Rating of '4' and Support Rating Floor of 'B+' factor the bank's size and importance within the Brazilian banking universe, which is relatively concentrated in nature. Safra is currently the fifth largest private sector bank in the system. This support rating remains unchanged despite the Negative Rating Outlook on the sovereign rating. The affirmation of Safra's long-term senior unsecured debt ratings is driven by Safra's IDR, given its unsecured nature and ranks equally to all other senior unsecured debt. Because the majority of the notes are issued in Brazilian Real (BRL) and since the settlement will be in U. S. Dollars (USD), a subscript 'emr' was added to the ratings of these issuances to reflect the embedded market risk of the exchange rate fluctuation between the BRL and the USD.

Safra's strong efficiency and relatively low cost funding have helped the bank to consistently post satisfactory profitability ratios. Over the past four fiscal year-ends the average return on average equity (ROAE) and return on average assets (ROAA) was 18.8% and 1.2% respectively. At the end of March 31, 2016 the ROAE and ROAA ratios were 20.4% and 1.25% respectively. Despite the weak economic environment, Fitch expects that, in the medium term, Safra's ROAA will remain above 1%. Given Safra's low risk and growth appetite during 2016, this ratio is likely to be below the average of the larger private sector Brazilian banks and other Latin American bank peers rated at the same rating level.

A focus on a market that Safra knows well, along with a conservative risk appetite, allows Safra to continue to post above average asset quality ratios. Safra's good credit quality is evidenced by its Dec. 31, 2015, over 90 day past due loans to total loans ratio (Over 90) of 1.5%, one of the lowest in the banking system whose average was 3.4%. Safra's impaired loans (classified under Bacen 'D' to 'H') to total loans ratio was 4.0% (vs. banking system's 6.8%). Safra's Loan Loss Reserve coverage of loans past due over 90 days was a very comfortable 369%. In addition, the levels of charge-offs continue being low at slightly below 1%, partly due to the strength of its collections unit and its enhanced underwriting policies. At the end of the first quarter 2016, the impaired loan ratio rose to nearly 4.7% and the Over 90 reached 2.0% while the coverage ratio declined to 321%. Given the continued difficult operating environment and negative outlook for the rest of the year, Fitch expects that Safra's asset quality ratios will continue to be pressured, but will still be manageable given the comfortable coverage level and the bank's conservative underwritting.

The bank continues to focus on ensuring a stable liquidity position through conservative asset liability management policies to mitigate gaps through hedging and funding diversification. The restricted growth strategy should also allow for continued selectivity and the repayment of higher cost funding. Fitch expects that Safra will be able to maintain the improvements achieved in asset and liability maturity management in the medium term; helping to mitigate the challenges of its mostly wholesale funding business model.

Safra's Fitch Core Capital ratio (FCC) has been on a strengthening trend for the past three fiscal year ends and has reached a comfortable 11.0% at March 31, 2016, up from 10.3% at Dec. 31, 2015. The recent increase was aided by retained income and lower risk assets as the loan portfolio was allowed to shrink by 8.8% during the quarter. Fitch expects that Safra's FCC will remain close to the current level in the medium term. The bank already meets the Central Bank regulatory minimum total capital requirement solely by means of its Tier I regulatory capital ratio of 12.9%. Fitch does not expect Safra to have any difficulty adjusting the upcoming implementation of Basel III according to the Brazilian Central Bank's timetable. Safra's had a Total Regulatory ratio of 15.4% at March 31, 2016.

Safra Leasing's National Ratings are equalized to those of its parent bank. According to Fitch criteria, this subsidiary is 'Core' to Safra by means of its significant participation as a funding source of the consolidated activities. The leasing subsidiary is operationally aligned with the bank and shares in the reputational risk. Also, the ratings of its subordinated debt incorporate the support from Safra and are notched down once in view of the lower expected recovery of the securities due to its contractual subordination in the event of liquidation.

RATING SENSITIVITIES

Positive Rating Action: Further upgrades to Safra's ratings are limited considering the bank's current business model, which despite increased diversification and satisfactory asset quality, still weighs mostly on a wholesale funding structure. If those structural characteristics are significantly altered, a rating review may occur.

Negative Rating Action: Safra's ratings, including its IDRs, are sensitive to any change in the sovereign rating as described above. The Rating Outlook for the sovereign rating is negative. An unlikely deterioration of Safra's profitability that would weaken its FCC capital ratio to below 9% or an operating return on average assets below 1% for a sustained period of time could also trigger a rating review.

Fitch affirms the following:

Banco Safra

--Long-Term Foreign - and Local-Currency IDRs at 'BB'; Outlook Negative;

--Short-Term Foreign - and Local-Currency IDRs at 'B';

--Viability Rating at 'bb';

--Support Rating at '4'

--Support Rating Floor at 'B+';

--National Long-Term Rating at 'AA+(bra)'; Outlook Stable;

--National Short-Term Rating at 'F1+(bra)'.

Market Linked BRL Securities due 2016 and 2017:

--Long-Term Foreign-Currency at 'BBemr'.

Senior CHF notes due 2017 and 2019:

--Long-Term Foreign-Currency Rating at 'BB'.

Safra Leasing S. A. Arrendamento Mercantil:

--National Long-Term Rating at 'AA+(bra)'; Outlook Stable;

--National Short-Term Rating at 'F1+(bra)'.

12th, 13th, 14th and 15th Subordinated Debenture Issues:

--National Long-Term Rating at 'AA(bra)' .