OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Banco Pine S. A. (Pine) at 'BB-'/Outlook Negative. Fitch also affirmed the bank's other ratings. A complete list of rating actions is included at the end of this release.

KEY RATING DRIVERS

The affirmation of Pine's ratings reflects Fitch's view that management has taken the appropriate measures to strengthen the bank's liquidity and asset quality ratios and that these offset the credit negatives of the weak profitability expected to continue in the medium term as a result of the continued weak economic environment. During FY2015 and first quarter 2016 (1Q16), Pine reduced its expanded credit portfolio while repositioning its remaining loan book toward mainly lower-risk borrowers. The reduction in risk-weighted assets has contributed to the strengthening of the bank's Fitch Core Capital Ratio (FCC). At Dec. 31, 2015, Pine's FCC reached 13.5%, which was the strongest ratio of the past four years. At March 31, 2016, Pine's FCC improved even further, to 14.3%, aided by a further decline in risky assets.

Pine's relatively large asset concentration - especially from corporate names on its loan book - resulted in asset-quality pressure due to the decelerating economy and the continuation of a challenging operating environment. The bank's impaired loans (BACEN 'D'-'H')-to-total loans ratio saw a material deterioration during FY2015, having risen from 5.0% to 9.3%. This ratio further weakened to nearly 10.5% by March 31, 2016. The some drivers of the growth in this ratio were the weak economy, borrowers named in the Lava Jato scandal, and the nearly 33% decrease in credit exposure over the last 15 months ended March 2016. A positive note comes from the relatively comfortable over-90-day non-performing-loan ratio (NPL: BACEN 'E'-'H') of 0.7% at March 31, 2016, which benefitted from a significant level chargeoffs during the first quarter that improved the 1.7% ratio seen at FYE2015.

Fitch notes that the repositioning of its lending activities towards lower-risk segments should reduce its credit costs in the medium term. During the 1Q16, the bank's loan loss provision expense reached BRL26 million. For 2016, management expects a declining trend and recoveries are also expected to be favorable. However, the strategic decrease in exposure and preference for higher-quality borrowers will likely impact pricing and revenues. To offset tighter margins, which Fitch expects to be around 3.5%, management is continuing with its strategy of cost reduction that has already seen some success, as the bank reported a 12.6% decrease in personnel and administrative expenses in 2015. Fitch expects Pine to maintain low profitability levels during 2016, but net losses are not part of our base case scenario.

Since end-2014 Pine has chosen not to expand its credit operations. This decision led to a significant 32% decrease in the expanded credit portfolio from BRL9.7 billion at March 2015 to BRL6.6 billion at March 2016. For 2016 the bank's guidance for credit growth ranges from zero to negative 5%. This lack of growth will continue to impact profitability (ROAE guidance of 4% to 8%); however, the bank's current priorities are clearly aimed at maintaining liquidity and keeping asset quality protected, thus avoiding higher provisioning expenses in 2016 and beyond. This decision can compromise the bank's future revenues, since it could lead the bank to reduce its spreads in order to face the increasing appetite of the competition in the medium term. However, in the short term, the general lack of risk appetite of some of its competitors has allowed the bank to access higher-quality credits that it could not easily attract earlier due to pricing.

During 2015 the composition of the portfolio of the 20 largest clients was altered by over 25% and the new names were mostly classified in the better rated 'A' and 'B' categories. The exposure to these top-20 clients represents slightly over 31% of the expanded credit portfolio; however, over 50% of the exposure is in the form of guarantees. In addition, at year-end 2015, the percentage of bank guarantees within the expanded credit portfolio rose to 34% from 30% a year earlier. These guarantees generally enhance asset quality given the quality of the companies that request them and as they are infrequently realized due to their nature. Also, Pine currently shows low concentration in credits that were named in the Lava Jato operation. However, Fitch notes that despite the improved quality resulting from tighter underwriting, credit risk policies, and guarantee structuring, Pine's credit portfolio will continue to be tested under the current scenario of economic deceleration.

Prudent asset and liability management and the excess of liquidity in Brazil and elsewhere in the last four years allowed Pine to obtain alternative funding options, such as bilateral credit lines from local and foreign banks, multilateral funding, and the transfer of development funds from BNDES. Though in a downward trend, Pine's funding base continues have some concentration as time deposits from high net worth individuals account for 23% of the total funding as of December 2015 (13% as of December 2014). However, this is not unexpected, as the bank with its excess liquidity has been repaying a relevant portion of its more expensive funding. As a result, the average cost of Pine's liabilities has been diminishing. Some examples of the bank's movements for this purpose are the early payment of around 50% of the debts issued in the Chilean market (Huaso Bonds), the bank's repayment of some of its more expensive funding issuances (including its subordinated debt), and the cost reduction associated with its DPGE portfolio (by attaching guarantees to it), resulting in lower insurance costs with the FGC (the local depositor guarantee fund). Despite such concentrations, the bank's current funding base looks good compared to the tenor of its portfolio and good liquidity levels, a situation that should prevail with Pine's strategy of zero or even negative loan growth.

Despite the trend of lower results seen in the last couple of years, the bank's capitalization levels remain satisfactory, as they were strengthened in 2015 and during 1Q16. FCC/Risk-Weighted Assets ratio was 14.3% as of March 31, 2016. This comfortable level of capitalization together with prudent underwriting and loan loss provisioning will make it easier for the bank to confront the current challenging operating environment.

The Negative Outlook was maintained as it reflects Fitch's view that key credit metrics of this mid-sized wholesale bank are highly influenced by the operating environment and could see further pressure considering our expectations for continued deterioration in domestic operating conditions, as evidenced by the Negative Outlook assigned to the Brazilian banking sector.

RATING SENSITIVITIES

Positive: Limited Upgrade Potential: Pine's ratings could be upgraded in a scenario of increasing revenues and adequate cost controls which resulted in constant improvement to its operating profitability. Also a clear trend of improvement in its asset quality and coverage ratios would support an upgrade.

Negative: Pine's ratings could be downgraded in case of further sustained deterioration in its performance, asset quality and/or capitalization (i. e. ROAA below 0.5%, impaired loans (D-H) remaining above 8.0% and/or FCC lower than 12%).

Fitch has affirmed the following ratings:

Banco Pine S. A.

--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 '5';

--Support Rating Floor at 'NF';

--Long-Term National rating at 'A+(bra)'; Outlook Negative;

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

--Senior unsecured BRL Letras financeiras due July 31, 2016 at 'A+(bra)';

--Subordinated Debt USD Notes due Jan. 6, 2017 at 'B';

--Huaso Bonds Program expiring in 2022 at 'BBB+(cl)';

--Huaso Bonds due Dec. 10, 2017 at 'BBB+(cl)'.