OREANDA-NEWS. Fitch Ratings has downgraded the Foreign and Local Currency Issuer Default Ratings (IDRs) for Banco Pine S.A. (Pine) to 'BB' from 'BB+'; the Viability Rating (VR) to 'bb' from 'bb+' ; and the National Long-Term Rating 'A+(bra)' from 'AA-(bra)'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The downgrade of Pine's ratings reflects Fitch's opinion that the drop on the bank's profitability observed during 2014 to a level below of that of previous years is a trend that should continue in the medium term. Such structural change on the bank's profitability profile mainly comes as a result of reduced revenues due the more temperate growth and reposition of its loan book towards less risky segments, competition challenges and possible needs for increased loan loss provisions in the short and medium term.

Pine's relatively large asset concentration - especially from corporate names on its loan book - results in asset quality pressures due to a decelerating economy and challenging operating environment. Fitch notes that the repositioning of its lending activities towards lower risk segments could reduce its credit costs in the medium term. However, it also demands not only an appropriate pricing, but a deeper assessment of the bank's costs (credit and operating costs) in order to rebalance the risk-reward relationship of its deals. In the agency's view, this task may be limited by the pressures of the operating environment.

Since end-2014 Pine has chosen not to expand credit operations. This decision aimed at maintaining the bank's asset quality protected, avoiding higher provisioning expenses in upcoming years and thus partially offsetting the retraction in its profitability. This decision can compromise the bank's future revenues, since it can reduce its spreads to face the increasing appetite of the competition in the medium term. The current levels of liquidity in the industry and the search of lower risk credit operations by Pine's competitors increases the credit offer by banks with larger bargaining power (and a wide product range) to better quality clients - which are Pine' focus.

The good quality of Pine's credit portfolio (which is the result of adequate underwriting, credit risk policies and guarantee structuring) may be tested under the current scenario of economic deceleration. Also, its relatively large exposure to some corporate clients will likely demand higher provisioning levels in the period 2015/16. This increased credit cost should reduce the bank's capital generation capacity as it pressures its profitability. Fitch expects Pine to remain with low profitability levels during 2015 and 2016, but net losses are not part of our base case scenario. In general, Fitch estimates that Brazilian banks profitability should be impacted by an increase in credit provisioning in the range of approximately 30% in 2015 - and Pine would not be an exception.

Prudent asset and liability management and the excess of liquidity in Brazil and elsewhere in the last 4 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. However, although in a down trend, Pine's funding base continues concentrated, with term deposits accounting for 27% of the total funding as of December 2014 (36% as of December 2013). Despite such concentrations, the current funding base of the bank bodes well compared to the tenor of its portfolio and good liquidity levels, a situation that should prevail in an environment of lower loan growth.

The average cost of Pine's liabilities has been gradually reducing. Some examples of the bank's movements on this purpose are the early payment of around 50% of the debts issued in the Chilean market (Huaso Bond), 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 FGC.

In an attempt to hold its profitability under control, Pine has been adopting measures to contain personnel and administrative costs. Among these, the bank has reduced its staff by around 10% from November 2014 to April 2015. Such cost control measures should partially compensate the expected increase on loan loss reserves.

Despite the trend of lower results showed in the last couple of years, the bank's capitalization levels were maintained in 2014. The Fitch's Core Capital/Risk-Weighed Assets ratio was 12.4% as of December 2014, against 12.3% as of December 2013 (or 13.3% from 2011 to 2013). Pine's capitalization is still adequate compared to similarly rated banks, considering the concentration of its loans, the limited growth appetite of the bank for the short term and the expected trend of low profitability in the medium term. Such capitalization jointly with prudent and on time loan loss provisioning will bode well for the bank to confront the current challenging operating environment.

Pine shows low concentration on credits deriving from the production chain related to 'Lava Jato' (car wash) operation - directly or indirectly dependent upon Petroleo Brasileiro S.A. - Petrobras.

RATING SENSITIVITIES

Limited Upgrade Potential: Pine's ratings could be upgraded in a scenario of increasing revenues and adequate costs control, which resulted in constant improvements to its operating profitability.

Negative Rating Action: Pine's ratings could be further downgraded in case of deterioration in its performance, asset quality and/or capitalization (meaning ROA below 1.0%, impaired loans (D-H) above 5.0% and/or FCC lower than 12%).

Fitch takes the following rating actions:

Banco Pine S.A.
--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Stable;
--Short-Term Foreign and Local Currency IDRs affirmed at 'B';
--Viability Rating downgraded to 'bb' from 'bb+';
--Support Rating affirmed at '5';
--Support Rating Floor affirmed at 'no floor';
--Long-Term National Rating downgraded to 'A+(bra)' from
'AA-(bra)' ; Outlook Stable;
--Short-Term National Rating affirmed at 'F1+(bra)' ;
--Senior unsecured BRL letras financeiras due 15th October 2015 and 31st July 2016 downgraded to 'A+(bra)' from 'AA-(bra)';
--Subordinated Debt USD Notes due 2017 downgraded to 'B+' (B plus) from 'BB-';
--Huaso Bonds Program Expiring in 2022 downgraded to 'A-(cl)' from 'A(cl)';
--Huaso Bonds due 2017 downgraded to 'A-(cl)' from 'A(cl)'.