OREANDA-NEWS. Fitch Ratings has affirmed Caixa Economica Federal's (Caixa) Issuer Default Ratings (IDRs), National Ratings, Support Rating (SR) and Support Rating Floor (SRF). The Rating Outlook is Negative. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS, NATIONAL RATINGS AND SENIOR DEBT
Caixa's IDRs, National and senior debt ratings are driven by sovereign support and equal to Brazil's sovereign ratings. The Negative Outlook mirrors that on the sovereign ratings. The ratings reflect full ownership by the federal government, the bank's domestic systemic importance and the policy role it plays in the implementation of the government's economic programs and anticyclical measures. Fitch considers Caixa a public-mission bank and does not assign a Viability Rating (VR).

The Central Bank of Brazil identified Caixa as a domestic systemically important bank in 2015. Caixa is the third and second-largest bank in Brazil in terms of assets and deposits, respectively. It is Brazil's largest lender in the housing sector, and the largest holder of savings deposits (68% and 36% of market share, respectively, in March 2015). The bank's strategy is driven by government economic policies aimed at extending credit to the low-income groups. Caixa finances and manages government programs such as Programa Minha Casa Minha Vida and Bolsa Fam?lia. It also manages various public funds.

Caixa's loan book has grown significantly above the market average in recent years (36% on average between 2011 and 2014 versus about 15% of sector average in the same period). Growth was broadly even across loan books. In 2014 and the first quarter of 2015 (1Q15), annual growth was lower at 22% and 21%, respectively. It revised down its loan growth target for 2015 to 14.5%-18.5%, as a result of lower funding availability, particularly for mortgages, and weak macroeconomic environment. In Fitch's opinion, rapid loan growth of the past years, coupled with the challenging macroeconomic environment, may result in asset quality deterioration, as loans season and the borrowers' payment capacity deteriorates.

Caixa's asset quality indicators have started showing signs of weakness as of the second half of 2014. Fitch expects asset quality weakening to continue, as a result of the aforementioned reasons. At March 2015, impaired loans (loans classified in the D-H scale of the central bank) and non-performing loans (NPLs) over 90 days reached 8.67% and 2.86% of total loans, respectively, up from 7.20% and 2.30%, at end-2013. Likewise, loan loss reserve coverage fell to 52% and 158%, of impaired loans and NPLs, respectively. Unlike the large private retail banks, Caixa does not have additional loan loss reserve buffers. Current NPLs for mortgage loans are still low compared to similar but more mature portfolios in Latin America. Fitch believes Caixa's NPLs are likely to converge to regional medians in the medium term, even under a scenario of stable unemployment and household disposable income. Recent vintages with a higher loan to value ratios are likely to be more exposed to a potential decline in real estate prices.

Caixa's profitability has been lower than the sector average historically, reflecting the lower net interest margin and larger cost base, which stems partly from its public policy role. Furthermore, loan loss charges are likely to rise in the short term. At March 2015, these stood at 88% of pre-impairment operating income, reflecting that there is little room for absorbing large increases going forward. In the same period, Caixa's profitability ratios were slightly weaker than in 2014 and 2013, whereby its ROAA fell to 0.59% from 0.74% at end-2014 and 0.85% at end-2013.

In 1Q15, there was a system-wide net outflow from savings deposits. As Caixa is Brasil's largest takes of savings deposits, it also experienced an outflow, even though it maintained its market share. The decline was more than compensated by the increase of financial bills (letras de credito imobiliario, LCIs). As savings deposits and financial bills fund about 65% of mortgage loans, continued pressure on savings deposits would hinder mortgage loan growth and could lead the bank to revise its loan growth target downwards. Caixa has a structural maturity mismatch, given the long term nature of the mortgage portfolio and the short term saving deposits. This makes the bank reliant on the stability of saving deposits.

Caixa's capital base is sustained by the National Treasury and Tier 2 securities held by the Workers' Severity and Indemnity Fund (Fundo de Garantia do Tempo de Servico, FGTS). Historically, its capital ratios have been below the average of other retail banks, due to low internal capital generation, very rapid asset growth and high dividend pay-outs. The bank's capital adequacy ratios improved significantly following the central bank's approval to convert its legacy hybrid securities held by the National Treasury to Common Equity Tier 1 (CET1) capital in the second half of 2014. This led to a meaningful improvement in Caixa's FCC ratio, which stood at 10.31% at March 2015, up from 11.05% at December 2014, and 6.01% at December 2013. Fitch views Caixa's capitalization levels as adequate in the short term, considering expectations of slower growth. However, capitalization could become a constraint, should the bank decide to resume fast growth.

SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's SR of '2' reflects the high probability of support, should it be needed. Its SRF of 'BBB' is equivalent to Brazil's sovereign IDRs.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Caixa's subordinated debt is rated two notches below its long-term foreign currency IDR. The notching is driven by the expected high loss severity of the notes. No notching for non-performance is applied because coupons are not deferrable and the write-down trigger is close to the point of non-viability. As a result of this, Fitch believes the non-performance risk is not material from the rating perspective. Also, because Caixa is a fully government-owned domestic systemically important bank, it likely would receive owner (i.e. government) support before the loss absorption features of the notes are triggered. This also explains why the anchor rating for the notes' rating is Caixa's support-driven IDR, rather than Fitch's standard anchor rating VR for hybrid securities. Fitch does not assign any equity credit to these securities.

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The bank's IDRs, National and senior debt ratings are sensitive to a change in Brazil's sovereign ratings and/or to any changes in its willingness to support Caixa.

SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are potentially sensitive to any change in assumptions around the propensity or ability of the Brazilian sovereign to provide timely support to the bank. Fitch does not expect a change in these assumptions over the rating horizon.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Caixa's subordinated debt ratings are sensitive to the same considerations that might affect its IDRs, as they are notched down from the IDR

Fitch has affirmed Caixa's ratings as follows:

--Long-term foreign and local currency IDRs at 'BBB', Outlook Negative;
--Short-term foreign and local currency IDR 'F2';
--Long-term national rating at 'AAA(bra)', Outlook Stable;
--Short-term national rating at 'F1+(bra)';
--Support Rating at '2';
--Support Rating Floor at 'BBB';
--Senior unsecured USD notes due 2017, 2018, 2019 and 2022, long-term foreign currency rating at 'BBB';
--Subordinated notes due 2024 at 'BB+'.