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Fitch Affirms BRDE's IDRs at 'BB'; Outlook Negative.

Rio de Janeiro: Fitch Ratings has affirmed Banco Regional de Desenvolvimento do Extremo Sul's (BRDE) Long-Term Foreign and Local Currency Issuer Default Rating (IDRs) at 'BB' and the National Long-Term Rating at 'AA-(bra)'. The Rating Outlook for the IDRs is Negative and for the Long-Term National Rating is Stable. The bank's remaining ratings have also been affirmed.

The full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

IDRs, NATIONAL RATINGS AND SUPPORT RATING

BRDE's IDRs and national ratings reflect the support of its controllers, the states of Parana, Santa Catarina and Rio Grande do Sul, and are matched to those of the first two, which account for two-thirds of its capital and a slightly larger share of its credits.

The bank is relatively small, which, considering the financial flexibility of its controllers, reduces the cost and increases the probability of support. BRDE's ratings also reflect its importance and strategic role as a development bank in the South of Brazil. The institution is highly integrated and operates in line with the economic policies of its controllers.

BRDE's Support Rating (SR) of '3' reflects the moderate probability of support of the controllers, especially Parana and Santa Catarina. The agency believes that the likelihood of BRDE receiving shareholder support is not limited by the currently weak financial profile of Rio Grande do Sul. The other two controlling states have recently made capital injections to the institution. In addition, since BRDE does not distribute dividends and obligatorily reinvests all its profits, a capital withdrawal is very unlikely, according to Fitch. The agency does not assign Viability Ratings (VRs) to development banks such as BRDE.

Fitch has public ratings for Parana (BB/Negative, AA+(bra) and Santa Catarina (BB/Negative; AA-(bra)/Stable). The analysis of Rio Grande do Sul is done internally. The credit situation of the three states strongly influences BRDE's ratings.

BRDE's financial profile has no direct rating implications, but it has remained broadly stable since Fitch's last annual review. The bank mainly operates in the financing of private companies and cooperatives and operates, to a lesser extent, with municipalities, always with a development bias. BRDE has a stable business model and focuses its operations on its controlling and bordering states. It is one of the main onlenders of the Banco Nacional de Desenvolvimento e Social (BNDES, IDRs BB/Negative and National Rating AA+ (bra)/ Stable) in the southern region. BRDE also operates with funds from the Finep - Inovacao e Pesquisa (Finep, IDRs BB/Negative and National Rating AA+ (bra)/Stable), Fundo Constitucional de Financiamento do Centro-Oeste (FCO) and Caixa Economica Federal (Caixa, IDRs BB/Negative and National Rating AA+ (bra)/ Stable).

In order to diversify its funding lines, BRDE has international projects with multilateral lending institutions. There are also prospect fronts with the Ministries of Tourism, Cities and Environment, to create lines of transfer or financial management of specific funds (such as the Brazilian Audiovisual Sector Fund, already operated by BRDE). The bank also seeks operations for the Federal Government's Avancar Cidades program, which uses resources from the Fundo de Garantia e de Tempo de Servico (FGTS).

Fitch believes that, like other public banks, BRDE strategies and targets can be influenced by the policy orientations of its controllers. On the other hand, strategic decisions must be unanimously approved by the three states, which reduces the possibility of conflicts between controllers.

In 2016 and throughout 2017, BRDE's asset quality indicators showed small deteriorations when compared to the track record but are still at an adequate level and are better than those of its peers with the same performance profile. In September 2017, loans in 'D-H' corresponded to 4.2% of the total, and to 5.2% in 2016, against 3.5% in 2015. Overdue credits over 90 days also increased. In November 2017, the indicator was 3.3%, compared to 2.8% in 2016 and 1.8% in 2015. The percentage of credits written off to losses is low, benefiting from high recovery revenues.

Operating results have fallen in recent years but are still adequate and in line with its peers. In the first half of 2017, the return on risk-weighted assets was 1.4% (1.6% in 2016 and 2.4% in 2015), partly due to higher provisions expenses. The capitalization ratios are acceptable: as of June 30, 2017, its Tangible Assets / Tangible Assets index reached 14.7%. With regard to liquidity, BRDE does not have major pressures and short-term obligations. Its liquidity has historically been high and is allocated in an exclusive fund in Banco do Brasil DTVM.

RATING SENSITIVITIES

IDRs, NATIONAL RATINGS AND SUPPORT RATING

As BRDE's ratings are driven by support, they can be downgraded if one or more of its shareholders are also downgraded and / or if Fitch observes changes in bank control and dividend distribution policies. There may also be a downgrade if there are changes in the ability or propensity of the controlling states (especially Parana and Santa Catarina) to support BRDE. The potential for increases is limited and would only materialize in case of positive rating actions regarding its controllers.

FULL LIST OF RATING ACTIONS:

Fitch affirmed the following ratings:

Banco Regional de Desenvolvimento do Extremo Sul:

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

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

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

--National short-term rating at 'F1+(bra)';

--Support Rating at '3'.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:3BRAZ
Date:Apr 26, 2018
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