OREANDA-NEWS. Fitch Ratings has affirmed at 'BB' the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Banco da Amazonia S. A. (BdA), Banco do Brasil S. A. (BdB), Banco do Nordeste do Brasil S. A. (BNB), Banco Nacional de Desenvolvimento Economico e Social (BNDES) and Caixa Economica Federal (Caixa). Fitch also affirmed all five banks' long-term National Ratings at 'AA+(bra)', Support Ratings (SRs) at '3' and Support Rating Floors (SRFs) at 'BB'. The Outlook of the long term IDRs and National Ratings remains Negative.

At the same time, Fitch downgraded BdB's Viability Rating (VR) to 'bb-' from at 'bb' based on Fitch's assessment that recent credit events in the corporate portfolio will impact asset quality and profitability to a greater extent than previously expected, in turn further exacerbating the bank's medium term challenges regarding capital adequacy. The other four banks do not have VRs, due to their policy roles and/or development bank status that prevents having an opinion on their truly standalone credit profiles. A full list of rating actions follows at the end of this release.

Brazilian federal government owned banks remain more vulnerable to continued operating environment weaknesses than private sector banks, which typically have higher profitability, internal capital generation and loss absorption capacity. Risk appetite at government owned banks also tends to be higher, as reflected by their faster growth rates in the past decade, higher loan concentrations, lower excess loan loss reserves above the minimum requirements and, in the case of retail banks, relatively larger exposures to higher risk segments such as unsecured retail loans and/or SMEs lending. Therefore, these banks' IDRs and national-scale ratings remain heavily linked to the sovereign's capacity and willingness to provide support, if needed.

KEY RATING DRIVERS - IDRS, NATIONAL RATINGS, SUPPORT RATINGS, SUPPORT RATING FLOORS

The affirmation of BdA, BdB, BNB, BNDES and Caixa's IDRs reflect Fitch's view that the banks would receive support from the federal government should the need arise. The IDRs of all five banks are driven by sovereign support and are aligned with Brazil's sovereign ratings. This reflects either majority (BdA, BdB and BNB) or whole (BNDES and Caixa) federal government ownership, the banks' key policy role in the implementation of government economic policies, and, in the case of BdB and Caixa, their systemic importance. The Outlook on these banks' Long-Term IDRs remains Negative, mirroring the Outlook on the sovereign ratings. Fitch believes these banks could be subject to political influence given their state owned nature and strong links with the government.

The affirmation of all five banks' SRs at '3' reflects the moderate probability of sovereign support. Fitch believes that the Brazilian government would have a high willingness to support these banks in case of need, but its capacity to do so has fallen in the past year, as reflected in the successive sovereign rating downgrades in 2015 and 2016. The SRFs of all banks were affirmed at 'BB' and are aligned with the sovereign rating.

The affirmation of BdB, BNDES and Caixa's senior debt ratings at 'BB' and Caixa's subordinate debt rating at 'B+' reflects the affirmation of the banks' long-term foreign currency IDRs, which are the anchor ratings for all the debt ratings.

The return on average assets (ROAA) of BdA, the regional development bank of the northern states, fell to negative 0.25% at March 2016 (1.74% on average between 2012 and 2015), as a result of an increase in impairment charges for the shared risk operations with the Constitutional Fund of the North (Fundo Constitucional do Norte). The bank's capitalization remains adequate, with a FCC ratio of 14.7% at March 2016 (14.5% in 2015). Under a stress scenario, where the bank needs to make a sizable contribution to its employees' pension fund, its capitalization would come under pressure.

The ROAA of BNB, the regional development bank of the north-eastern states, decreased to 0.75% at March 2016 (1.69% on average between 2012 and 2015) at the back of higher loan impairment charges. Meanwhile, the bank's FCC ratio fell sharply to 7% in March 2016 (6.6% and 8.7%, in 2015 and 2014, respectively), mainly due large dividend payouts, provisions related to its employees' pension fund obligations and negative mark-to-market adjustments in its securities portfolio. This ratio will improve when the bank converts its legacy hybrid debt held by the National Treasury to Basel-III compliant Core Equity Tier 1 (CET1) by the end of 2016. Once converted, Fitch will consider it as part of equity, in line with its approach for other federal government banks which have such instruments. This would take the bank's FCC ratio to roughly 10%, at March 2016, on a pro forma basis.

BNDES, Brazil's largest development bank, has been realigning its strategy with the government's fiscal tightening measures that will limit the funding it receives from the National Treasury (NT) going forward. According to a recent government plan, pending the conclusion of a legal study, BNDES might have to pre-pay BRL 100 billion of its debt to the NT (21% of all its debt to NT and 12% of total funding in 2015). This would be manageable for the bank, but may result in a significant reduction in the bank's lending and investment operations in the medium term. BNDES's ROAA fell to 0.68% in 2015 (1.1% on average between 2012 and 2014) and is likely to remain under pressure due to higher loan and securities impairment charges. The bank's FCC ratio remained adequate at 9.6% in 2015 (10.4% in 2014) and should remain broadly stable given the expected continued reduction in asset growth.

Caixa's asset quality, profitability and capitalization have deteriorated through March 2016. Fitch expects this trend to continue in the next 12-18 months, but under its base-case scenario, the bank's regulatory capital ratios will be in compliance with the minimum regulatory requirements in 2016 and 2017, barring a more severe stress scenario or tail risks. At March 2016, the bank's ROAA declined to 0.28% (0.79% on average between 2012 and 2015), mainly as a result of large loan impairment charges. In the same period, FCC ratio remained unchanged at 10%, but it is likely to decline gradually due to low profitability.

KEY RATING DRIVERS - BdB's VIABILITY RATING

The downgrade of BdB's VR to 'bb-' from 'bb' reflects the pressures building on the medium-term prospects for the bank's operating profitability and capitalization, and the recent negative events regarding asset quality. The latter, in turn, reflects the bank's higher risk appetite as evidenced in higher loan concentrations in corporate lending and lower excess loan loss reserves above the minimum regulatory requirements, compared to the larger buffers of its large private sector peers. The bank's franchise, liquidity and funding structure remain solid, and are among BdB's major strengths to maintain a VR in the 'bb' range, though at the lower end of this category.

Fitch expects downside risks to profitability and capitalization to continue in the next 12-18 months, as a result of high impairment charges that will consume a meaningful share of pre-impairment profits (63% and 83% at March 2016 and 2015, respectively) and undermine internal capital generation. At March 2016, the bank's ROAA fell to 0.8% (1.1% on average between 2012 and 2015).

Fitch expects BdB's capitalization to tighten further in the coming years in line with the gradual phase-in of the Basel III framework and the increase in minimum requirements, and prospects of low profitability. However, the bank's regulatory capital should remain in compliance with regulatory requirements in 2016 and 2017, barring a more severe stress scenario or tail risks. At March 2016, BdB's FCC ratio stood at 8.7% (7.8% in 2015). The increase in the FCC ratio in 1Q16 was a result of a decline in risk weighted assets (RWAs), but is unlikely to be sustained.

RATING SENSITIVITIES - IDRS, NATIONAL RATINGS, SUPPORT RATINGS, SUPPORT RATING FLOORS, DEBT RATINGS

Any changes in Brazil's sovereign ratings or in Fitch's evaluation of the government's willingness to provide support BdA, BdB, BNB, BNDES and Caixa, in case of need, would directly affect these banks' IDRs, National Ratings, SRs, SRFs and debt ratings, all of which are driven by expected sovereign support.

RATING SENSITIVITIES - VIABILITY RATING

BdB's VR would be negatively affected if its FCC ratio falls below 7% and/or its regulatory capital ratios approach the minimum requirements earlier than Fitch's forecast. It could also be downgraded if the operating profits to RWAs weakens to levels consistently below 1%.

Fitch has taken the following rating actions:

BdA:

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

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

--National long-term Rating affirmed at 'AA+(bra)', Outlook Negative;

--National Short-term Rating affirmed at 'F1+(bra)';

--Support Rating affirmed at '3';

--Support Rating Floor affirmed at 'BB'.

BdB:

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

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

--National long-term Rating affirmed at 'AA+(bra)', Outlook Negative;

--National Short-term Rating affirmed at 'F1+(bra)';

--Support Rating affirmed at '3';

--Support Rating Floor affirmed at 'BB';

--Senior unsecured notes due 2018, 2019, 2020 and 2022 ratings affirmed at 'BB';

--Viability Rating downgraded to 'bb-' from 'bb'.

BNB:

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

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

--National long-term Rating affirmed at 'AA+(bra)', Outlook Negative;

--National Short-term Rating affirmed at 'F1+(bra)';

--Support Rating affirmed at '3';

--Support Rating Floor affirmed at 'BB'.

BNDES:

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

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

--National long-term Rating affirmed at 'AA+(bra)', Outlook Negative;

--National Short-term Rating affirmed at 'F1+(bra)';

--Support Rating affirmed at '3';

--Support Rating Floor affirmed at 'BB';

--Senior unsecured notes due 2016, 2019 and 2023 affirmed at 'BB'.

Caixa:

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

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

--National long-term Rating affirmed at 'AA+(bra)', Outlook Negative;

--National Short-term Rating affirmed at 'F1+(bra)';

--Support Rating affirmed at '3';

--Support Rating Floor affirmed at 'BB';

--Senior unsecured notes due 2017, 2018, 2019 and 2022 affirmed at 'BB';

--Subordinated notes due 2024 affirmed at 'B+'.