OREANDA-NEWS. Fitch Ratings has affirmed the following ratings of Banco Alfa de Investimento S. A. (Alfa):

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

--Short-Term National Rating at 'F1+(bra)'.

KEY RATING DRIVERS

Alfa's ratings reflect its conservative lending strategy and risk management, along with its good asset quality, high liquidity, comfortable capital ratios and track record of adequate performance. On the other hand, the ratings also factor in its wholesale funding, which is adequate for its business profile, and lower diversification of its activities in comparison with the largest local banks.

Although below peer average, Alfa's profitability is adequate. The bank has low funding costs, reduced risk exposure and low leverage. Profitability has decreased since 2013 (6% average ROE and 0.9% ROA), as compared to the four previous years (9.3% and 1.4%). Since 2013 the bank's results have been negatively impacted by the decrease in or low growth of its credit portfolio and, until 2014, by the lower financial margins of the operations, due to the strong competition from public banks.

The increased net financial revenue in 2015, resulting from higher financial margins in the period, was absorbed by the increase of credit provisioning expenses. However, a large part of such provisioning increase (BRL38 million in 2015) refers to provision in excess of local rules, which amounted to BRL68 million as of December 2015 and March 2016. Fitch considers this a conservative procedure, in accordance with Alfa's risk culture, which in our view is always guided by prudence in lending.

Despite the increase in loans classified as rated 'D-H' (2.3% as of March 2016, as compared to 1.9% as of December 2015 and 0.7% in 2014), Alfa's credit quality remains better than its peers. Coverage of loans classified as rated 'D-H' was at a high 109%. Non-performing loans (credits past due over 90 days) accounted for only 1.0% of the portfolio as of March 2016 (0.8% as of December 2015 and 0.5% in 2014). The value of the credit portfolio has decreased slightly since 2013, except in 2014, when it remained stable. Retail operations, basically vehicle financing and payroll deductible loans, accounted for 46% of the portfolio in March 2016 (52% in 2014), benefiting from the focus on high-income clients, with lower risk profiles. Wholesale operations (54% in March 2016 and 48% in 2014), focused toward large companies, also continued showing adequate risk, even with increased borrower concentration.

Alfa has been successful in lengthening the average term of its funding base, and captured a large volume of funding at attractive costs from local banks, through financial bills (LFs), since 2012, benefitting from the changes to compulsory deposit rules. This has also favored management of mismatches between assets and liabilities and liquidity, and minimized the high concentration by investor. The 20 largest investors accounted for 54% of the total funding, which is usual in wholesale banks.

Alfa capital indicators are comfortable (Fitch's core capital of 24.3% in March 2016) and have historically been higher than peer average. The bank has no subordinated debt and its intangibles are irrelevant. In Fitch's opinion, this ensures the bank a strong loss absorption capacity and cushion with which to continue expanding its operations.

RATING SENSITIVITIES

Positive Rating Action: Consistent improvements in funding diversification and a more robust performance (operating profit / average total assets above 1.5%) could positively affect the ratings.

Negative Rating Action: Alfa's ratings could be negatively affected in case of a scenario of substantial weakening of its asset quality and performance, which we believe is unlikely. A decline in Fitch's core capital/risk weighted assets ratio to less than 13%, along with deterioration in the operating profit / average total assets to less than 1.0% could lead to a negative rating action.

Originating in 1925, Alfa and the group's financial company have been listed on the BM&F Bovespa since 1977. The bank is controlled by Aloysio Faria, who holds 81.52% of its voting capital and 63.3% of the total capital, and it is part of an integrated finance group, whose institutions operate with a focus on offering financing to large companies, vehicle loans, payroll discount loans, private banking, investment bank activities and asset management. Management of the conglomerate's activities is centralized and all share the same control systems and auditing. The investment bank remains the leading institution of the Alfa Financial Conglomerate and accounts for most of the assets and equity.