OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Banco ABC Brasil S. A. (ABCBr) at 'BB+'/Outlook Negative. Fitch also affirmed the bank's other ratings. A complete list of rating actions is included at the end of this release.

KEY RATING DRIVERS

ABCBr's IDRs are above its Viability Rating (VR), which reflects the expected institutional support that Fitch believes it would receive from its parent, Arab Baking Corporation B. S.C. (Long-Term IDR 'BBB-'/Stable Outlook. ABCBr's VR of 'bb" continues to be based on the bank's low risk profile, consistent profitability, stronger capitalization and sound risk and liquidity management. The bank's profitability during 2015 and the first three months of 2016 remained satisfactory, despite the weak operating environment and the bank's lower appetite for growing its loan portfolio. The bank's results were aided in part by ABCBr's relatively low funding costs, strategic focus and the reduced appetite of some of its other competitors. The bank has continued its efforts to further diversify its funding profile, leading to stronger asset and liability management as it continues to expand its corporate and middle-market operations. As a result, the bank's credit portfolios continue to be conservatively matched to its funding, providing for comfortable levels of liquidity. ABCBr's ratings also reflect the well-positioned franchise and its overall sound financial profile as a wholesale-funded bank.

The bank operates under a well-defined strategy of providing credit and other banking services mainly to the corporate segment (annual revenues over BRL500 million) and also mid-sized companies (annual revenues above BRL 50 million). ABCBr's rating remains constrained by its parent's rating and ABCBR's own company profile, as its franchise does not compare as well to the large and dominant banks in Brazil in terms of size and diversification. This results in, among other things, a lower level of low-cost, diversified deposit funding. However, with the lower level of loan portfolio growth partially offset by a higher level of guarantees, the bank is currently in a very strong liquidity position which allows for lower funding costs.

The bank has performed consistently despite the very weak operating environment of the last three years. During the last 15 months ending March 31, 2016, the bank continued its focus on the business segments that it knows well. However, management sharply restricted its on-balance-sheet loan portfolio growth, especially reducing the amount of credit to its mid-sized company segment, while at the same time, increasing the amount of credit offered through guarantees - mostly for the corporate segment. Thus the bank was able to maintain a satisfactory level of revenues while lowering its level of risk. As of March 31, 2016, ROAE and ROAA were 14.26% and 1.54%, respectively, slightly lower than the 15.78% and 1.58% reported at Dec. 31, 2015.

The bank also continues to benefit from reduced levels of competition while maintaining its conservative underwriting, which is reflected in its low level of non-performing loans (NPLs). As of Dec. 31, 2015, ABCBr reported a low level of NPLs over 90 days (E-H) of 1% even though its impaired loan ratio (D-H) saw a rise to 4.5% from 3.5% a year earlier. The banking system average of impaired loans-to-total loans was approximately 6.8%. ABCBr's smaller ratio is a reflection of the focus on lower-risk companies and its conservative underwriting. The bank's loan loss reserve coverage ratio on E-H loans remained strong at 2.9%. The already conservative coverage ratio was enhanced in 2015 as the bank was able to activate tax credits as a result of adjustments to the employee pension (CSLL), and to offset this non-recurring income the bank increased the level of provisions. During the first quarter of 2016 (1Q16), the impaired loans ratio continued to be impacted by the weak economy and the bank's conservative credit classification; as a result, loans classified 'D-H' rose to 5.6%. However, the over 90-day NPL ratio rose only to 1.2% and coverage remained strong at 3.4%. While Fitch expects to see some weakening of the bank's asset quality in 2016, it will be due mostly to the continued weak environment. This expected deterioration should be easily absorbed by the comfortable level of ABCBr's loan loss reserves.

The bank continues to focus on ensuring a stable liquidity position through conservative asset liability management policies to mitigate gaps through hedging and funding diversification. Strategies include the sourcing of longer-term funding which includes the use of longer-term instruments such as Letras Financeiras, which saw significant growth in recent years. ABCBr continues to maintain satisfactory capital ratios. At Dec. 31, 2015, the Fitch core ratio (FCC) had improved significantly to nearly 12.6% (10.8% a year earlier). At March 31, 2016, the FCC ratio improved further to 13.7%. The bank already well-exceeds the Central Bank regulatory minimum total capital requirement just by means of its Tier I regulatory capital ratio of 13.6%. Fitch does not expect that ABCbr will have any difficulty adjusting to the upcoming implementation of Basel III according to the Brazilian Central Bank's timetable. ABCBr had a total Regulatory Capital ratio of 17.2% at the end of 1Q16.

ABCBr has a Support rating of at '3' in view of the expected support from its parent, Arab Banking Corporation, which is based in Bahrain. Given the subsidiary's relevant contribution to the parent's revenues and the brand, Fitch believes that in the unlikely event it is needed, the Brazilian subsidiary would likely receive support from its majority shareholder.

RATING SENSITIVITIES

Positive Rating Action: ABCbr's IDRs are driven by support and are currently one notch above the Sovereign rating of 'BB' and one notch below the Viability Rating of its majority parent. ABCbr's VR and its National Ratings are constrained by Brazil's operating environment. Brazil's sovereign rating was downgraded on May 5, 2016 to 'BB'/Negative Outlook, and is now the same as ABCbr's VR ratings. ABCbr's funding profile and narrow business niche is likely to be affected by the continued weak operating environment; as a result an upgrade of ABCBr's VR is limited in the medium term.

Negative Rating Action: Although unlikely in Fitch's view, a significant deterioration of ABCBr's asset quality that results in credit costs that severely limit its profitability and ability to grow its capital, combined with a reduction in its liquidity or capitalization position could lead towars a downgrade of the bank's ratings. An unlikely decline in the FCC-to-risk-weighted assets ratio below 9%, along with a reduction in operating income-to-average asset ratio below 1.5% could result in a ratings review. ABCbr's ratings could also be impacted by a further deterioration in the Sovereign rating, as the bank is closely linked with Brazil's operating environment.

Fitch has affirmed the following ratings:

Banco ABC Brasil:

-- Long-Term Foreign and Local Currency IDRs at 'BB+', Outlook Negative;

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

-- Viability rating at 'bb';

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

-- Short-Term National rating at 'F1+(bra)';

-- Support rating at '3'.