OREANDA-NEWS. August 20, 2012. Standard & Poor's Ratings Services affirmed its 'BB/B' global scale and 'brA+/brA-1' national scale counterparty credit ratings on Banco Indusval & Partners S.A. The stand-alone credit profile (SACP) remains at 'bb'. The outlook on all ratings is stable.

Rationale

The ratings on Indusval & Partners reflect its "strong" risk-adjusted capitalization with improving profitability and "adequate" quality of capital. In addition, the bank's experienced management team with long-track record in the middle market and a focus on improving diversification and asset quality are supportive factors for the ratings. The negative credit factors are the bank's "weak" business position, due to lower diversification by lines of business compared with its peers, and a "moderate" risk position, stemming from the bank's high concentrations of clients and its credit loss experience in recent years. The bank's "below average" funding profile also limits the ratings.

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in Brazil is 'bbb'. Our economic risk assessment reflects our opinion that economic improvements and cautious fiscal and monetary policies have added to the Brazilian economic authorities' flexibility to manage significant external shocks and potential distortions arising from the current economic expansion in Brazil. We believe these potential risks remain manageable, and the central bank's proactive stance has contained them. With regard to industry risk, sound regulation, regulators'

good track record, and a high and stable share of core deposits support the Brazilian banking industry. We consider the banking sector's moderate risk appetite as a positive factor in our assessment.

Indusval & Partners' "weak" business position reflects its very small participation within the Brazilian banking system and its highly concentrated business profile. As of March 2012, the bank's market share, by total assets, was 0.1%. Despite an expected strong growth rate for the next 12-18 months, we don't expect significant changes in its market position. Indusval & Partners' business portfolio is highly oriented towards the small to midsize enterprise (SME) segment. However, since 2011, the management has been improving diversification of business lines and products and strengthening asset quality by penetrating larger SMEs and corporates, resulting in a strong loan portfolio growth. The corporate loan segment now represents 35% of total loans, up from 14% in the first quarter of 2011. We expect the bank's lending to the SME segment to make up the majority of total loans due to its expertise and long track record.

As part of the new strategy, Indusval & Partners is increasing its base of products which would diversify its revenues and increase its noninterest income. Nevertheless, the bank still lags its national peers, whose different business lines and geographic diversification support stronger business positions. Due to intense competition, we believe Indusval & Partners will struggle to maintain a continuing business volume and generate sound profitability and healthy asset quality metrics. In addition, we believe that the bank would be more reliant on pricing to maintain and attract new strategic customers compared with its peers that have larger shares and longer track record in these business segments.

We assess Indusval & Partners' capital and earnings as "strong." Following a capital injection of BRL 201 million in 2011, which counted as Tier 1 capital, the bank attracted new partners. The U.S.-based private equity fund Warburg Pincus provided 75% of this capital, the controlling shareholders of Sertrading 15%, and the bank's controlling shareholders the remainder. As a result, the bank's regulatory capitalization rose to 23.7% in the first quarter 2011 of from 17.6% at the end of 2010. As of March 2012, the regulatory capitalization was 18.1%, reflecting the strong loan growth for the past 12 months.

As of December 2011, Indusval & Partners' risk-adjusted capital ratio (RAC) was 11.8%. Even though we believe this ratio would decrease in the next 12-18 months due to an expected strong loan growth, we expect it to remain strong, at slightly above 10% in average, during this time frame. The lower RAC ratio reflects our expectations that the bank's additional capital requirements will grow at a faster pace than its capital through retained earnings, reflecting the aggressive future growth. However, if Indusval & Partners maintains an aggressive dividend payout policy, capital levels could weaken faster than expected. That would result in a revision of our assessment of the bank's capitalization to "adequate" from "strong," which could affect the rating.

In our view, Indusval & Partners' risk position is "moderate." The bank has a high concentration of clients: at the end of 2011, the top 20 clients represented 26% of total loans. In addition, the bank's credit loss experience has been below average in recent years. This is because during 2011 Indusval & Partners decided to reclassify its loan portfolio in order to be covered for any event of delinquency of operations before the entrance of new shareholders. In addition, the economic slowdown in Brazil is pressuring the bank's asset quality, which affects the banking system in general. Following the 7.5% GDP growth of 2010, the Brazilian economy is growing at slower rates--2.8% in 2011 and we expect it to rise 2.0% in 2012. Importantly, during the global financial crisis of 2008-2009, Indusval & Partners' asset quality metrics deteriorated due to the challenging environment for SMEs during that period.

By the end of 2011, Indusval & Partners' nonperforming loans (NPAs) decreased to 4.1% from 5.8% for June 2011, and were 2.8% at the end of March 2012 due to higher-than-historic charge-off levels. In addition, during the second half of 2011, Indusval & Partners started exiting businesses that did not comply with its new underwriting standards. This and greater lending to larger SMEs and corporates, which would represent lower credit risk, will improve the bank's credit loss experience. The bank's new standards for underwriting loans to SMEs incorporate standards that the bank uses for assessing credit risk for corporates, which are more stringent.

Indusval & Partners' funding is "below average" and its liquidity is "adequate." As of March 2012, the bank's total deposits represent 61% of its funding base; the remaining funding sources are foreign borrowings (15%), agribusiness and financial letters of credit (11%), government loans through Brazilian development banks (9%), and interbank loans (4%). Even though the bank's deposit base is comprised of time deposits, we believe that the small portion of retail deposits (13% of total deposits) is a weakness in terms of diversification and stability. The bank's top 10 depositors represent 17% of total deposits, reflecting a high deposit concentration. In our view, Indusval & Partners' funding base would be less stable under stressed market conditions, as it happened during the global financial crisis of 2008-09. The bank's liquidity remains adequate--as of July 2012, its liquid assets covered 39% of deposits. In addition, the short tenor of the bank's loans could provide liquidity in case of financial stress.

Indusval & Partners will struggle to diversify its funding sources, and will focus on increasing its retail deposits which are at cheaper funding rates and are more stable. This is so due to the bank's focus on penetrating larger SMEs and corporates, which will pressure its net interest margin.

Outlook

The stable outlook on Indusval & Partners reflects our expectation that the bank will maintain its RAC ratio slightly above 10%. We are assuming a loan growth rate of 20% in 2012 and 15% in 2013, higher profitability--reflected in

core earnings to average adjusted assets of 0.5%-1.0% for 2012 and 2013--and a dividend payout ratio of about 25%, which will strengthen its capital. We also

expect that the bank's new strategy would relieve pressure on profitability

through lower credit loss provisions.

An upgrade could result from significant improvements in Indusval & Partners' business position, such as greater revenues diversification and a rising share of the market. Significant improvements to the bank's funding base

diversification could also result in an upgrade.

If Indusval & Partners' risk-adjusted capitalization deteriorates due to a higher-than-expected loan growth for 2012 and 2013, weak profitability, or an aggressive dividend payout policy, resulting in a RAC ratio of less than 10.0%, a downgrade is possible. In addition, liquidity pressures could also result in a downgrade.