OREANDA-NEWS. Moody's Investors Service today downgraded the ratings of Banco Indusval S.A. (BI&P), including its standalone bank financial strength rating (BFSR) to E+ from D-; the E+ BSFR is now equivalent to a lower b1 baseline credit assessment. Moody's also downgraded the bank's long-term global local and foreign currency deposit ratings to B1 from Ba3, as well as the long and short-term Brazilian national scale deposit rating, to Baa2.br and BR-3 from A2.br and BR-2, respectively. The short-term global ratings remained unchanged at Not Prime. At the same time, Moody's changed the outlook on all ratings to stable from negative.

The following ratings assigned for Banco Indusval S.A. were downgraded, with the outlook changed to stable from negative:

Bank financial strength rating to E+, from D-

Long term global local currency deposit rating to B1, from Ba3

Long term global foreign currency deposit rating to B1, from Ba3

Long term national scale local currency deposit rating to Baa2.br, from A2.br

Short term national scale local currency deposit rating to BR-3, from BR-2

The following ratings remained unchanged:

Short term global local currency deposit rating Not Prime

Short term global foreign currency deposit rating of Not Prime

RATINGS RATIONALE

The downgrade of BI&P's deposit ratings to B1, from Ba3 incorporates Moody's view that the weak economic environment will make it harder for the bank to generate healthy assets and gain scale over the medium-term to ensure that its profitability moves solidly beyond breakeven.

For the past six consecutive quarters BI&P has reported losses or only slightly positive results, which have weakened its ability to replenish capital through earnings. BI&P's efforts to clean up legacy non performing loans led to sizable provisions, while repositioning its franchise towards the more selective SME lending and agribusiness segments resulted in challenging margin conditions. Moreover, while the bank has been able to manage operating costs related to active pursuit of partnerships and acquisitions to diversify its operations over the past years, these businesses are still to reach breakeven. At the same time, the performance of these new platforms are taking more time than expected, in an environment of intense competition and a decelerating economy that is delaying growth plans.

Moody's views the bank's capital replenishment capacity as weak, after years of rapid capital consumption because of both poor bottom line results and robust loan growth. The loan growth was primarily in the agricultural segment, where the bank currently concentrates 21% of its credit exposure. Asset quality indicators have been below the system average and reserve coverage is adequate; nevertheless, concentration in agribusiness and related industries raises the risk of asset quality and capital volatility in the context of weak profitability. The bank's capitalization was 13.3% in 2Q14, from 14.6% the year before, a thin loss-absorption buffer compared to those of other banks in Brazil that are similar in size.

The stable outlook incorporates Moody's expectations that the new business strategy and complementary platforms will bear results, including the contribution from stable fee earnings, which have contributed positively to earnings diversification in the past quarter. Moody's also acknowledges the bank's efforts to diversify funding sources as BI&P attracts more granular retail depositors that benefit its overall funding cost.

Funding and liquidity remain negative rating drivers for BI&P, as well as for other midsized banks in Brazil, because of the volatility inherent in wholesale market deposits, said Moody's. Further downward rating pressure could also arise from persistently weak profitability or from an erosion of asset quality, as a consequence of risk concentration or excessive risk taking under adverse economic conditions. This would hurt the bank's capital position, reducing the bank's loss absorption capacity and limiting its business growth potential.

The B1 global local currency deposit rating derives from BI&P's standalone baseline credit assessment of b1, and does not benefit from systemic support uplift because of the bank's modest market share in local banking system deposits. The global local currency deposit rating of B1 has historically been associated with default frequencies of 10.9% and 19.0% over 3- and 5-year investment horizons, respectively, said Moody's.