OREANDA-NEWS. Fitch Ratings has today affirmed the ratings of Omni S.A. Credito Financiamento e Investimento at 'B'. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

IDRs AND NATIONAL RATINGS

Fitch's affirmation of Omni's IDR and National Long-Term rating is driven by the company's stable funding structure, its satisfactory level of capitalization, adequate liquidity and its consistent performance within the challenging operating environment of the past three and a half years. The ratings also consider Omni's expertise in its main business niche - financing autos (cars, trucks and utility vehicles, mostly pre-owned, over 10 years old, as well as new and used motorcycles) for the lower purchasing-power classes ('C' and 'D'), a segment that is less targeted by the competition, due in part, to Omni's strategic choice of business locations. The ratings also consider Omni's business model, which is supported by solid management information systems and risk controls. Such controls are required in the used-vehicle financing niche where significant levels of impairments are expected and must be adequately managed to ensure a satisfactory level of profitability.

The ratings also consider Omni's small size compared with its peers, its higher leverage, business market, greater susceptibility to fluctuations in the economy that could impact its borrowers. While the company's business model and niche enables high revenue, the resulting concentrations, and higher level of impaired loans result in a muted net income that would be typical of institutions with these characteristics.

Omni reported a small loss for the first half of 2015 which was primarily the result of lower revenue generation combined with higher funding expenses as the company conservatively built up its cash position in view of the challenging operating environment and in anticipation of a potential asset purchase.

The lower revenue generation was partly the result of management's strategy of limiting the transfer of higher funding costs to its clients out of concern of losing some of those clients or triggering impairments. The purchase of Banco Pecunia's automobile financing portfolio took place mainly in August 2015 is now expected to produce an additional revenue stream on top of that generated by the existing portfolio. Omni expects to report of a net income of approximately BRL 10 million by year end 2015.

Loan growth during the first half of 2015 was restricted to low single digits due to the challenging operating environment. With the absorption of the newly-purchased loan portfolio assets from Banco Pecunia and other third parties, Omni's credit portfolio will increase by approximately 35%. Fitch expects that asset quality of the combined portfolio will be stronger given its seasoned nature and the strength of the less-depreciated collateral behind the purchased portfolio.

Given the nature of consumer credit to the lower-income classes, Omni's delinquency ratios are usually higher than those reported in traditional financing activities. However, these higher levels of impairment continue to be managed satisfactorily and are within the expectations and pricing parameters that Omni has for its business model. Management's expertise in pricing is crucial for the successful financing of very used vehicles as the residual value of the underlying asset is very limited. Omni's asset quality metrics are frequently monitored. The high costs of the credit impairments are usually offset by the charging of higher interest rates. Credit risks are also mitigated by the small size of the individual transactions and large number of borrowers.

During the past few semesters, Omni's continued to diversify its sources of funding. The highlights were the completion of three securitizations of assets for receivables-backed investment funds (FIDCs), and a significant 163% Y-O-Y increase in the placement of its certificate of deposits (CD's) known as 'Letras de Cambio' which lowered the company's dependence on more expensive sources of funding. Omni also has close to BRL200 million of funding from its principal shareholder in the form of time deposits, notes and hybrid capital. Over the last year Omni has replaced much of its guaranteed deposit funding product (DPGE1) with lower-cost Letras de Cambio), where the finance company has special operating agreements with brokerages and distributors for the placement of these instruments. These, and Omni's other debt instruments are currently in high demand by individuals, especially up to the limit of BRL250,000 that is guaranteed by the deposit insurance fund, Fundo Garantidor de Credito.

The increase in the company's loan portfolio via the purchase of third-party assets has impacted the company's liquidity and profitability ratios. Fitch expects that over the next few quarters, these ratios will return to more comfortable levels.

The company's asset quality ratios should remain at satisfactory levels as the quality of the purchased portfolio is good and is expected to offset some deterioration resulting from the difficult operating environment. The company's diversified funding strategy is expected to enable Omni to continue working with a comfortable liquidity level during the remainder of 2015 and early 2016. Even though Omni faces a low level of competition, management plans on restricting any organic 2015 growth to between 6% - 8% (to keep up with the inflation rate). This strategy will enable the company to remain selective with its underwriting, as the majority shareholder wishes to prioritize asset quality and liquidity over profitability.

Fitch's calculation of core capital-to-total weighted risk assets (FCC) decreased to 11.8% at 1H2015 from 13.6% in 2014, mostly due to the losses reported in the first half of 2015. This ratio will also decrease with the incorporation of the recently-purchased assets, however, this reduction is expected to be temporary as the new portfolio matures. Fitch expects Omni's FCC to then return to historical levels. Hybrid capital and debt instruments, considered Tier II in the regulatory capital calculations, were not included in Fitch's calculation, although Fitch recognizes the benefits of this additional long-term source of funding.

The company comfortably met the Central Bank regulatory minimum total capital requirement solely by means of its Tier I regulatory capital ratio of 16.4% at the end of June 2015. The year-end ratio is expected to be lower given the increase in risk-weighted assets but is expected to increase in the coming quarters as the portfolio matures.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND SENIOR DEBT

Omni's ratings could benefit from stronger growth in its operational income ratios, continued funding diversification, and a sustained improvement in its asset quality ratios. Charge offs were higher in 2014 with the inclusion of securitizations of non-performing loans which rose to 11.2% at December 2015 from 6.6% a year earlier. Charge offs at June 2015 were lower at 5.6%. Specifically, Omni's ratings may be upgraded if the company manages to increase its operational ROAA to around 2% within the economic cycle while preserving comfortable FCC capitalization levels above 12%; and maintains adequate asset and liability management and loan loss reserves aligned with its asset quality trends.

However, negative pressures on the rating may come from: a decrease in operating earnings and operational ROAA falling below 1.0% combined with a Fitch core capital ratio below 9%; a relevant increase in the level of encumbered assets; and/or a significant deterioration of its asset quality ratios.

The rating actions are as follows:

Fitch affirms the following:

Omni S.A.
--Long-term foreign and local currency IDRs at 'B'; Outlook Stable;
--Short-term foreign and local currency IDRs at 'B';
--National Long-term rating at 'BBB(bra)'; Outlook Stable;
--National short-term rating at 'F3(bra)';
--Support rating at '5';
--Support rating floor at 'NF' (No Floor).