OREANDA-NEWS. Fitch Ratings has today downgraded the long-term Issuer Default Ratings (IDRs) of three state-owned regional banks (Banestes S.A. - Banco do Estado do Espirito Santo [Banestes], Banco de Brasilia S.A. [BRB] and Banco do Estado do Rio Grande do Sul S.A.'s [Banrisul]) and two regional development agencies (Agencia de Fomento do Estado do Rio de Janeiro S.A. - AGERIO [Agerio] and Agencia de Fomento do Estado de Sao Paulo - Desenvolve SP [Desenvolve SP]). The Rating Outlook for all the long-term IDRs remains Negative. At the same time, Fitch has downgraded Banrisul's Viability Rating (VR) and affirmed Banestes and BRB's VRs. Fitch does not assign VRs to development agencies.

These rating actions follow the downgrade of Brazil's sovereign rating ('BBB-', Negative Outlook, for additional information see 'Fitch Downgrades Brazil to 'BBB-'; Outlook Negative', dated Oct. 15 2015, at 'www.fitchratings.com') and the subsequent revision of the ratings or the creditworthiness of the Brazilian states that control these issuers (see 'Fitch Downgrades Brazilian States of Sao Paulo, Maranhao and Rio de Janeiro; Outlook Negative', dated Oct. 23 21015, at 'www.fitchratings.com').

A full list of rating actions is at the end of this press release.

KEY RATING DRIVERS - IDRs, VRs, DEBT RATINGS, SRs and SRFs
Banestes, BRB, Agerio and Desenvolve SP's IDRs reflect the institutional support from their controlling shareholders. In Fitch's opinion, all of these issuers are strategically important for the states that control them. Banestes and BRB carry out transfers to municipalities, and are responsible for the cash management of the state, they also act as tax-collecting agents for their states and have reasonable regional retail franchises. The development agencies, Agerio and Desenvolve SP, act as their controlling states' development arms and implement their economic development policies.

Banestes and BRB's IDRs were downgraded to 'BB-' and 'BB' from 'BB' and 'BB+', respectively, and their Outlook remains Negative. These rating actions reflect Fitch's expectation of weaker financial strength of Banestes and BRB's controlling states - Espirito Santo (EES) and the Government of the Federal District (GDF) - over the next 12-24 month period. This expectation follows the recent downgrade of Brazil's sovereign ratings. In Fitch's opinion, the probability of the respective controlling shareholders providing support to these banks, if necessary, is moderate, which results in a Support Rating (SR) of '3'.

Banestes' VR was affirmed at 'bb-' and it reflects the bank's regional importance, with adequate liquidity, capitalization and stable deposit source. Banestes relies on low-cost retail funding, provided by its branch network, mainly in EES. It has cautiously pursued higher diversification, issuing Financial Bills (Letras Financeiras) in the local market and increasing its funding in real estate credit bills (LCIs).

BRB's VR was affirmed at 'bb-' and it reflects its regional importance and the recent progress in its franchise, with above average profitability, adequate liquidity and a stable deposit source. BRB benefits from a relatively cheap retail funding base. The VR also reflects fierce competition among the major Brazilian banks, which obliges BRB to heavily invest in technology.

Banrisul's IDRs are driven by its VR and are also influenced by Fitch's internal assessment of Estado do Rio Grande Sul's (ERS) creditworthiness. Banrisul's VR was downgraded to 'bb' from 'bb+', reflecting the deteriorated operating environment in Brazil. This resulted in the downgrade of its LT IDRs to 'BB' from 'BB+' and also in a one notch downgrade of the bank's subordinated debt to 'B+' from 'BB-', as it is notched down twice from the bank's VR (once for loss severity and once for non-performance). The downgrade of Banrisul's VR reflects Fitch's expectation of deterioration in asset quality and capitalization ratios, as a result of the weakening of ERS' financial profile. A potential deterioration in the bank's asset quality would demand higher loan loss charges, which would negatively affect Banrisul's profitability and its internal capital generation. As other government-owned institutions in Brazil, Fitch contemplates the political influence on Banrisul's ratings.

Banrisul has a significant franchise in ERS, with 17% market share in credit and 40% in deposits. Around 15% of the bank's loan portfolio is related to ERS' employees. In addition, Banrisul has a strong performance in regional corporate credits within the ERS. The bank's SR of '4' and Support Rating Floor (SRF) of 'B' reflect the limited possibility of support from the federal government in a stress scenario, due to the relative importance of Banrisul to the system.

Agerio's IDRs were downgraded to 'BB' from 'BB+', and their Outlook remains Negative. The rating action mirrors the action on Agerio's parent, the State of Rio de Janeiro (ERio, LT FC and LC IDRs 'BB'/Negative Outlook). AgeRio's ratings are driven by expected support from ERio and equalized to those of its parent. Therefore, the downgrade of the ratings reflects ERio's reduced capacity to support AgeRio. AgeRio's SR was affirmed at '3', indicating moderate probability of support from its shareholder, in case of need.

Desenvolve SP's IDR were downgraded to 'BBB-' from 'BBB' and the Negative Outlook was maintained, following the same rating action on its parent, the State of Sao Paulo (ESP, LT FC and LC IDRs 'BBB-'/Negative Outlook). Desenvolve SP's ratings are driven by expected support from ESP and equalized to those of its parent. Its SR was affirmed at '2' indicating high probability of support from its shareholder, in case of need.

RATING SENSITIVITIES
IDRS, VRs, SRs and SRFs
Banestes and BRB's IDRs are highly influenced by Fitch's internal analysis of the shareholders of these banks, EES and GDF, respectively. As such, their ratings would be affected by any change in these states' financial strength and/or in their willingness to provide support to these subsidiaries.

Banestes' VR is sensitive to a change in Fitch's assumptions regarding exposure to regional risk, capitalization and credit quality. The VR could be downgraded if Banestes' credits past due over 90 days rise above 6% and/or Fitch Core Capital (FCC) ratio falls below 10%.

BRB's VR could be downgraded in case of significant deterioration in the bank's asset quality that reduced FCC ratio to less than 10%. Although unlikely in the short term, the VR could be upgraded if BRB is able to maintain credit quality at its current levels and further reinforce its capital base.

Banrisul's ratings could be downgraded in case of further deterioration of asset quality ratios, with increase in credits past due over 90 days above 5%, should the coverage for impaired loans deteriorate, or if the FCC ratio falls to less than 12%. Furthermore, Banrisul's ratings could be affected by a change in Fitch's opinion on ERS' creditworthiness, given the bank's significant presence in the state. In addition, further pressures on the state finances that may result on arrears on Banrisul's payroll lending portfolio could result in additional negative pressures on Banrisul's VR.

AgeRio's ratings are aligned with those of ERio. Therefore, any further changes in ERio's ratings or Rating Outlooks, or willingness to provide support to AgeRio, or in Fitch's evaluation of AgeRio's strategic importance to its parent, would result in changes in AgeRio's ratings.

Likewise, Desenvolve SP's ratings are aligned with those of ESP, and any changes in the latter's ratings or in its capacity or willingness to support Desenvolve SP would lead to a rating review.

Fitch has taken the following rating actions:

AgeRio
--Long-term local and foreign currency IDRs downgraded to 'BB' from 'BB+', Outlook Negative;
--Short-term local and foreign currency IDRs affirmed at 'B';
--Support Rating affirmed at '3'.

Banestes
--Long-term local and foreign currency IDRs downgraded to 'BB-' from 'BB', Outlook Negative;
--Short-term local and foreign currency IDRs affirmed at 'B';
--Support Rating affirmed at '3';
--Viability Rating affirmed at 'bb-'.

Banrisul
--Long-term local and foreign currency IDRs downgraded to 'BB' from 'BB+', Outlook Negative;
--Short-term local and foreign currency IDRs affirmed at 'B';
--Viability Rating downgraded to 'bb' from 'bb+';
--Support Rating affirmed at '4';
--Support Rating Floor affirmed at 'B';
--Subordinated notes due in February 2022, downgraded to 'B+' from 'BB-'.

BRB
--Long-term local and foreign currency IDRs downgraded to 'BB' from 'BB+', Outlook Negative;
--Short-term local and foreign currency IDRs affirmed at 'B';
--Support Rating affirmed at '3';
--Viability Rating affirmed at 'bb-'.

Desenvolve SP:
--Long-term local and foreign currency IDRs downgraded to 'BBB-' from 'BBB'; Outlook Negative;
--Short-term local and foreign currency IDRs downgraded to 'F3' from'F2';
-- Support Rating affirmed at '2'.