OREANDA-NEWS. Fitch Ratings has affirmed the following ratings of Banco Original S.A. (Original):

--Long-term Foreign Currency (FC) and Local Currency (LC) Issuer Default Rating (IDR) at 'B+', Outlook Stable;
--Short-term FC and LC IDR at 'B';
--National long-term ratings at 'BBB+(bra)', Outlook Stable;
--National short-term rating at 'F2(bra)';
--Viability Rating at 'b+';
--Support Rating at '5';
--Support Rating Floor 'No Floor';

KEY RATING DRIVERS
The affirmation of Original's ratings reflects its large and solid capital base, sufficient to withstand its long-term strategic targets, its comfortable position liquidity and its growing funding base. In contrast, the rating also reflects Original's intrinsic concentration in liabilities, the still modest profitability and its need to further grow and consolidate its corporate franchise in order to achieve a more recurrent level of earning generation. The rating also takes into account bank's ambitious business plan that resulted in expressive investments over the last years and the challenge to generate scale on these new business in a less favorable macroeconomic scenario.

Fitch views the bank's plan to develop a retail bank focused on high-end individuals as an ambitious undertaking that will require disciplined risk management given the challenging operating environment. The bank's revamped management team is composed of professionals with vast experience in leading local financial institutions, which will be essential for the successful implementation of the bank's plan to build a solid franchise and become a relevant midsized bank in the Brazilian market. Fitch also factors in the risks of competing with larger and more established banks with larger client bases and a more complete product offering.

Profitability, so far, has been somehow capped during the last years by Original's large capital base and its need to leverage and to optimize its capital levels. Earnings were quite volatile until 2012, as the bank faced the restructuring, deleveraging and run-off process from its old legacy of retail and agribusiness loans. Revenue generation has been in a slow gradual improvement trend since then, backed mainly by the strong growth of its credit portfolio. Still, Original's overall profitability remains low and reflects the challenges to further develop and mature its franchise. During the first six months of 2015, Original posted net income of BRL55.6 million compared to BRL24.1 million in the same period over the last year. ROAE improved to 5.5% from 2.4% a year ago, while ROAA of 2.2% compares to 1.6% for the same period.

Improvement and even stability of earnings will also depend on whether Original is able to execute its business plan without compromising strong credit standards, considering the very delicate macro economic momentum. Until now, new vintages have not brought any material concerns, and, though asset-quality indicators are slightly worse versus last year, they are still in line with Fitch's expectations. Impaired ratio of 5.5% (as measured by the percentage of D-H loans to total portfolio), remains broadly in line for its rating category and even if compared with the local industry. On the other hand, this above-market credit growth raises some challenges regarding the bank's ability to manage credit costs well. Such considerable growth may potentially be translated into increased overdue loans considering the more deteriorated local macro-scenario, specially on the agribusiness segment (30% of total loans), which tends to be more volatile and sensitive in less benign conditions.

Capitalization is vastly comfortable, despite the strong growth of the loan portfolio over the past 18 months, with Fitch Core Capital (FCC) of 30.7% at June 2015. Fitch expects the bank to reduce capital levels to a more efficient level to the extent it addresses its growth targets, and that implementation of the bank's business plan should result in higher internal capital generation going forward. Nevertheless, the weak operating environment, the bank's expansion plans may be halted by the challenging economic scenario. Developing and achieving the proposed business plan may prove challenging under the current scenario and competence levels, and Fitch acknowledges that such expansion may come with certain degree of volatility on the banks operating results, common of banks in this stage of development.

Original has been active on expanding and diversifying its funding base. However, funding remains concentrated, as is typical of small medium-size banks that do not have a retail distribution and rely mostly on institutional investors. As observed with other banks with similar business profile of Original, agreements with local securities/brokerage companies are being assigned to distribute its funding products among a retail client base. Even though it creates certain operational/performance reliance on those entities, it also introduces a positive element of pulverization among retail clients besides promoting less expensive funding costs. Liquidity remains comfortable and partially mitigates those risks. At June 2015, cash plus other liquid assets correspond to 36% of total assets.

RATING SENSITIVITIES
Positive Rating Action: Ratings could benefit from a less concentrated funding base and by a successful implementation of the proposed business plan that result in consistent operating profitability. Also, preserving capital levels along the target of 16% set up by management would be important to enhance the financial profile of the bank while it grows.

Negative Rating Action: A longer than expected development of its business plan or a deterioration of its corporate lending or agribusiness loan portfolio that result in negative results could lead to a downgrade of Original's ratings. Operating ROAA below 0.5% and a deterioration of Fitch Core Capital to levels below 15% could trigger a downgrade on the ratings.