OREANDA-NEWS. Fitch Ratings has downgraded the long-term Issuer Default Ratings (IDRs) of three regional development agencies (Agencia de Fomento do Parana [FP], 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]) and two state-owned regional banks (Banco do Estado do Rio Grande do Sul S.A.'s [Banrisul] and Banco de Brasilia S.A. [BRB]).

In addition, Fitch has affirmed the long-term IDRs of Banestes S.A. - Banco do Estado do Espirito Santo (Banestes), another state-owned regional bank. The Rating Outlooks of all six institutions' long-term IDRs are Negative. Fitch has also affirmed the Viability Ratings (VR) of BRB and Banestes and downgraded Banrisul's VR. Fitch does not assign VRs to development agencies.

At the same time, Fitch has also affirmed the National Scale ratings of Desenvolve SP and FP at 'AA+(bra)' and 'AA(bra)', respectively and downgraded AgeRio's National Scale ratings to 'A(bra)' from 'A+(bra)' following the same rating actions on its respective parents. The Outlooks of National Scale ratings of Agerio and Desenvolve SP are Stable, and the Outlook of Fomento Parana is negative mirroring its parents' National ratings' Outlook.

The rating actions on this report follow the recent downgrade of Brazil's sovereign rating ('BB+'/Negative Outlook, for additional information see 'Fitch Downgrades Brazil to 'BB+'/Outlook Negative', dated Dec. 16 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 Seven Brazilian Subnationals; Outlooks Negative', dated Dec. 22 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

Regional Development Agencies

The IDRs of all three development agencies, Desenvolve SP, AgeRio and FP, are driven by expected institutional support from their respective controlling states, Sao Paulo, Rio de Janeiro and Parana, and are equalized with IDRs of their parents. Therefore, the downgrade of the long-term IDRs of the three development agencies, Desenvolve SP ('BB+'/Negative Outlook from 'BBB-'/Negative Outlook to), AgeRio (to 'BB-'/Negative Outlook from 'BB'/Negative Outlook) and FP (to 'BB+'/Negative Outlook from 'BBB-'/Negative Outlook) mirrors the downgrade of the long-term IDRs of their respective parents and reflects their reduced capacity to provide support, in case of need.

The Negative Outlook of these long-term IDRs mirrors the IDRs of the controlling states. The development agencies act as the development arms of the government of their respective states and implement their economic development policies. Fitch has also downgraded the Support Ratings (SR) of Desenvolve SP and FP's to 3 from 2, reflecting the reduced capacity of support from its shareholders and affirmed Agerio's SR at 3.

State-owned Regional Banks

The downgrade of Banrisul's VR to 'bb-' from 'bb' and its long-term IDRs to 'BB-'/Negative Outlook from 'BB'/Negative Outlook reflects its higher sensitivity to a potential further deterioration of its asset quality and capitalization ratios, as a result of the weakening operating environment of the State of Rio Grande do Sul (ERS). The State, which has higher inflation compared to the Brazil's average (IPCA LTM at 11.2% compared to 10.5% in Brazil), should complete its seventh consecutive quarter of GDP contraction and there are no evidences of recovery in the short term. Banrisul's VR also reflect the bank's regional importance, its stable retail funding base, profitability and adequate liquidity ratios.

Following the downgrade of its VR, Fitch downgraded Banrisul's subordinated debt to 'B' from 'B+', as it is notched down twice from its VR (once for loss severity and once for non-performance). Fitch affirmed Banrisul's SR at 4 and its Support Rating Floor (SRF) at 'B', reflecting the lower propensity of support from the Federal Government in case of need. Fitch considers the relative importance of Banrisul to the financial system as it ranks as the 12th largest financial institution in the country in terms of assets and eighth largest in terms of deposits even considering that there are no explicit guarantees from the Federal Government evidencing such support.

The downgrade of BRB's long-term IDRs to 'BB-'/Negative Outlook from 'BB'/Negative Outlook reflects Fitch's expectation of weaker financial strength of its respective controlling subnational, Distrito Federal (GDF). With this Rating action, the IDRs of BRB are now driven by its VR, which was affirmed at 'bb-'. BRB's VR reflects its regional importance, developments of its franchise, profitability, liquidity and stable and low cost funding base. It also mirrors the bank's challenging asset quality as well as the increasing competition from the largest Brazilian banks.

The affirmation of Banestes' long-term IDR at 'BB-'/Negative Outlook reflects the fact that its IDRs are now driven by its VR, which offsets Fitch's expectation of a weaker financial strength of its controlling state, State of Espirito Santo (SES). Banestes' VR reflect its adequate liquidity and capitalization, besides its stable retail deposit base - mainly in the SES. The reduced capacity of support from its shareholder is reflected in the downgrade of its SR to 4 from 3.

The Negative Outlook on all three regional state-owned banks' IDRs reflects the continued deterioration in the Brazilian operating environment that should further pressure their key credit metrics, especially asset quality, capitalization and profitability over the rating horizon.

RATING SENSITIVITIES

IDRS, VRs, SRs and SRFs
Regional Development Agencies

The ratings of Desenvolve SP, Agerio and FP are aligned with those of their respective parents. Therefore, any further changes in the parents' ratings or Rating Outlooks, or willingness to provide support, or in Fitch's evaluation of the development agencies to their parents, would result in changes in their ratings.

State-owned Regional Banks

Banrisul's VR and IDRs could be further downgraded in case of a deeper deterioration of its asset quality ratios, with an increase in NPL ratio (90 days past due loans) to above 5%, a reduction of the coverage for impaired loans, or if its FCC ratio reduces to less than 12%. In addition, further pressures on the controller's financials that may result on arrears on Banrisul's payroll lending portfolio could result in an additional negative revision on the bank's VR.

BRB's VR and IDRs could be downgraded in case of a significant deterioration of its asset quality (NPL above 5%, combined with a reduction on its FCC ratio to less than 10%).

Banestes' VR and IDRs could be downgraded if Banestes' NPL ratio increase to levels above 6% and/or Fitch Core Capital (FCC) ratio falls below 10%.

While the IDRs of Banrisul, BRB and Banestes are driven by their stand-alone credit profile, they are also influenced by Fitch's internal assessment of their controlling states' creditworthiness due to contagion risks in case of a deterioration of their controllers. As such, these banks' ratings could be affected by a change in Fitch's opinion on the controlling states' creditworthiness, given that each of these banks' operations are largely concentrated in their respective states.

Fitch has taken the following rating actions:

Regional Development Agencies

FP:
--Long-term local and foreign currency IDRs downgraded to 'BB+' from 'BBB-'; Outlook Negative;
--Short-term local and foreign currency IDRs downgraded to 'B' from 'F3';
--Long-term national rating affirmed at 'AA(bra)'; Outlook Negative
--Short-term national rating affirmed at 'F1+(bra)';
--Support Rating downgraded to '3' from '2'.

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';
--Long-term national rating downgraded to 'A(bra)' from 'A+(bra)'; Outlook Revised to Stable from Negative;
--Short-term national rating affirmed at 'F1(bra)';
--Support Rating affirmed at '3'.

Desenvolve SP:
--Long-term local and foreign currency IDRs downgraded to 'BB+' from 'BBB-'; Outlook Negative;
--Short-term local and foreign currency IDRs downgraded to 'B' from'F3';
--Long-term national rating affirmed at 'AA+(bra)'; Outlook Stable;
--Short-term national rating affirmed at 'F1+(bra)';
--Support Rating downgraded to '3' from '2'.

State-owned Regional Banks

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 'B+'.

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';
--Viability Rating affirmed at 'bb-';
--Support Rating affirmed at '3'.

Banestes
--Long-term local and foreign currency IDRs affirmed at 'BB-'; Outlook Negative;
--Short-term local and foreign currency IDRs affirmed at 'B';
--Viability Rating affirmed at 'bb-';
--Support Rating downgraded to '4' from '3'.