Fitch Affirms Banco Daycoval's Ratings at 'BB'

SAO PAULO & RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings has today affirmed Banco Daycoval S.A.'s (Daycoval) ratings, including its Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB'. The Rating Outlook is Negative. Daycoval's IDRs are driven by its Viability Rating, which was also affirmed at 'bb'. The Negative Rating Outlook mirrors the Negative Outlook assigned to Brazil's Sovereign Rating (rated 'BB').

A complete list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

Similar to most Brazilian banks, Daycoval remains under significant pressure from ongoing operating environment challenges that exacerbate downside risks to asset quality and profitability.

Daycoval's ratings reflect the bank's consistent track record of performance, maintained in different cycles of local economy, higher business diversification when compared to other medium size banks in the region, comfortable liquidity and capitalization positions. Its funding remains concentrated by investors exhibiting wholesale characteristics. However, conservative management of its assets and liabilities, and a strong cash position considerably mitigate liquidity risk.

Daycoval has been successful in expanding its credit operations and maintaining adequate profitability over the last years. In view of the high delinquency in credits to small and medium-sized companies in 2012, the bank addressed its growth to consumer credit, mainly to the lower risk payroll discount loans. The expansion into this segment helps to better dilute

debtor concentrations and income sources.

Since 2014, the bank resumed the growth of its SME loan portfolio in addition to expansion for its payroll loan. This resulted in an overall loan growth higher than its peers and the average of private banks. In Fitch's view the diversification and short-term nature of Daycoval's loan portfolio and the adequate management of collaterals as well as the bank's expertise in the sector allows them to rapidly adjust pricing of its portfolio and reduce its risk appetite to the segment. During 2015 and 2016, the bank once again scaled back its appetite for growth in the SME segment given the accelerated deterioration of the operating environment.

Considering that the SME loan portfolio is more volatile and vulnerable to economic cycles, Fitch does not expect the bank to suffer asset quality pressures above those expected for the system as a whole. The bank's risk appetite and pricing of new transactions already incorporate the negative economic cycle and factors in the increased risks of such scenarios.

Asset-quality risks stems from potential pressures arising from the bank's exposure to the middle-market segment, (clients with sales up to R$300 million/year) which tends to be more vulnerable during periods of economic crisis and recession.

In Fitch's view, Daycoval has taken conservative measures to mitigate such risks, by reducing its concentration by client, reinforcing collateral structures and repricing its portfolio.

Historically, Daycoval has shown a conservative stance towards balance-sheet leverage compared to other medium size players. Profitability remains resilient as the bank has been able to maintain disciplined cost control and has proven agile at credit re-pricing when an adverse macro environment is perceived.

Daycoval continues to benefit from the high demand for deposits and other deposit-like funding instruments, which has allowed the bank to properly match its assets and liabilities, in spite of a much larger payroll lending business.

Cash and securities (excluding Repurchase agreements) over total deposits remained above 220% during the last eight quarters and plays a critical role on mitigating the risks of wholesale funding vs long-term retail loans.

Daycoval has a very comfortable capital position (18% of FCC and capital regulatory ratio of 18.2% as of March 2016). Most importantly, the bank has been standing out among its peers given its historical high liquidity and capitalization levels, which enable Daycoval to sustain the growth of its loan portfolio. Equity totaled BRL 2,8 billion in March 2016 and is composed of only Tier 1 capital.

RATING SENSITIVITIES

Given the current sovereign level, the potential for an upgrade to Daycoval's ratings is limited.

The ratings could be negatively affected by continued asset quality deterioration which results in pressure on the bank's results (Operating Profit / Risk Weighted Assets below 2%) and on capital (Fitch core capital ratio lower than 13%), which could be triggered by larger than expected asset quality deterioration and/or aggressive asset growth or cash dividend policy.

Fitch has affirmed the following ratings:

Daycoval

--Long-Term Foreign- and Local-Currency IDRs at 'BB'; Outlook Negative;

--Short-Term Foreign- and Local-Currency IDRs at 'B';

--Viability Rating at 'bb';

--Long-Term National Rating at 'AA(bra)'; Outlook Stable;

--Short-Term National Rating at 'F1+(bra)';

--Support Rating at '5';

--Support Rating Floor at 'NF';

--Senior unsecured USD notes due 2019, Foreign-Currency Rating at 'BB';

--Senior unsecured BRL letras financeiras due 2016 and 2017 at 'AA(bra)'.

Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'.

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008505

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008505

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160706006223/en/

Fitch Ratings
Primary Analyst
Eduardo Ribas
Director
+55-11 4504-2213
Fitch Ratings Brasil Ltda. ,
Alameda Santos, 700 - 7th floor, Sao Paulo, SP, Brazil
or
Secondary analyst
Raphael Nascimento
Associate Director
+55-11 3957-3664
or
Committee Chairperson
Alejandro Garcia
Managing Director
+1-212-908-9137
or
Media Relations:
Jaqueline Carvalho, Rio de Janeiro, +55 21 4503 2623
Email: [email protected]
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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