Fitch Upgrades Banco Safra S.A. and Safra Leasing S.A.'s Ratings

NEW YORK & SAO PAULO--()--Fitch Ratings has upgraded Banco Safra S.A. (Safra) Viability Rating to 'bbb' from 'bbb-' and its Issuer Default Rating (IDR) to 'BBB' from 'BBB-'. In addition, Fitch has upgraded the National Scale Rating of Safra Leasing S.A.- Arrendamento Mercantil (Safra Leasing). A complete list of rating actions is provided at the end of this release.

KEY RATING DRIVERS

Safra's IDRs are driven by its VR. The upgrade of Safra's ratings reflects the bank's good performance during the last three years in a challenging environment of greater uncertainty and higher credit costs. As such, Safra has been able to preserve strong asset quality ratios and enhanced loan loss provisions, improve its liquidity and asset and liability management; while the preservation of its strong efficiency ratios and controlled margins resulted in profitability ratios above the media of the market and constructive to adequately internally generate capital. Safra's ratings are still constrained by its below average capitalization ratios compared to other banks rated in the 'bbb/bbb+' range, the need to further diversify its income sources and the challenges derived from its wholesale funding nature.

Safra's Support Rating of '4' and Support Rating Floor of 'B+' factors in its size within the Brazilian banking universe, which is relatively concentrated in nature with the largest five private and public sector banks controlling more than 78% of total deposits; while Safra is the fifth largest private sector bank in the system.

Safra's long-term senior unsecured debt ratings are driven by Safra's IDR given its unsecured nature and equally to all other senior unsecured debt. Given that the notes are issued in Brazilian Real (BRL) while the settlement will be in U.S. Dollar (USD) a subscript 'emr' was added to the ratings of these issuances to reflect the embedded market risk of the exchange rate fluctuation between the BRL and the USD.

Safra's strong efficiency and relatively low cost funding have aided the bank to consistently post good profitability ratios, below the average of Brazilian large banks, but less volatile with an average ROAA of 1.4% over the last five years. The recent downward trend in interest rates and higher, but controlled credit costs have temporarily eroded this ratio, but Fitch expects Safra's ROAA will stabilize above 1% in the medium term. In a lower interest rate environment, prudent loan growth and further income diversification will be needed to enhance profitability ratios and compensate for lower margins.

Focusing on a market that Safra knows well, along with a well-articulated business plan that take advantage of times of economic flourish and recovery when the environment deteriorates, allows Safra to post above average asset quality ratios. Safra's good credit quality is evidenced by its 90 day past due loans to total loans ratios that have averaged below 1.4% for the past three years. Recent volatility in the operating environment has had a modest negative effect on this ratio, with 90 day past due loans reported at 1.7% as of March 31, 2013, however, this ratio is less than half of the banking system average and Safra's Loan Loss Reserve coverage of loans past due over 90 days was a healthy 216%. In addition, the levels of charge-offs continue the trend of being low, partly due to the strength of its collections unit.

The bank continues to focus on ensuring a stable liquidity position through conservative asset liability management policies to mitigate gaps through hedging and funding diversification including the use of longer term funding instruments such as Letras Financeiras which saw a significant growth during the past 15 months ending with nearly BRL11.3 billion at March 2013 versus BRL6.2 billion a year earlier. Fitch expects that Safra will be able to maintain the improvements achieved in terms of asset and liability maturity management in the medium term; helping to partially compensate its wholesale funding nature.

Since 2011, Safra continues to improve the strength of its capital ratios. Fitch core capital ratio has been stable at around 10% and Fitch expects that it will remain around that level in the future. At March 31, 2013 the Fitch core ratio was 10.3% and the bank nearly met the Central Bank regulatory minimum total capital requirement solely by means of its Tier I regulatory capital ratio of 10.7%. The bank does not expect to have any difficulty adjusting the upcoming implementation of Basel III according to the Brazilian Central Bank's timetable.

Safra Leasing ratings are equalized to those of its parent bank. According to Fitch criteria, this subsidiary is 'Core' to Safra by the means of its significant participation as a funding source of the consolidated activities, the commercial and operational alignment with the bank and the reputational risk derived of the close use of its franchise and branch network. Also, the rating of its subordinated debt incorporates the support to be provided by Safra and notched down once due the lower expected recoveries of the securities due its contractual subordination in case of liquidation.

RATING SENSITIVITIES:

In Fitch's view and considering the current business model of Safra which weighs on a wholesale funding structure and the maintenance of sufficient albeit tight capital ratios; further upgrades may be limited unless those structural characteristics are changed. An unexpected deterioration of its asset quality and hence its profitability for a sustained period of time may trigger a negative rating review, as also, a deterioration of the recent improvement towards asset and liability management.

Safra Leasing's ratings will mirror any change on Safra's ratings.

Fitch has taken the following rating actions:

Banco Safra S.A.

--Long-term foreign and local currency Issuer Default Ratings (IDRs) upgraded to 'BBB' from 'BBB-'; Outlook Stable;

--Short-term foreign and local currency IDRs upgraded to 'F2' from 'F3';

--Viability rating upgraded to 'bbb' from 'bbb-';

--Support rating affirmed at '4';

--Support rating floor affirmed at 'B+';

--National long-term rating upgraded to 'AAA(bra)' from 'AA+(bra)'; Outlook Stable;

--National short-term rating affirmed at 'F1+(bra)'.

Banco Safra senior notes due 2016

--Long-term foreign currency rating upgraded to 'BBB(emr)' from 'BBB-(emr)'

Banco Safra senior notes due 2017

--Long-term foreign currency rating upgraded to 'BBB(emr)' from 'BBB-(emr)'.

Safra Leasing S.A. Arrendamento Mercantil

--National long-term rating upgraded to 'AAA(bra)' from 'AA+(bra)'; Stable Outlook;

--National short-term rating affirmed at 'F1+(bra)'.

Safra Leasing S.A. Arrendamento Mercantil - 12th, 13th, 14th and 15th Debenture Issuances

--National long-term rating upgraded to 'AA+(bra)' from 'AA(bra)'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria', dated Aug. 15, 2012;

--'Rating FI Subsidiaries and Holding Companies', dated Aug. 10, 2012;

-- Assessing and Rating Bank Subordinated and Hybrid Securities', dated Dec. 5, 2012;

--'National Ratings Criteria', dated Jan. 19, 2011;

--'Banco Safra S.A.', dated Dec. 21, 2012;

--'Safra Leasing S.A. - Arrendamento Mercantil', dated Dec. 21, 2012.

Applicable Criteria and Related Research:

Assessing and Rating Bank Subordinated and Hybrid Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Banco Safra S.A.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=687292

Safra Leasing S.A. - Arrendamento Mercantil

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=697843

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796407

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Contacts

Fitch Ratings
Primary Analyst
Robert Stoll, +1-212-908-9155
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Eduardo Ribas, +55-11-4504-2600
Associate Director
or
Committee Chairperson
Franklin Santarelli, +1-212-908-0739
Managing Director
or
Media Relations:
Jaqueline Carvalho, Rio de Janeiro, +55-21-4503-2623
jaqueline.carvalho@fitchratings.com
or
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Stoll, +1-212-908-9155
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Eduardo Ribas, +55-11-4504-2600
Associate Director
or
Committee Chairperson
Franklin Santarelli, +1-212-908-0739
Managing Director
or
Media Relations:
Jaqueline Carvalho, Rio de Janeiro, +55-21-4503-2623
jaqueline.carvalho@fitchratings.com
or
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com