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Fitch Affirms Cooperativa de Ahorro y Credito FUCEREP at 'B'; Outlook Negative
April 18, 2017 / 7:40 PM / 8 months ago

Fitch Affirms Cooperativa de Ahorro y Credito FUCEREP at 'B'; Outlook Negative

(The following statement was released by the rating agency) SAO PAULO, April 18 (Fitch) Fitch Ratings has affirmed Cooperativa de Ahorro y Credito FUCEREP's (FUCEREP) Long-Term Issuer Default Ratings (IDRs) at 'B' and Viability rating (VR) at 'b'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this press release. KEY RATING DRIVERS - IDR and VR FUCEREP's IDR and VR are highly influenced by its small size within the financial system and the challenges the cooperative faces to meet the increased regulatory capital requirements in times when its overall financial performance has been weak, posting net losses for four years in a row. The ratings also consider Fitch's perception of higher risk appetite as the cooperative diversifies its operations into riskier businesses, and the entity's adequate, though rapidly deteriorating, asset quality. FUCEREP's capital ratios have markedly declined in the last four years as a consequence of the net losses and the increase of the intangible assets (largely IT investments) since 2015. In spite of this, its Fitch Core Capital (FCC) ratio remains adequate for its business model and rating level (25.14% at Dec. 31, 2016), supported by the annual capital contributions made by its members. However, since July 2013, the cooperative has been subject to a new regulatory minimum net equity requirement that must reach 24% of risk weighted assets, according to the regulator's phase-in schedule by 2019. At YE16 FUCEREP did not meet the target set by the regulator, so it agreed with the Central Bank on a plan by which it met the regulatory requirement by March 31, 2017 through the sale of UYU50 million of loans. In Fitch's opinion, reaching the new minimum equity represents a challenge to planned growth. FUCEREP's financial performance has been weak in the past four years. While its operating revenues have increased in line with loan growth, the entity registered operational losses in the past two years mainly affected by lower growth, rising loan loss provisions and a hefty cost base, which has grown due to large IT investments; net losses were also affected by the inflation adjustment starting with 2014. Although FUCEREP is a not-for-profit entity, profitability is important for the cooperative as a source of internal capital generation with which to finance its expansion. FUCEREP's past due loans (+60 days past due) ratio has historically been well contained at a manageable level (average of 6.33% in 2010-2015), benefitting from the payroll deduction mechanism of 75% of its portfolio. However, its asset quality indicators have deteriorated since 2014 and its past due loans ratio rose to 12.88% at December 2016, affected by the economic slowdown and the slight decline in total loans. In the medium term, further pressures could arise from strong projected growth and expansion into new segments. Charge-offs are low (0.79% at YE16) and loan loss reserve coverage adequate (131.3%). KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR FUCEREP's Support and Support Rating Floor of '5' and 'NF', respectively, reflect Fitch's opinion that if needed, extraordinary government support, although possible, cannot be relied upon given the bank's small size and deposit market share. RATING SENSITIVITIES IDRs AND VR FUCEREP's IDRs have a Negative Outlook reflecting the challenges to meet the increased regulatory capital requirements in times when its overall financial performance has been weak. FUCEREP's VR and IDR could be downgraded if it consistently fails to meet the capital requirements or if its weak profitability together with further material deterioration in asset quality lead to its Fitch Core Capital ratio falling and remaining below 15%. The Outlook on FUCEREP's IDRs could return to stable if the entity consistently meets its regulatory capital requirements and improves its profitability. Sustained progress in its profitability metrics, with ROA consistently remaining above 1%, together with asset quality and capitalization remaining at adequate levels could lead to positive rating actions. RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR Changes in the SR and SRF of FUCEREP are highly unlikely in the foreseeable future. Fitch has affirmed the following: FUCEREP: --Long-Term Foreign and Local Currency IDRs at 'B'; Outlook Negative; --Viability rating at 'b' --Support rating at '5'; --Support rating floor at 'NF'. Contact: Primary Analyst Pedro Gomes Director +55 11 4504-2604 Fitch Ratings Brasil Ltda. Alameda Santos, 700 - 7th floor Cerqueira Cesar, Sao Paulo, SP, Brazil Secondary Analyst Santiago Gallo Director +56 2 2499 3320 Committee Chairperson Theresa Paiz Fredel Senior Director +1-212-908-0534 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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