Fitch Affirms Itau Asset Management's Ratings at 'Highest Standards'

Fitch Ratings has affirmed the International Scale Asset Manager Rating at 'Highest Standards' for Itau Asset Management (IAM). The Rating Outlook remains Stable.

KEY RATING DRIVERS

IAM's 'Highest Standards' rating reflects Fitch's opinion that the company's investment platform and operational framework are superior relative to the standards applied by institutional investors in international markets.

The affirmation of IAM's rating reflects the benefits achieved by the asset manager for being part of the Itau Unibanco Holding S.A. group (IUH, Local Currency IDR 'A-'; Outlook Stable by Fitch), the largest private financial conglomerate in Brazil and Latin America. The rating also considers IAM's continued market leadership in several investor segments, its large distribution channels, a broad and diversified client base, robust revenue generation and the high quality of its executive team. Furthermore, the rating also reflects the company's well-established and disciplined investment process, strict risk and compliance policies, and strong investments in technology and controls.

The asset manager's rating applies only to its activities in the domestic market and does not include its offshore funds, private banking activities and third-party funds of funds. It also does not consider Intrag DVTM, a company that offers fiduciary administration and custody services to institutional customers, among other services, and Kinea Investimentos Ltda., dedicated to the management of alternative investments. All these operations have their own processes and policies, segregated from the management of traditional funds.

Fitch believes that IAM's main challenges include the successful implementation of its international expansion plans; performance improvement in the more sophisticated funds, particularly in equity funds; maintenance of profitability levels in the face of strong competition from other asset managers and in a lower interest rate environment.

The 'Highest Standards' rating is based on the following assessments:

Company: Highest

Controls: Highest

Investments: Highest

Operations: Highest

Technology: Highest

Company

IAM is part of a solid, well-diversified and profitable financial conglomerate, and remains the largest private asset manager in Brazil, with significant experience in the local market. It is fully segregated from Itau Unibanco group's other business activities, and relies on a strong corporate governance policy. IAM has well-established processes and highly qualified and experienced professionals.

IAM underwent major restructuring in 2013, following a similar process at the group level, aimed at simplifying the institution to achieve higher agility and efficiency gains. This process resulted in several changes to the asset manager's senior team during that year, including in the positions of CIO, and the Director of Risk, among others. Prior to that, the asset manager also had a change in CEO position in 2012. These changes, however, did not affect the continuity of IAM's processes and strategy, mainly because most of the new executives already belonged to the asset manager or to the Itau Unibanco group.

The rate of growth in assets under management (AUM) has remained below that of the industry since 2009, given competitive pressures from other asset managers. AUM profile continues to be concentrated on fixed income and indexed funds (82% of AUM in June 2014, including mandates managed for private pension funds). IAM's more sophisticated funds, particularly in equity funds, have been impacted by economic turbulences, which has undermined the performance of these funds and, consequently, caused the withdrawal of investors and smaller share of these strategies in AUM, in line with the local fund industry. With regard to the performance in other investment strategies, that constitute the majority of AUM, performance has been good, most of them above benchmark over the 12 months ended in June 2014.

IAM's strategy and main challenge is to achieve greater global presence in order to diversify its business from its local consolidated presence. The asset manager has signed alliances with international institutions and made strong investments in platforms for overseas distribution, product offerings and global-standard systems. However, the volume of foreign investors has decreased since 2011, to BRL9 billion in June 2014, due to turbulences in local and global economy.

Controls

IAM's risk management and compliance is supported by the group's robust and independent corporate structure, with strong governance and supervision. The funds have not reported breaches to their market and liquidity limits, and breaches in concentration limits were low and promptly resolved. IAM is implementing new market and liquidity risk systems (Sophis), which should further improve integration of its operations and reduce operational risks, among other benefits.

Investments

Fitch considers IAM's investment process to be one of the best among asset managers in the Brazilian market. The process is well-formalized and segmented, with highly specialized teams, including a centralized trading area (except for the high Alpha funds), and based on committees with strong macroeconomic, fundamentalist and quantitative research. The investment team is robust and very experienced and enjoys the support of the risk control area and the sophisticated systems that enable pre-trading alerts and blocks, among other facilities. The replacement of the CIO in early 2013, and of other executives since then, has not resulted in major changes to the investment process.

Operations

The fiduciary administration and custody activities are carried out by another business unit of the group as with other large asset managers linked to financial groups in Brazil. This unit is well-known in its business segment for providing services to other asset managers in the local market. The processes observe regulations and best practices and are supported by secure and robust technological platforms and by a robust corporate structure. Processes are automated, with little manual intervention, are scalable and offer an advanced degree of risk control through indicators that monitor the services provided.

Technology

Itau Unibanco group relies on a robust technological area and solid technological platform that supports IAM with strong, automated and integrated management systems, risk controls and back office. IAM made significant investments in systems and controls, which are constantly improving. The asset manager implemented a renowned front and middle office system (Charles River) and is in the process of implementing the market and liquidity risk control system (Sophis), among others, that enable greater integration of these functions, as well as a higher degree of automation and velocity in its transactions.

Company Profile

Founded in 1965, IAM is the second largest asset manager in Brazil, with a 14.2% market share and AUM of BRL364 billion in June 2014, according to the Brazilian Association of Entities of the Financial and Capital Markets (Anbima). IAM is a business unit of IUH, the largest private financial conglomerate in Brazil and Latin America.

RATING SENSITIVITIES

IAM's rating could be sensitive to important adverse changes to any of its rating drivers mentioned above, mainly in case of a weakening in its financial profile, high turnover of key staff or deterioration in processes and policies. An important deviation from Fitch's guidelines for any key driver could also lead to a rating downgrade.

To obtain additional information on Fitch's criteria for rating asset managers, refer to the criteria mentioned below, available at Fitch's websites, 'www.fitchratings.com' or 'www.fitchratings.com.br'.

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

Applicable Criteria and Related Research:

-- 'Asset Manager Analysis and Rating Criteria' (May 6, 2014).

Applicable Criteria and Related Research:

Asset Manager Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747701

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=874574

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