Fitch Assigns First-Time Ratings to Banestes S.A. Banco do Estado do Espirito Santo; Outlook Stable

Fitch Ratings has today assigned the following ratings to Banestes S.A. Banco do Estado do Espirito Santo (Banestes):

--Foreign and Local Currency Long-Term Issuer Default Rating (IDR): 'BB', Outlook Stable

--Foreign and Local Currency Short Term IDR: 'B'

--Long Term National Rating: 'A+(bra)', Outlook Stable

--Short Term National Rating: 'F1(bra)'

--Support Rating: '3'

--Viability Rating: 'bb-'

KEY RATING DRIVERS

Banestes' IDRs and support ratings reflect its strategic importance to the State of Espirito Santo (ES). The bank is the tax collecting agent for ES, promotes transfers to municipalities, and is responsible for the cash management of the state. Furthermore, it has strong operations in state public entities, providing services and granting credits to suppliers and public servants, in special payroll deductible loans.

In Fitch's opinion, the probability of ES support to the bank in a stress scenario would be moderate, due to uncertainties as to the controller's capacity to bear such costs. ES's financial performance was moderate, with the operating margin reduction in 2013. On the other hand, the state has been reducing its debt levels and increasing investment in recent years with positive impact on tax collections.

The viability rating (VR) reflects the bank's regional relevance, with adequate liquidity, capitalization and stable deposit source. Banestes relies on low-cost retail funding, provided by its agency network, mainly in ES. It has cautiously pursued higher diversification, issuing Financial Bills (Letras Financeiras) in the local market and increasing its funding in real estate credit bills (LCIs).

Banestes operates as a commercial bank in different segments focused both on corporates and on individuals. Banestes' activities are concentrated in Espirito Santo, where the bank holds around 30% of the deposits and 17% of credit operations, through a network of 133 agencies covering all 78 municipalities.

Impaired loans (classified in 'D-H' risk classes, as per Brazilian Central Bank regulations) accounted for 9.5% of the portfolio, against 9.0% in 2013 and 6.5% in 2012. Fitch notes that, despite the bank's moderate performance, the provisioning level remains in line with its retail profile (covering 59% of impaired loans). Credits past due over 90 days (non-performing loans - NPLs) reached 3.7% in June 2014, in line with its peers (3.5%).

Banestes reported profitability ratios slightly below that of its peers (13.6% ROE), although at adequate levels. The bank maintained credit growth in line with that experienced in the banking system and should end 2014 within projections between 8%-11%.

Liquidity remains adequate and covered around 40% of the deposits in June 2014. The quality of Banestes capital base is good and is fully composed of Tier 1 capital, with Fitch's core capital ratio of 14.5% in September 2014 (against 13.3% in 2013) compatible with its retail profile.

RATING SENSITIVITIES

Banestes' ratings could be changed in the case of modifications in Fitch's assessment on the probability and willingness of its controller, the state of Espirito Santo, to provide support to Banestes, if necessary.

The bank's VR is sensitive to a change in Fitch's assumptions regarding exposure to regional risk, minimum Fitch core capital, and credit quality. The VR could be downgraded if Banestes presents NPLs (credits past due over 90 days) above 6% and/or Fitch Core Capital below 10%.

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

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'National Ratings Criteria' (Oct. 30, 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

National Scale Ratings Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=956915

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.