Fitch Downgrades AgeRio to 'C' Following Action on Parent
KEY RATING DRIVERS - IDRS, NATIONAL RATINGS, SUPPORT RATINGS
The rating action mirrors the recent downgrade of AgeRio's parent, the State of Rio de Janeiro (ERio, Long-Term Foreign Currency and Local Currency IDRs 'C'). (See 'Fitch Downgrades State of Rio de Janeiro to 'C' from 'B-',' dated Sept. 15, 2016 at 'www. fitchratings. com' for more details.)
The rating action reflects the increased risk of contagion from ERio's very weak credit profile to AgeRio's business model, asset quality and funding structure. AgeRio's ratings are based on institutional support from ERio and aligned with those of its parent. Fitch does not assign a Viability Rating to AgeRio, as it is a development agency and therefore cannot be assessed on standalone basis.
Fitch views AgeRio as strategically important for ERio, as it acts as the state's development arm and implements its economic development policies. A track record of frequent capital injections by ERio, most recently in the second half of 2015, reinforces Fitch's view. ERio controls 99.99% of AgeRio. Furthermore, by state law ERio's stake in AgeRio's voting shares cannot fall below 51%, and it is the financial agent or administrator of three state funds.
As of June 2016, AgeRio remained highly capitalized with a total regulatory capital ratio of 70.10% (75.30% in December 2015). Fitch believes that, under a stress scenario, ERio could withdraw part of the capital at AgeRio, which would lead to a decline in the development agency's loss absorption capacity.
In 2015, AgeRio's overall profitability fell but remained adequate, as a solid increase in fee income broadly offset a large increase in loan impairment charges. Return on average assets (ROAA) stood at 1.07% (1.49% in December 2014). In the same period, AgeRio's impaired loans classified in the D-H range of the central bank's risk scale rose to 6.54% of total loans (5.37% in December 2014), while impaired loan coverage by reserves rose significantly to 223.9% (89.67% in December 2014). Fitch expects loan impairment charges to remain high throughout 2016 as a result of the continued weakness in the operating environment in ERio that is undermining the credit worthiness of AgeRio's borrowers.
IDRS, NATIONAL RATINGS, SUPPORT RATINGS
Changes in Parental Support: AgeRio's ratings are linked to those of ERio. Any further changes in ERio's ratings would lead to a review of AgeRio's ratings.
Fitch has taken the following rating actions:
--Long-Term Foreign and Local Currency IDRs downgraded to 'C' from 'B-';
--Short-Term Foreign and Local Currency IDRs downgraded to 'C' from 'B';
--Long-term National Rating downgraded to 'C(bra)' from 'BB-(bra)';
--Short-term National Rating downgraded to 'C(bra)' from 'B(bra)';
--Support Rating affirmed at '5'.