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Moody's downgrades Banco Original on JBS contagion risks

Moody's on June 1 lowered its global long-term local and foreign currency deposit ratings on Banco Original SA and sister bank Banco Original do Agronegócio SA to B2 from B1, while revising the outlook on both banks to negative from stable.

The downgrade reflects contagion risks for both lenders resulting from a corruption investigation into sister company JBS SA, a protein producer controlled by holding company J&F Investimentos SA.

The rating agency also cut both banks' Brazilian long- and short-term national scale deposit ratings to Ba2.br/BR-4 from Baa1.br/BR-2, while lowering their baseline credit assessments to "b2" from "b1" and their long-term counterparty risk assessments to B1(cr) from Ba3(cr).

While the banks have not been directly implicated in the corruption scandal, regulators are currently looking into their recent activities in the derivatives market.

"Further revelations or developments in the cases — even if they do not relate specifically to the bank itself — could cause investors to begin to lose confidence in the bank, which in turn could have negative impacts on its liquidity and funding costs," Moody's said.

The rating agency added that both banks currently have a relatively high level of liquid resources, but should their funding costs rise due to recent events, they will likely face more pressure on their already challenged earnings.

In May, Fitch Ratings said Banco Original SA had thus far contained pressures on its business and financial portfolio resulting from the scandal, but noted that the events could impact the lender's funding and liquidity.