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Moody's changes Banese's outlook to negative on capital ratio decline

Moody's on Sept. 3 changed its outlook on Banco do Estado de Sergipe SA's Ba2 local currency deposit rating to negative from stable.

The new outlook on Banese, as the bank is known, reflects a recent decline in the bank's capitalization ratio, which followed a material negative adjustment on equity that reduced Moody's tangible common equity to risk-weighted assets ratio for the lender by 248 basis points to 6.6% in the second quarter.

The adjustment was a result of the need to account the actuarial liabilities at a Banese-sponsored private pension fund, triggered by the decline of Brazil's benchmark Selic interest rate, Moody's said.

"A lower capital position reduces the bank's loss-absorption capacity and limits its growth perspective and competitive strength in its regional market, where the bank holds 41% of loan market share," the rating agency added.

Banese plans to issue local currency subordinated notes to increase its regulatory capital and ask shareholders to reduce future dividend payouts, Moody's said.

"Despite the positive performance in recent quarters, Banese's earnings will likely be challenged by growing competition from large retail banks and slow operational growth," the rating agency noted. "As the bank enters a new credit growth cycle, capital will be a key driver of its ability to remain competitive."

At the same time, Moody's affirmed all of its ratings on the bank, including its "ba2" baseline credit assessment and its long- and short-term local currency deposit ratings of Ba2/Not Prime. The outlook on the Ba3 long-term foreign currency deposit rating remains stable.