Fitch Ratings has revised the Rating Outlook on Banco de Brasilia S.A.' (BRB) Long-Term National Rating to Negative from Stable, and affirmed the rating at 'A-(bra)'.

Fitch has also affirmed BRB's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B'/Outlook Stable.

The Negative Outlook on BRB's National ratings reflects Fitch's reassessment on the Government of Federal District (GDF) credit risk relative to national peers, reducing its ability to provide support to BRB, whose ratings are notched from, given the ongoing deterioration of the state's operating balance. Fitch expects GDF's operating margins to continue weakening in the initial years of the scenario horizon from an already low level in 2022. The payroll bill is expected to continue pressuring operating expenditures, while tax policy volatility will lead to revenue losses in the short term.

The bank's Viability Rating (VR) is not part of this review and was last downgraded on June 6, 2023, to 'b' from 'b+' and placed on Rating Watch Negative. There has not been any material development in the bank's financial performance since then.

A full list of rating actions is below.

Key Rating Drivers

Ratings Driven by Shareholder Support: BRB's IDRs and Shareholder Support Rating (SSR) are driven by shareholder support of its majority shareholder, the GDF, as per Fitch criteria's 'higher of' approach, reflecting Fitch's assessment that the support is stronger than BRB's standalone profile (as reflected in its VR). BRB's National Ratings are notched from Fitch's view of GDF's creditworthiness on the national scale. Fitch believes the bank's national scale rating better reflects its creditworthiness relative to its respective supporting entity.

The Negative Outlook on the National Ratings reflects our view of GDF's deteriorating fiscal flexibility to support the bank and Fitch's view that a downgrade on the state would likely result in a downgrade of the issuers' Long-Term National Ratings. The Stable Outlook on the Long-Term IDR reflects Fitch's view that any downside on the banks' IDRs, that could potentially arise from further weakening of GDF's creditworthiness, would be limited, due to sufficient headroom on BRB's main source of support in the international scale.

Moderate Probability of Support: The support assessment combines GDF's moderate propensity to support BRB and limited ability to do so. BRB is strategically important to GFD, as it is the local government's main financial agent and has a meaningful share in the Federal District's loans and deposits. The support assessment is also influenced by its strategic core role and importance as a development bank in BRB's hometown, the Federal District, by providing consumer and commercial lending and, to a lesser extent, with municipalities on a development bias. Fitch also believes that the local regulator would likely favor support of BRB by the parent state as needed.

VR Not Affected: The bank's VR, which indicates its standalone credit strengths, is not affected by this development. In June 2023, Fitch downgraded BRB's VR and placed it on Rating Watch Negative, highlighting further weakening in the bank's core capitalization and earnings following the announcement of its 1Q23 financial statements, as well as uncertainty about the sufficiency and timeliness of core capital strengthening measures.

For details on the Key Rating Drivers and Sensitivities of BRB's VR, please see the press release ' Fitch Downgrades BRB's L-T IDRs to 'B'/Stable; Places VR Rating on Negative Watch', dated June 6, 2023.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

NATIONAL RATINGS

BRB's Long-Term National Ratings could be downgraded if GDF's operating balances continue to deteriorate, which would likely jeopardize its ability to service debt and put further pressure on the state's creditworthiness in the national scale, from which BRB's ratings are notched from.

IDRs and SSR

Material negative changes in Fitch's assessment of GDF's ability and willingness to provide support to BRB could affect the Shareholder Support Rating (SSR) of the bank.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

IDR, SSR and NATIONAL RATINGS

Positive changes in Fitch's assessment of GDF's ability and willingness to provide support to BRB could affect the ratings. This is unlikely in the near term due to GDF's key financial metrics.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

BRB's ratings are linked to GDF's.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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