Fitch Affirms Safra Asset Management's National Asset Manager Rating at 'M1(bra)'

SAO PAULO & RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings has today affirmed the 'M1(bra)' National Asset Manager Rating of Safra Asset Management (Safra Asset), business unit of Banco J Safra S.A. (J Safra), fully controlled by Banco Safra S.A. (Safra; foreign and local currency Issuer Default Rating of 'BBB-'; Stable Outlook by Fitch). The 'M1(bra)' rating is assigned to asset manager operations that show the lowest vulnerability to operating and investment management failures.

Safra Asset's National Asset Manager Rating factors in its well-defined practices for risk controls, policies and compliance, in addition to the robust and segregated structures in line with the local market best practices for fiduciary administration and custody. The rating also benefits from the Safra group's long track record in investment management activities in Brazil, ongoing investments to improve its structure and resources, and the important distribution channels to serve several segments of investors.

The rating considers Safra Asset's domestic activities only and does not include the investment management activities of fund of third-party funds and private wealth management, locally and abroad. Those areas have segregated processes and policies.

The asset management activities are strategically important for Safra group, both in terms of financial contribution and relationship with its clients. Since the 2008 restructuring, Safra Asset has been focused in value added products, especially in multimarket class that represented 35% of its total AUM in the first half of 2012 (1H'12) (61% in 2010), above the average of other large local asset managers. On the other hand, Safra group distribution channels are limited compared with other large financial conglomerates despite the fact of reaching several investors' types. The combination of these factors have resulted in an AUM annual compounded average growth rate of 20% between 2007 and 2011, compared with 14% of the industry in the same period. At the same time, its client base has been built by more sophisticated investors in niches of main segments, such as corporate, pension funds, private clients and prime retail.

As consequence, Safra Asset has presented a high concentration of clients historically that substantially contributed for the high volatility of AUM during the 1H'12, with a decrease of 24% of AUM largely due to net redemptions of large corporate investors. This effect was related to very specific cases of performance-based competitive mandates managed by a determined group of institutions through dedicated funds. Despite the size of the redemption, there was not a significant impact to Safra Asset's financial standing or fund performance of other segments and clients. Furthermore, a reasonable portion of this volume has returned between September and October 2012 due to performance improvement.

There were no relevant changes in the asset manager's structure in the last year, although a new Head of Equities has been in charge since April 2012 without changes in investment process guidelines. Risk Management and Compliance count with formalized process, controls and appropriate independence that have been continuously refined since 2007, when Safra Asset reinforced substantially those areas. In the mid term, Safra group is planning a major change in its core systems architecture to improve the automation capabilities and processes efficiency. Also, the asset manager is working to expand distribution efforts in order to boost sales of more sophisticated funds due to the aggressive competition in a lower local interest rate environment.

Risk management has maintained appropriate practices through committee-based governance and oversight. Funds had not experienced market risk limit breaches due to the low utilization in risk budgets based on its conservative approach. Deviations in concentration limits have been low and promptly addressed. Processes continue to be performed through good systems and controls from market and liquidity perspectives. Operational risk management has been improved in recent years and is supported by the group corporate structure although there is a room for further enhancements.

The investment process remains well-defined based on formalized committee decisions and practices that have been reviewed after the 2008 restructuring by new CEO and CIO. Portfolio management structure relies on a lean investment team with portfolio managers traditionally organized by market expertise and dedicated professionals for macro and equities research. The structure has exhibited overall stability since the implementation of a new compensation policy in 2008 although the equities team has presented a certain level of turnover during the last two years. Nevertheless, Fitch considers that the institutionalized nature of Safra Asset's investment and administration process mitigates the impacts of the reasonable turnover rate and equities funds represented 3% of total AUM in 1H'12.

Administration and Custody are mostly performed by the group's business units as it is at other large bank-related asset managers. The processes are compliant with regulations and best practices and are supported by secure and good technology platforms and the important corporate structure.

Among the key challenges for Safra Asset is to achieve lower volatility on AUM and a higher diversification of its client base. Other challenges include the continuous improvements in efficiency of processes and controls in order to reduce the operational risks, sustain a consistent performance mainly in multimarket funds class and achieve a steady investment team for equities funds; particularly in light of the high presence of institutional and sophisticated investors in its AUM base and the lean organization structure.

Since 1980, Safra group has provided asset management services through Safra Asset, business unit of Banco J Safra S.A., fully controlled by Banco Safra S.A., the sixth largest privately-owned bank in Brazil by assets. Safra Asset's AUM reached BRL32 billion in June 2012 and was ranked as the 11th-largest asset manager in Brazil with around 1.4% of market share (eighth-largest with 2.2% of market share in December of 2011), according to the Brazilian Association of Financial and Capital Markets Entities (Anbima).

Safra Asset's 'M1(bra)' rating is based on the following category scores, which represent a scale from 1 to 5, with 1 as the highest possible score:

Company & Staffing: 2.0

Risk Management & Controls: 1.75

Portfolio Management: 1.75

Investment Administration: 2.0

Technology: 2.25

The rating may be sensitive to significant adverse changes to any of the aforementioned rating drivers. A material deviation from Fitch guidelines for any rating driver could cause the rating to be lowered by Fitch. For additional information on Fitch asset managers' guidelines, please refer to the criteria referenced below, which can be found on Fitch's websites, at 'www.fitchratings.com' or 'www.fitchratings.com.br'.

Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Reviewing and Rating Asset Managers' (Aug. 13, 2010);

--'National Scale Asset Manager Rating Criteria' (July 2, 2010).

Applicable Criteria and Related Research:

Reviewing and Rating Asset Managers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547947

National Scale Asset Manager Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=536665

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Fitch Ratings
Primary Analyst:
Gilberto Moriama, [phone]
Director
Fitch Ratings Brasil Ltda.,
Alameda Santos, 700 - 7 andar - Cequeira Cesar
Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst:
Pedro Gomes, [phone]
Director
or
Committee Chairperson:
Davie R. Rodriguez, CFA, [phone]
Senior Director
or
Elizabeth Fogerty, [phone]
Media Relations, New York
[e-mail]

Source: Fitch Ratings