Itau Unibanco Holding S.A. -- Moody's affirmed Banco BMG's ratings following the announcement of joint-venture with Itaú Unibanco; outlook remains negative

Sao Paulo, July 13, 2012 -- Moody's Investors Service has today affirmed all the ratings assigned to Banco BMG S.A. (BMG), including its D- bank financial strength rating (BFSR), its Ba3 long-term global local and foreign currency deposit rating and its Not Prime short-term global local and foreign currency deposit rating. The bank's long-term foreign currency senior unsecured and subordinated debt ratings were affirmed at Ba3 and B1, respectively, as were its long-term and short-term deposit ratings on the Brazilian national scale, at A3.br and BR-2, respectively. The outlook on all the ratings remains negative.

This rating action follows the 10 July 2012 announcement that BMG and Itaú Unibanco S.A. (IU) will enter a joint venture to form a new entity, Banco Itaú BMG Consignado, which will be dedicated to payroll lending, subject to the execution of final agreements and regulatory approval. In a related action, Moody's has affirmed all the ratings assigned to IU, maintaining its positive rating outlook.

RATING RATIONALE

Affirmation of Banco BMG's ratings

In affirming Banco BMG's ratings, Moody's acknowledges the benefits of the joint venture, which include BMG's partnership with the higher rated IU in the development of a strategic business for both banks, as well as the provision of a long-term funding facility at competitive rates that will support BMG's loan origination. In addition, under the agreement BMG will transfer its distribution platform, controls and back-office operations to the new bank, which will bring down its currently high operating costs. IU is expected to retain 70% of the new bank's ownership, with the remaining 30% in the hands of BMG.

The structure of the deal will allow BMG to retain control over 30% of all loans originated by the new bank, with the possibility of selling them back to IU. Such an arrangement ensures that funding will be available to support loan origination and growth, while addressing BMG's own on-balance-sheet funding challenges.

Moody's notes that concerns about reduction of the bank's core operation as the new bank takes over the payroll origination is mitigated by the expectation that the new venture will provide opportunities for loan growth and earnings generation, particularly given its importance in diversifying IU's product mix and that bank's commitment to funding the operation. The affirmation of the ratings, therefore, incorporates Moody's assessment that BMG's minority interest in the new bank should result in higher earnings than those that would have been generated by the bank alone.

Moody's also notes that by transferring its expertise and infrastructure in payroll lending to the new bank, BMG likely will need to develop new markets and products, which may affect its earnings, asset quality and capital. Management intends to focus on developing a commercial lending platform and other consumer finance products such as auto finance, as it leverages the platform it acquired last year from Banco Schahin.

The negative rating outlook reflects Moody's concerns about the transition of the franchise in a more competitive market, as the bank shifts its business toward other consumer products and lending to small and midsized enterprises. Negative revenue dynamics for the next few quarters and the bank's currently limited capital are also incorporated into the negative outlook, since these factors likely will continue to restrict BMG's business growth.

The last rating action on Banco BMG occurred on 19 March 2012, when Moody's rated the bank's US$150 million 9.625% senior unsecured notes due March 2017 at Ba3. All other ratings remained unchanged.

Banco BMG S.A. is headquartered in Belo Horizonte, Brazil and had consolidated assets of R$19.7 billion (US$10.8 billion) and equity of R$3.4 billion (US$1.9 billion) as of 31 March 2012.

Affirmation of Itaú Unibanco's ratings

The affirmation of Itaú Unibanco S.A.'s ratings takes into account the positive effect of the deal on the bank's portfolio mix, as it allows for increased exposure to low-risk, low-margin loans, in line with management's stated strategy. The capitalization of the joint venture, at R$700 million, is not material for IU considering its consolidated BIS ratio of 16.1% as of 31 March 2012.

The last rating action on IU occurred on 27 June 2012, when Moody's downgraded the bank's standalone BSFR to C- from B- and its supported long-term and short-term global local currency deposit ratings to A3 from A1 and to Prime 2 from Prime 1, respectively. This concluded the rating review initiated in February 2012 related to the assessment of sovereign linkages. Other ratings remained unchanged. The ratings have a positive outlook, in line with the outlook on Brazil's Baa2 sovereign debt rating.

Itaú Unibanco Holding S.A. is headquartered in São Paulo, Brazil and had consolidated assets of R$896.84 billion (US$492.3 billion) and equity of R$72.5 billion (US$39.8 billion) as of 31 March 2012.

The principal methodology used in rating these banks was "Moody's Consolidated Global Bank Rating Methodology" published on 29 June 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".br" for Brazil. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in March 2011 titled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

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