(The following statement was released by the rating agency) NEW YORK, September 14 (Fitch) Brazil’s recently announced increase on the social security tax levied on banks could negatively affect the sector’s net earnings, says Fitch Ratings. Fitch expects banks to adjust to the higher tax burden through loan repricings, resulting in a marginally higher cost of credit for borrowers, which could cause an uptick in delinquencies and further weaken loan growth. Fitch estimates that the net effect of the tax increase could trim banks’ earnings by 4% on average. Initially, banks will benefit from the increase of their tax credit base, resulting in an accounting gain that will eventually be erased by higher fiscal and labor provisions for anticipated loan losses. Banks may be challenged in recouping some of the higher tax expenses through re-pricings of loans and services, as loan rates are already at their highest levels in three years, averaging about 17.4%. Higher loan rates would be an additional headwind on loan originations. The tax increase raises Brazil’s social contribution on net profits (CSLL) to 20% from 15%, effective Oct. 1. The CSLL currently makes up about 40% of a bank’s total income tax. Effective tax rates on Brazil’s banks stood at about 28% as of year-end 2014 among a sample group of 12 Brazilian banks. Brazil’s challenging fiscal condition stems from weak tax revenue amid an economic recession and certain tax cuts awarded in recent years. The Brazilian government is currently pursuing an agenda of tax hikes and spending adjustments to improve the outlook for fiscal accounts. The financial services industry is one of Brazil’s most targeted corporate sectors for raising tax revenue. Recent proposals targeting tax schemes applicable to the financial sector (none of which has moved forward) have included further increasing the CSLL to 23%, ending interest on capital (IOC) deducibility, and re-establishing the provisional contribution on financial transactions (CPMF). The government did achieve the reinstatement of a financial transaction tax (IOF) on loans from the state-development bank BNDES, while aiming to increase revenues and reduce its budget deficit. In Fitch’s opinion, the proven capacity of Brazilian banks to preserve profitability exposes them to the risk of additional tax increases. Bank results have been aided by good cost management, diversification into noncredit products and active repricings of loan books. The weighted average ROAA for the Brazilian banking system reached 1.1% in first-quarter 2015, versus 1.2% in 2014 due to larger credit costs. Moreover, despite wider interest margins, further expected pressures on credit costs and this new tax increase will pressure profitability in 2015, 2016 and likely first-half 2017, due to the natural lagging effect of credit deterioration. Further tax increases could lead to an even sharper slowdown on credit demand and negative headwinds in asset quality. If realized, they could contribute to Fitch maintaining its negative credit outlook on the Brazilian financial sector. Contacts: Raphael Nascimento Associate Director Latin American Financial Institutions + 55 11 4504-2600 Sao Paulo, Brazil Eduardo Ribas Director Latin American Financial Institutions + 55 11 4504-2213 Claudio Gallina Senior Director Latin American Financial Institutions + 55 21 4504-2216 Matthew Noll, CFA Senior Director Financial Institutions Fitch Wire + 1 212 908-0652 New York Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed atwww.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.