Banco Modal S.A. has a meaningful volume of investments allocated to merchant banking. In the last few years, the fair value assessment of these investments resulted in gains that

FINANCIAL INSTITUTIONS

CREDIT OPINION9 November 2018

Update

RATINGS

Banco Modal S.A.Domicile Rio de Janeiro, Rio de

Janeiro, Brazil

Long Term CRR Ba3

Type LT Counterparty RiskRating - Fgn Curr

Outlook Not Assigned

Long Term Debt Not Assigned

Long Term Deposit B1

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Analyst Contacts

AlexandreAlbuquerque

+55.11.3043.7356

VP-Senior [email protected]

Farooq Khan [email protected]

Vicente Gomez +52.55.1555.5304Associate [email protected]

Aaron Freedman +52.55.1253.5713Associate Managing [email protected]

» Contacts continued on last page

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Banco Modal S.A.Update to credit analysis

SummaryBanco Modal S.A.'s (Modal) baseline credit assessment (BCA) of b1 takes into considerationthe bank's reliance on market funds, deteriorating profitability, moderate capitalization, highlevel of charge offs and high level of concentrations. The bank's ample liquidity, partiallyoffsetting these challenges. The standalone assessment also factors in the risks associatedwith the bank's large exposure to merchant banking investments.

The deposit and senior debt ratings of B1 are based on Modal's BCA of b1, and do not benefitfrom any parental and government support uplift, given our assessment of a low probabilityof support, owing to the bank's modest market share in domestic deposits.

Exhibit 1

Rating Scorecard - Key financial ratios

1.8% 8.4%

-0.8%

13.4% 67.7%

-13%

-3%

7%

17%

27%

37%

47%

57%

67%

77%

-2%

0%

2%

4%

6%

8%

10%

12%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid Banking

Assets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

Banco Modal S.A. (BCA: b1) Median b1-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Financial Metrics

THIS REPORT WAS REPUBLISHED ON 14 NOVEMBER 2018 TO INCLUDE A PARAGRAPH ON PAGE 3 REGARDING THEBANK'S LOAN BOOK AND A PARAGRAPH ON PAGE 4 DISCUSSING POTENTIAL FUTURE EARNINGS GENERATIONFROM FEE-BASED ACTIVITIES, INCLUDING 'MODALMAIS' DIGITAL PLATFORM.

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1149288

https://www.moodys.com/credit-ratings/Banco-Modal-SA-credit-rating-820602468

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Adequate liquidity management

» Capitalization is moderate

Credit challenges

» Profitability challenged to show stable earnings generation capacity

» Asset risk strained by single-name concentration, market risk and non-banking investments and high charge offs

OutlookThe stable outlook on Modal's ratings reflects our expectation that the potential negative pressures from the bank's asset risk andprofitability are appropriately counterbalanced by its capital position and adequate liquidity management.

Factors that could lead to an upgrade

» There is limited upward pressure to Modal’s ratings. However, ratings could benefit from substantial and sustained improvement inits profitability metrics and a reduction on its earnings volatility. A decline in the exposure to risky merchant banking investmentsand the maintenance of its capital position above current levels could bring ratings up.

Factors that could lead to a downgrade

» The bank’s ratings could face downward pressure if it is unable to sustain its capitalization in conjunction with keep posting losses,or if the bank encounters problems with its merchant banking investments, or both.

Key indicators

Exhibit 2

Banco Modal S.A. (Consolidated Financials) [1]6-182 12-172 12-162 12-152 12-142 CAGR/Avg.3

Total Assets (BRL billion) 2.9 3.2 2.9 1.8 1.5 20.14

Total Assets (USD billion) 0.8 1.0 0.9 0.5 0.6 8.04

Tangible Common Equity (BRL billion) 0.2 0.3 0.4 0.2 0.2 1.74

Tangible Common Equity (USD billion) 0.1 0.1 0.1 0.1 0.1 -8.54

Problem Loans / Gross Loans (%) 0.4 1.1 1.8 3.8 0.0 1.45

Tangible Common Equity / Risk Weighted Assets (%) 8.4 8.7 11.2 7.6 10.4 9.26

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 0.7 1.8 3.3 9.1 0.0 3.05

Net Interest Margin (%) 0.9 2.4 2.9 3.9 2.1 2.45

PPI / Average RWA (%) -0.8 1.1 0.8 1.5 -0.1 0.56

Net Income / Tangible Assets (%) -0.8 0.5 0.5 0.8 -0.4 0.15

Cost / Income Ratio (%) 120.8 77.2 79.0 67.7 101.9 89.35

Market Funds / Tangible Banking Assets (%) 24.1 13.4 14.3 12.9 21.9 17.35

Liquid Banking Assets / Tangible Banking Assets (%) 71.6 67.7 59.6 62.0 59.8 64.15

Gross Loans / Due to Customers (%) 29.7 25.3 39.1 49.0 68.3 42.35

[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP. [3] May include rounding differences due toscale of reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latestaccounting regime. [6] Simple average of Basel III periods presented.Source: Moody's Financial Metrics

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 9 November 2018 Banco Modal S.A.: Update to credit analysis


ProfileModal is an investment bank, with BRL2.9 billion of assets as of June 2018. The bank's main businesses are advisory, capital market,brokerage, and merger and acquisition services. The bank is small compared with Brazil's overall banking system, with a market share ofless than 1% each in terms of deposits, assets and loans as of June 2018. Created in 1996, Modal has offices in Rio de Janeiro and SaoPaulo, and a branch in the Cayman Islands.

Detailed credit considerationsThis assessment takes into account Modal's Prudencial Conglomerate financial statements, which include the statements of BancoModal S.A. and its subsidiaries, and Modal Administradora de Recursos Ltda.

Asset risk strained by single-name concentration, market risk and non-banking investments and high charge offsThe b1 score for Asset Risk reflects the inherent borrower concentration in Modal's loan book and relevant non-lending credit risks.Also, it is somewhat weighted by the bank's exposure to market risk, which represented 8.9% of its total capital requirement as of June2018, though down from the 25% of the same period last year.

Modal's total credit risk exposure, including loans, private securities and guarantees, declined by 20.6% in the 12 months ended June2018. This decline was driven mainly by a sharp decline in the bank's loan book (-27%).

The problem loan ratio was equivalent to 0.4% as of June 2018, and experienced high volatility in the last years, which reflects thefacts that (1) the bank's loan book is somewhat concentrated, and (2) there are still negative pressures arising from the economicenvironment. In addition, the bank presented charge offs equivalent to 4.8% of the bank's gross loans as of June 2018.

However, the bank's reserve coverage is still ample as loan loss reserves represented a high 727% of problem loans as of June 2018,which can give an ample loss absorbing cushion against unexpected losses.

Modal has a meaningful volume of investments allocated to merchant banking. In the last few years, the fair value assessment of theseinvestments resulted in gains that are accounted for directly in the bank’s shareholders' equity. Although an impairment analysis ofthese investments is carried out each six to 12 months, the continued success and future valuation of these investments is difficult toforecast with any certainty because these investments are mostly in non-financial private companies with limited transparency.

Risks related to high borrower concentration remains a concern, particularly when compared to same rated peers. This challengereflects Modal’s exposure to a limited number of sectors and will continue to expose asset quality to potentially high volatility. As ofJune 2018, the bank’s exposure to the infrastructure sector, including loans and private securities, represented about 27% of the bank’stotal loans. That said, we expect that the bank will maintain reasonable levels of reserves for loan losses, which will help mitigate assetrisks.

Capitalization is moderateThe b2 Capital score reflects Moody's capital measure, represented by the ratio of tangible common equity to risk-weighted assets(TCE/RWA) of 8.4% as of June 2018, which declined from 11.2% in December 2016. The sharp drop in capital levels was because of asignificant increase in intangible assets, which we deduct from TCE because such assets do not have good extraordinary loss absorptioncapacity.

However, Modal has reported adequate regulatory capital, illustrated by its Common Equity Tier 1 ratio of 12.8% as of June 2018compared with 13.9% as of June 2017. The trend of Modal’s capital position will be directly linked to its ability to generate capital withinternal results to support its ongoing growth in operations.

Profitability challenged to show stable earnings generation capacityThe caa2 profitability score captures the potential challenges arising from Modal's ability to sustain stable earnings in a slow businessenvironment. Also, the score takes into account the revenue contribution from segments that are more subject to volatility, includinginvestment banking, sales, and trading and merchant banking.

As such the bank posted a net income to tangible banking assets of -0.8% due to a lower net interest income, net interest margincompressed to 0.87% from the last three year average of 3%. At the same time the bank efficiency worsened due to higher



administrative and personnel expenses. The operating expense increased 47% year-over-year, while its loan book contracted asignificantly 27%.

Historically, Modal has recorded meaningful volumes of unrealized gains, which were equivalent to 0.4% of its tangible assets as ofJune 2018. The current unrealized gains are mainly related to the positive evaluation of the bank's merchant banking investments andsecurities. The unrealized gains and losses are incorporated into our profitability assessment when they become effectively realized.Therefore, the bank's stock of unrealized gains may benefit its future results if they are realized at current levels.

Moody’s expects future earnings recurrence to improve in the next 12 to 18 months as Modal focuses on enhancing fee-based incomeactivities, that helps to insulate earnings volatility from trading and credit. To this end, the bank is promoting its newly created digitalplatform ModalMais, which will add more granular revenues, and increasing its mutual and private equity funds activities, includingcustody and administration services. That said, we will continue to closely monitor the bank’s ability to implement its business plan andto consistently improve its recurring earnings.

Large volume of liquid resourcesThe Combined Liquidity score of baa3 captures the bank's large volume of liquid assets.

Modal holds a large volume of liquid resources even after deducting the illiquid investments from its securities portfolio, mainlyincluding its merchant banking investments, and other instruments with lower liquidity, such as debentures. The bank also maintains afavorable tenor gap in the maturity of its assets and liabilities.

Modal's rating is supported by the Moderate- Macro Profile of BrazilBrazil's Moderate- Macro Profile reflects the large size and diversified nature of the country's economy, more credible monetary policy,increasing commitment to addressing corruption and improving overall government effectiveness, and very low susceptibility toexternal shocks. However, Brazil's economic rebound, which began in 2017 after a deep two-year recession, has been weaker thanexpected, reflecting the high degree of uncertainty surrounding policy continuity beyond 2019.

Although public-sector banks continue to account for a substantial portion of total credit, loans granted by them have beencontracting since 2015, which has reduced the market distortions created by their previous aggressive lending policies. Moderateeconomic growth in 2018 and 2019 will support modest lending growth over the next 12 months. Consequently, banks will face little tono pressure on their funding needs, while low interest rates and low inflation will improve borrowers' repayment capacity, leading to astabilization in asset quality.

Support and structural considerationsGovernment supportWe believe there is a low likelihood of government support for Modal's rated deposits, given its modest market share of deposits inBrazil.

Counterparty Risk (CR) AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default, and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR Assessment is an opinion on the counterparty risk related to a bank’s covered bonds, contractual performanceobligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

Modal's CR Assessment is positioned at Ba3(cr)/Not Prime(cr)The CR Assessment is one notch above the bank's adjusted BCA of b1, and, therefore, above the bank's deposit rating, reflecting ourview that the probability of default is lower at the operating obligations than at the level of deposits. Modal's CR Assessment does notbenefit from government support because such support is not incorporated in the bank's deposit ratings.

Counterparty Risk Rating (CRR)Moody’s Counterparty Risk Ratings are opinions of the ability of entities to honor the uncollateralized portion of non-debt counterpartyfinancial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honored. CRR



liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralized portion ofpayables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchase agreements. CRRsare not applicable to funding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicerand trustee obligations, and other similar obligations that arise from a bank performing its essential operating functions.

Modal's CRR is positioned at Ba3/Not PrimeModal's global local and foreign currency CRRs are positioned at Ba3 and Not Prime, one notch above the bank's adjusted BCA,reflecting the lower probability of default of CRR liabilities and our expectation of a normal level of loss given default.

About Moody's Bank ScorecardOur scorecard is designed to capture, express and explain in summary form our Rating Committee’s judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.

Rating methodology and scorecard factors

Exhibit 3

Banco Modal S.A.Macro FactorsWeighted Macro Profile Moderate

-100%

Factor HistoricRatio

InitialScore

ExpectedTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 1.8% baa3 ↓ ↓ b1 Single name

concentrationNon lending credit risk

CapitalTCE / RWA 8.4% b2 ← → b2 Risk-weighted

capitalisationProfitabilityNet Income / Tangible Assets -0.8% caa2 ← → caa2 Expected trend

Combined Solvency Score b1 b2LiquidityFunding StructureMarket Funds / Tangible Banking Assets 13.4% baa3 ← → ba2 Market

funding qualityLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 67.7% a3 ← → baa1 Quality of

liquid assetsCombined Liquidity Score baa2 baa3Financial Profile ba3

Business Diversification 0Opacity and Complexity -1Corporate Behavior 0

Total Qualitative Adjustments -1Sovereign or Affiliate constraint: Ba2Scorecard Calculated BCA range ba3-b2Assigned BCA b1Affiliate Support notching 0Adjusted BCA b1



Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Rating 1 0 ba3 0 Ba3 Ba3Counterparty Risk Assessment 1 0 ba3 (cr) 0 Ba3 (cr) --Deposits 0 0 b1 0 B1 B1[1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody's Financial Metrics



Ratings

Exhibit 4Category Moody's RatingBANCO MODAL S.A.

Outlook StableCounterparty Risk Rating Ba3/NPBank Deposits B1/NPNSR Bank Deposits Baa2.br/BR-3Baseline Credit Assessment b1Adjusted Baseline Credit Assessment b1Counterparty Risk Assessment Ba3(cr)/NP(cr)

Source: Moody's Investors Service



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REPORT NUMBER 1149288


http://www.moodys.com


Analyst Contacts

Alexandre Albuquerque +55.11.3043.7356VP-Senior [email protected]

Farooq Khan [email protected]

Vicente Gomez +52.55.1555.5304Associate [email protected]

Aaron Freedman +52.55.1253.5713Associate [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


Documents

Banco Modal S.A. has a meaningful volume of investments allocated to merchant banking. In the last few years, the fair value assessment of these investments resulted in gains that