Rio Grande Do Sul and Moody's Credit Report

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1 Page 1 of 6 Credit Opinion: Banco do Estado do Rio Grande do Sul S.A. Global Credit Research - 10 Jan 2012 Porto Alegre, Brazil Ratings Category Moody's Rating Bank Deposits Baa3/P-3 NSR Bank Deposits -Dom Curr Aaa.br/BR-1 Bank Financial Strength D+ Baseline Credit Assessment Contacts Analyst Phone Aleandre Albuquerque/Sao Paulo Ceres Lisboa/Sao Paulo M. Celina Vansetti/New York City Key Indicators Banco do Estado do Rio Grande do Sul S.A. (Consolidated Financials)[1] [2]9-11 [2]12-10 [2]12-09 [2]12-08 [3]12-07 Avg. Total Assets (BRL billion) [4]15.6 Total Assets (USD billion) [4]14.4 Tangible Common Equity (BRL billion) [4]10.8 Tangible Common Equity (USD billion) [4]9.7 Net Interest Margin (%) [5]9.4 PPI / Avg RWA (%) [6]7.2 Net Income / Avg RWA (%) [6]3.5 (Market Funds - Liquid Assets) / Total Assets (%) [5]-35.9 Core Deposits / Average Gross Loans (%) [5]136.8 Tier 1 Ratio (%) [6]17.4 Tangible Common Equity / RWA (%) [6]16.7 Cost / Income Ratio (%) [5]57.2 Problem Loans / Gross Loans (%) [5]1.7 Problem Loans / (Equity + Loan Loss Reserves) (%) [5]5.0 Source: Moody's [1] All ratios are adjusted using Moody's standard adjustments [2] Basel II; LOCAL GAAP [3] Basel I; LOCAL GAAP [4] Compound Annual Growth Rate based on LOCAL GAAP reporting periods [5] LOCAL GAAP reporting periods have been used for average calculation [6] Basel II & LOCAL GAAP reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE Moody's Investors Service assigns a bank financial strength rating (BFSR) of D+ (D plus) to Banco do Estado do Rio Grande do Sul S.A. (Banrisul), which translates into a baseline credit assessment (BCA) of Baa3. The BFSR reflects Banrisul's franchise as a state-government bank with a solid client base in the region and relevant market penetration in terms of core deposit and lending operations within the state. The bank enjoys a strong business connection to corporates located in Rio Grande do Sul and is the paying agent of civil servants from numerous municipalities within the state. The rating also incorporates Banrisul's adequate profitability indicators, which are supported by a steady and low-cost funding structure. The bank's activities include short-term loans to small and medium-sized companies and payroll loans to civil servants. The long track record of low asset quality metrics is a reflection of Banrisul's granular and low-risk loan book. On the other hand, the rating is constrained by the bank's limited geographic diversification, which makes Banrisul more vulnerable to growing competition in the banking sector and, at the same time, is a challenge for the epansion of operations outside its niche region. Moreover, the concentration of activities in a single region increases the risk that the bank's earnings generation may be affected by adverse economic impacts to the rural sector, hence hitting most of the bank's clients. These are factors that could pressure profitability should growth opportunities become scarcer in the region. The Baa3 global local-currency (GLC) deposit rating derives from Banrisul's BCA of Baa3. Moody's also incorporates an assessment of local government support from its controlling shareholder, the state of Rio Grande do Sul, according to which, the state government would be forthcoming in case of stress because of its regional importance in terms of deposits - roughly 26.7% of demand and 16.4% of savings deposits in the state - and also because of its regional identity. Rating Drivers

2 Page 2 of 6 - Role of payment agent for civil servants allows bank to access a steady core-funding base. - Good asset quality indicators deriving from a low-risky loan portfolio. - Adequate profitability and efficiency ratios. - Regional franchise with stable market share of deposits and loans in the region. - As a state-government bank, the bank leverages off the supplier chains of the state and government-related companies. - Growth prospects outside the state of Rio Grande do Sul are subject to strong competition. - Risk of misuse of Banrisul by local government is lessened by the fact that capital is publicly listed and that bank abides to corporate governance practices Rating Outlook All ratings have a stable outlook. What Could Change the Rating - Up Upward pressures could come from the bank's proven ability to withstand rising competition while sustaining the bank's profitability and capital ratios, as well as asset quality standards. Success in epanding operations outside the state of Rio Grande do Sul could also be positive for profitability and for ratings. What Could Change the Rating - Down Negative pressure on ratings could arise from deterioration in profitability due to increase in competition within its core market as well as inability to epand operations beyond the state's borders. Potential weakening of agricultural activity in the region could also drive profits down, in view of client's strong connection to the segment. Recent Results and developments In September 2011, Banrisul posted a net income of R$677.7 million, up by 32.5% year-on-year basis. Core earnings measured by pre-provision income to average risk weighted assets increase to 8.1% from 7.5% in September 2010, resulting from the epansion of the loan portfolio (21% in the year) in highmargined commercial loans, especially to individuals - payroll loans - and to middle market companies. Cost- to-income ratio continued to decrease, reaching 49.76% from 52.32% in the previous year, indicating management's ability to maintain epenses at control while revenues goes up as the loan portfolio epands. Total loans amounted to R$19.6 billion, accounting for 54% of total assets. Improved asset quality ratios (NPLs over 90 days as a percentage of total loans down to 1.38% in September 2011, from 1.63% in September 2010) reflecting both the low-risk nature of the portfolio as well as the epansion of operations. The commercial portfolio was 56% composed by consumer lending and 44% by wholesale businesses. Main increments by products were payroll loans and working capital. RECENT CREDIT DEVELOPMENTS In December 23, 2011, Banrisul published a material fact announcing the acquisition of 49.9% of shares of the payroll loan provider Bem-Vindo Promotora de Vendas e Serviços S.A. The acquisition of the company will allow Banrisul to participate directly in the origination of payroll loans outside the state of Rio Grande do Sul, since Bem-Vindo has a branch network that etents to other regions in Brazil: 44 in the southeast, 13 in the northeast, 7 in the north, 5 in the south and 4 in the mid-west. The acquisition of Bem-Vindo will also enable Banrisul to decrease the amount of payroll loans it acquires from other financial institutions. DETAILED RATING CONSIDERATIONS Detailed considerations for Banrisul's currently assigned ratings are as follows. Bank Financial Strength Rating The D+ stand-alone BFSR reflects the bank's regional franchise and its participation in the markets for deposits and lending operations within the state of Rio Grande do Sul. As a state-controlled bank, Banrisul is responsible for the payroll of civil servants from the state and numerous municipalities in the region. The bank is also able to leverage credit activities off local companies that are government's suppliers. Having the largest distribution footprint and longest presence in the region, Banrisul benefits from an ample client base in a state that presents GDP per capita above the country's average, unemployment rates below national level and high population density. Management has adopted a strategy to reduce dependence on the state and to increase competitiveness by epanding the branch network outside the state of Rio Grande do Sul. However, Banrisul still has to prove its ability to compete adequately in markets where the bank does not benefit from access to cheap and abundant funding. Moody's BFSR scorecard outcome was positively affected by Banrisul's financial indicators, particularly in terms of profitability and capital adequacy; hence resulting in A scores for both factors. The scorecard's outcome also benefited from Moody's generally positive opinion about Brazil's regulatory environment. The rating is also underpinned by a comfortable liquidity position derived from a steady funding base, which is largely comprised of low cost resources from individuals, including demand, savings and time deposits. The bank's granular and large distribution network in the state facilitates access to core deposits, thus lessening eposure to liquidity crunches. The assigned rating of D+ is two notches below the aggregate rating of C produced by Moody's scorecard. We believe the D+ is an appropriate measure of the bank's stand-alone financial strength because it captures the high reliance of the bank's business on the regional economy as well as the challenges to epand operations organically outside Rio Grande do Sul.

3 Page 3 of 6 Liquidity Banrisul's highly liquid profile is supported by its core funded operation, which has benefited from the bank's access to deposit accounts of civil servants from the state of Rio Grande do Sul (RS) and from most of the municipalities within RS. Such source of funding has proven resilience in times of stress. As of September 2011, core deposits (demand and savings) represented 36% of Banrisul's total deposits and 31% of all funding sources. Banrisul's balance of time deposits have remained stable for the past years. The bank's granular footprint in the state contributes to the distribution of time deposits to individuals, who hold most of that instrument (80%) while the remaining position (20%) is etended to small and medium sized companies. There is no relevant participation of institutional investors. Domestic on-lending from both federal and regional development banks have also contributed to diversify the bank's funding structure and support the longterm commercial loans. Nevertheless, Banrisul's comfortable liquidity cushion - even considering its eposure to riskier securities - would be sufficient to meet its maturities and other potential outflows. The bank's funding base is very granular, showing very small concentration in terms of individual depositors. As of September 2011, the 10 largest depositors represented 4.5% of total deposits and 3.9% of total funding. The 100 largest depositors represent 13.5% and 11.5%, respectively. Franchise Value Banrisul was established in 1928 as a bank oriented to supply rural and mortgage loans. During the 60's and 70's, after having epanded operations through the state, the bank acquired public financing institutions in the region. As of 1990, Banrisul was a multiple-service bank. In 2007, the bank made an primary public offering of 42.82% of its total capital, raising R$2.1 billion and enhancing its corporate governance practices to abide by the rules of BMF&Bovespa's Novo Mercado. Currently, the portfolio of products offered by the bank includes: (1) payroll- deductible loans to civil servants and retirees; (2) consumer loans to individuals; (3) short-term secured loans to small and medium-sized private companies; and (4) loans to the agricultural sector. The bank also oversees the payment of salaries for civil servants that are employed by the state government as well as for municipal governments. Moreover, the bank provides financial services to the state government as well as to entities associated with the state. Despite its good market positioning in its core regional market the bank has a more modest participation in the system's deposits and a small footprint within the national industry. Nevertheless, as of September 2011, the bank ranked 11th in terms of asset and 8th in terms of total deposits. The bank's business scope is mostly tied to the local economy, which has a good performance compared to the country, accounting for roughly 6.5% of Brazil's GDP in Banrisul has 399 branches located in the state of Rio Grande do Sul, which makes it the largest distribution network in the region. In addition, the bank has 25 branches in the neighboring state of Santa Catarina, 14 more located in other Brazilian states and two abroad (New York and Grand Cayman). Banrisul's Overall, the bank is present in 414 cities, covering 98.3% of its main market. In 2011, management has put in place an epansion project for branches in the state of Santa Catarina. The client base comprises approimately 2.62 million account holders, which represent around 24.5% of the state's population. Banrisul's main competitors are Banco do Brasil, Caia Economica Federal and Santander, which acquired Meridional, a bank previously owned by the federal government. The competition is stronger with those 3 banks because they have been present in the region for a long time. Large retail banks Bradesco and Itaú are also present in the region, however, with fewer branches. Asset Quality Banrisul's good asset quality is supported by the low-risk nature of its loan book, which consisted 31% of payroll loans and 33,3% of collateralized operations with small- and mid-sized companies. The recent epansion of the bank's payroll loan operations also contributed to keep delinquency at low level. For the past three years the bank has reported non-performing loan ratios that remained below 2%. At those levels, the bank's delinquency ratio have also remained below the national average for the system. Overall, credit risk is mitigated by the good granularity of Banrisul's loan book, particularly deriving from a retail lending operation that accounts for roughly 56% of total loans, and by a secured commercial operation predominantly comprised of small and medium companies from the region. Furthermore, the favorable macroeconomic conditions present in the state of RS contribute to keep delinquency at low level. Management maintains high level of reserves against potential losses as part of its conservative approach towards credit risk - the ratio reached 473% of non-performing loans in September 2011, indicating a comfortable cushion to absorb both epected and unepected losses. Profitability The bank's profitability is sustained by the consistent growth of loan operations and by a funding base that is both stable and has low cost. Earnings are originated predominantly from commercial lending, which comprised roughly 57% of total revenues as of September More specifically, commercial loans related to the retail segment answered for 36% of the total. During the past years, payroll loans have been an important driver for growth in revenues and contributed to lessening the relevance of revenues from securities operations in total earnings (18% of total in September 2011). Overall, the bank's regional presence and low- risk products guarantee a fairly stable earnings generation. Banrisul's access to a steady client base, both individuals and local companies, supports earnings recurrence. As a result, profitability indicators have shown resilience to domestic liquidity tightening in late 2008 and 2009 and to competition, as indicated by a pre-provision profits to average risk-weighted assets ratio of 8.42% and net income to average risk-weighted assets of 3.7% in September Moreover, net interest margins have remained in the range of 8.5% and 10.5% since December Efficiency Banrisul's efficiency ratio has been affected positively by increase in revenues from lending operations, which jumped roughly 24% on a year-over-year basis. Epansion of the bank's loan book, in operations both with individuals (annual growth of 17%) and companies (24.2%), has driven revenues up. At this point, efficiency is not a factor of concern although further improvements would be positive for Banrisul's rating. Capital Adequacy Banrisul's capital ratio has declined during the past three years as a consequence of the increased volume of loan operations in the bank. Nevertheless, the BIS ratio is still at an adequate level. The ratio fell to 15.9% in September 2011 from 20.1% in Since 2007, after the bank had its initial public offering, the volume of dividends distributed to shareholders have dimmed to payout levels of 35% to 38%,

4 Page 4 of 6 an important step to strengthen Banrisul's capital replenishment capacity through income retention. Risk Positioning Banrisul is controlled by the government of the state of Rio Grande do Sul, which detains 99.59% of the bank's voting capital and 56.97% of total capital. The remaining shares of the bank belong to Banrisul Foudantion (0.15%), the bank's pension fund, the Social Security Institute of the state of Rio Grande do Sul (0.05%), and investors (42.82%) that acquired participation in the bank's IPO held in Despite the controlling stake of the government, corporate governance practices were enhanced in 2007, according to levels required by Bovespa's Novo Mercado rules. The government is responsible for appointing the bank's president as well as some of the senior eecutives. Nonetheless, more of one-third of the Board is comprised of independent members. As of March 2011, the bank's corporate governance was enhanced with the creation of a position of a chief control and risk officer. The CRO is responsible for monitoring and controlling credit, market, liquidity and operational risks, which were already managed altogether through an integrated risk department established in August The bank's financial statements (as with all commercial Brazilian banks) are prepared under local GAAP and provide some level of detail; however, they still lack important disclosures, such as detailed calculation of capital adequacy and risk weighted assets. The bank releases results on a quarterly basis as well. Global Local Currency Deposit Rating (Joint Default Analysis) Banrisul's global local currency deposit rating of Baa3 derives from the bank's BCA of Baa3. The GLC deposit rating also incorporates Moody's assessment of support from Banrisul's controlling shareholder, the regional government of the state of Rio Grande do Sul. Such support would be forthcoming should a stress occur because of the bank's role as payment agent for state and municipal public servants as well as because of its market share of core deposits in the region. Nonetheless, the bank would receive no systemic support because of its limited market share in terms of demand and saving deposits relative to total deposits in the system. Notching Considerations Moody's believes that there is no legal authority mechanism in place for Brazilian bank regulators to impose losses on subordinated creditors outside of a liquidation scenario; therefore, junior obligations should be notched off an issuer's fully supported deposit rating or that for GLC deposits. Currently, Banrisul does not have any junior obligation rated by Moody's. National Scale Rating Moody's assigns long- and short-term Brazilian national scale ratings of Aaa.br and BR-1 to Banrisul. The rating derives from the bank's creditworthiness in its niche market and is derived from its global local-currency rating. Foreign Currency Deposit Rating Banrisul has foreign currency deposit ratings of Baa3 and Prime 3. Following Moody's methodology, the rating maps directly from the bank's global localcurrency deposit rating. ABOUT MOODY'S BANK RATINGS Bank Financial Strength Rating Moody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety and soundness and, as such, eclude certain eternal credit risks and credit support elements that are addressed by Moody's Bank Deposit Ratings. Bank Financial Strength Ratings do not take into account the probability that the bank will receive such eternal support, nor do they address risks arising from sovereign actions that may interfere with a bank's ability to honor its domestic or foreign currency obligations. Factors considered in the assignment of Bank Financial Strength Ratings include bankspecific elements such as financial fundamentals, franchise value, and business and asset diversification. Although Bank Financial Strength Ratings eclude the eternal factors specified above, they do take into account other risk factors in the bank's operating environment, including the strength and prospective performance of the economy, as well as the structure and relative fragility of the financial system, and the quality of banking regulation and supervision. Moody's uses the Baseline Credit Assessment (BCA) to map BFSRs onto the 21-point Aaa-C rating scale and like the BFSR, it reflects a bank stand- alone default risk. Each point on the Aaa-C scale represents a specific probability of default and therefore allows Moody's to use the BCA as an input to Moody's Joint Default Analysis (JDA), described below. The baseline credit assessment reflects what the local currency deposit rating of the bank with the given BFSR would be without any assumed eternal support from a government or third party. Global Local Currency Deposit Rating A deposit rating, as an opinion of relative credit risk, incorporates the Bank Financial Strength Rating as well as Moody's opinion of any eternal support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's ability to repay punctually its deposit obligations. As such, Moody's Bank Deposit Ratings are intended to incorporate those aspects of credit risk relevant to the prospective payment performance of rated banks with respect to deposit obligations, and includes: intrinsic financial strength, sovereign transfer risk (in the case of foreign currency deposit ratings), and both implicit and eplicit eternal support elements. Moody's Bank Deposit Ratings do not take into account the benefit of deposit insurance schemes which make payments to depositors, but they do recognize the potential support from schemes that may provide assistance to banks directly. According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bank is determined by the incorporation of any eternal elements of support into the bank's Baseline Credit Assessment. In assigning the local currency deposit rating to a bank, the JDA methodology also factors in the rating of the various potential support providers (parent company, cooperative group, regional or national governments), as well as the degree of dependence that may eist between each one of them and the bank. Moody's assessment of the probability of systemic support (by a national government) is derived from the analysis of the capacity of a government and its central bank to provide support on a system-wide basis. The systemic support indicator is determined for a particular country and serves as an input for all bank ratings in that country. The support indicator can be set at, above or, in rare cases, below the government's local currency bond rating for that country.

5 Page 5 of 6 National Scale Rating National scale ratings are intended primarily for use by domestic investors and are not comparable to Moody's globally applicable ratings; rather they address relative credit risk within a given country. An Aaa rating on Moody's National Scale indicates an issuer or issue with the strongest creditworthiness and the lowest likelihood of credit loss relative to other domestic issuers. National Scale Ratings, therefore, rank domestic issuers relative to each other and not relative to absolute default risks. National ratings isolate systemic risks; they do not address loss epectation associated with systemic events that could affect all issuers, even those that receive the highest ratings on the National Scale. Foreign Currency Deposit Rating Moody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the same class of obligation. The implementation of JDA for banks can lead to a high local currency ratings for certain banks, which could also produce high foreign currency ratings. Nevertheless, it should be reminded that foreign currency deposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits. This may result in the assignment of a different, and typically lower, rating for the foreign currency deposits relative to the bank's rating for local currency obligations. Foreign Currency Debt Rating Foreign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign currency deposit ratings, foreign currency debt obligations may also be constrained by the country ceiling for foreign currency bonds and notes, however, in some cases the ratings on foreign currency debt obligations may be allowed to pierce the foreign currency ceiling. A particular mi of rating factors is taken into consideration in order to assess whether a foreign currency bond rating pierces the country ceiling. They include the issuer's global local currency rating, the foreign currency government bond rating, the country ceiling for bonds and the debt's eligibility to pierce that ceiling. About Moody's Bank Financial Strength Scorecard Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and regions. The model output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. Rating Factors Banco do Estado do Rio Grande do Sul S.A. Rating Factors [1] A B C D E Total Score Trend Qualitative Factors (70%) C- Factor: Franchise Value C- Neutral Market Share and Sustainability Geographical Diversification Earnings Stability Earnings Diversification [2] Factor: Risk Positioning D Neutral Corporate Governance [2] - Ownership and Organizational Compleity - Key Man Risk - Insider and Related-Party Risks Controls and Risk Management - Risk Management - Controls Financial Reporting Transparency - Global Comparability - Frequency and Timeliness - Quality of Financial Information Credit Risk Concentration - Borrower Concentration - Industry Concentration Liquidity Management Market Risk Appetite Factor: Operating Environment D Neutral Economic Stability Integrity and Corruption Legal System Financial Factors (30%) B+ Factor: Profitability A Neutral PPI / Average RWA - Basel II 6.66% Net Income / Average RWA - Basel II 3.26% Factor: Liquidity B Neutral (Mkt funds-liquid Assets) / Total Assets % Liquidity Management

6 Page 6 of 6 Factor: Capital Adequacy A Neutral Tier 1 Ratio - Basel II 15.51% Tangible Common Equity / RWA - Basel II 14.47% Factor: Efficiency C Neutral Cost / Income Ratio 57.80% Factor: Asset Quality B+ Neutral Problem Loans / Gross Loans 1.67% Problem Loans / (Equity + LLR) 5.11% Lowest Combined Score (9%) B Economic Insolvency Override Neutral Aggregate Score C Assigned BFSR D+ [1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non public information [2] - A blank score under Earnings diversification or Corporate Governance indicates the risk is neutral 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. 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