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Fitch Affirms Banco Inbursa's VR & IDRs at 'bbb+' / 'BBB+'; Outlook Negative
March 16, 2017 / 8:51 PM / in 7 months

Fitch Affirms Banco Inbursa's VR & IDRs at 'bbb+' / 'BBB+'; Outlook Negative

(The following statement was released by the rating agency) MONTERREY, March 16 (Fitch) Fitch Ratings has affirmed Banco Inbursa, S.A.'s (BInbursa) Viability Rating (VR) at 'bbb+' and Long-Term Issuer Default Ratings (IDR) at 'BBB+'. The Rating Outlook is Negative. Simultaneously, Fitch has affirmed the National scale ratings of BInbursa and its financial subsidiaries Sociedad Financiera Inbursa, S.A. de C.V. Sofom, E.R. (Sofom Inbursa), and CF Credit Services, S.A. de C.V., Sofom, E.R. (CF Credit) at 'AAA(mex)' and 'F1+(mex)'. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS VR AND IDRs The Outlook on BInbursa's Long-Term IDRs is Negative, since these are at the sovereign level, and highlights the downside potential from a sovereign downgrade due to performance, and BInbursa's prospects could be affected as a result of a worsening operating environment. Fitch's expectation is that the relativities of BInbursa's VR/IDRs versus the sovereign rating will be maintained in the event of a potential sovereign downgrade. BInbursa's Local and Foreign Currency IDRs are driven by its VR of 'bbb+' which reflects its robust loss-absorbing capacity created by ample and high-quality capital ratios. Capital adequacy is one of BInbursa's main strengths and is maintained at levels generally above peer banks and with solid buffers over regulatory minimums. At YE16, the Fitch Core Capital (FCC) /risk weighted assets (RWAs) ratio stood at 20.4% (average 2013-2015: 20.5%), the highest among the seven largest Mexican banks. In Fitch's view, the ample capital base more than offset the bank's slightly riskier business profile, higher growth and concentrations than those of closest peers. The ratings also reflect the bank's moderate asset quality and contained credit losses despite the bank's rapid growth in the retail lending segment. Its non-performing loan (NPL) ratios remain better than those shown by its closest peers due to its continuing to be a corporate bank. At YE16, the adjusted impairment ratio (NPLs plus charge-offs/total loan portfolio plus charge-offs) stood at 3.6% (closest peers around 5%). Fitch expects that BInbursa's loan quality metrics gradually deteriorated due to its continued rapid growth in retail loans, although they demonstrated the ability to rapidly adjust under adverse conditions. Borrower concentrations are still high. The 20 largest exposures accounted for 2.2x the bank's Tier I equity (YE15: 1.7x). BInbursa's ratings also factor in the strong franchise in corporate/commercial lending and its steadily gaining market share in the retail segment, both in loans and deposits. BInbursa's franchise is strengthened when assessed together with the other financial companies of its parent, Grupo Financiero Inbursa (GF Inbursa) and the strong synergies with other non-financial companies related to the controlling shareholders. BInbursa is the fifth largest bank in Mexico by loans and seventh by customer deposits. The bank's sound and relatively stable earnings are also considered, but profitability is usually highly influenced by trading profits/losses. However, the sustained loan diversification through retail loans that have increased net interest margins have gradually stabilized the bank's profitability. Fitch estimates that BInbursa's operating profitability/RWA ratios will remain around the 2.0% level, which still compares well to similarly rated peers. Fitch believes that trading results will likely continue to add some volatility to overall profitability. Nevertheless, we estimate that this will decrease, as traditional banking earnings will continue to increase. BInbursa's ratings also reflect its adequate funding and liquidity profiles; although due to its serving as a corporate bank there are moderate concentrations and still some reliance on wholesale medium-term funding. However, in Fitch's view this is positive for BInbursa because it serves to finance the largest share of medium- and long-term loans and to reduce balance sheet liquidity and maturity mismatches. The bank plans to continue to finance long-term assets with similar-term debt issues until the deposits take on the importance and stability needed to finance such assets. BInbursa's loans/customer deposits ratios will continue to lag behind those shown by its closest national and international peers. At YE16, loan/customer deposits stood at 218% (average 2013-2015: 235%), levels which have gradually improved due to the constant growth of retail customer deposits. INTERNATIONAL SENIOR DEBT The rating of the expected senior unsecured notes and the current notes issued by BInbursa reflects that these are senior unsecured obligations of BInbursa that rank pari passu with other senior indebtedness and, therefore, align with the bank's long-term 'BBB+' IDRs, which in turn are driven by the bank's VR of 'bbb+'. SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating (SR) of '3' and Support Rating Floor (SRF) of 'BB+' are driven by its moderate systemic importance and the growing share of retail deposits, although this is still modest. Fitch believes there is a modest probability of receiving sovereign support if the bank were to need it, which underpins its current SR and SRF. NATIONAL RATINGS BInbursa's National scale ratings were affirmed, since its IDRs are at the same level of those of the sovereign, and National scale ratings are relative rankings of creditworthiness within a certain jurisdiction. Sofom Inbursa and CF Credit's National scale ratings were also affirmed, since they are perceived by Fitch as core subsidiaries of BInbursa and fully integrated into its operations and franchise. Also, the local holding company of both operating entities, GF Inbursa, whose creditworthiness is totally aligned with that of its main operating subsidiary (BInbursa), is legally enforced to provide support to its subsidiaries if necessary. Therefore, the National scale ratings of these non-bank financial institutions are aligned with the bank's National scale ratings. The 'AAA(mex)' and 'F1+(mex)' ratings of the local debt issued by CF Credit and Sofom Inbursa are in line with BInbursa's National scale rating level, since it is senior unsecured debt and the likelihood of default of these local senior unsecured obligations is the same as the likelihood of default of BInbursa. RATING SENSITIVITIES VR, IDRs AND INTERNATIONAL SENIOR DEBT The ratings and Outlook for BInbursa are sensitive to any further changes in Mexico's sovereign ratings, or material deterioration on the local operating environment over the foreseeable future. In Fitch's view, there is a material possibility that the IDR would be downgraded in the event of a sovereign downgrade. Short-term ratings do not have Outlooks, but any downgrade of BInbursa's IDRs could trigger a one-notch downgrade on its short-term IDRs. Also, BInbursa's VR, IDRs and global notes ratings could be downgraded if the bank's capital adequacy metrics or internal capital generation deteriorate materially (i.e. FCC ratio is consistently below 15%), or in the event of a reversal in the improving trends in funding and liquidity, and/or business and revenue diversification. Materially higher earnings volatility and/or inability to sustain recurring operating profits/RWA ratios above 2% could also be detrimental to the bank's ratings. Fitch considers there to be limited upside potential for BInbursa's VR and IDRs at present, in line with the expectations for the Mexican sovereign ratings and operating environment. However, BInbursa's ratings could be upgraded over the medium term if business and risk diversification continues to improve steadily, when loan/customer deposit ratios reach levels consistently close to 100%, and if the bank reduces earnings volatility driven by market-related revenues. SUPPORT RATING AND SUPPORT RATING FLOOR Upside potential for the SR and SRF is limited, and can only occur over time with a material gain of the bank's systemic importance. Fitch does not expect the SR to change in the event of a potential sovereign downgrade. In turn, since BInbursa's SRF is below the sovereign rating, this rating is unlikely to be affected in the event of a moderate sovereign downgrade. However, the SR could be downgraded if the bank loses material market share in terms of retail customer deposits; while the SRF could be downgraded from a multi-notch downgrade of the sovereign rating. NATIONAL RATINGS Since BInbursa's National ratings are local relative rankings of creditworthiness within a particular jurisdiction, Fitch does not expect their relativities to change in the event of a moderate downgrade in the sovereign rating. In turn, any potential changes of Sofom Inbursa and CF Credit's National ratings will be driven by any changes in BInbursa' ratings. Fitch has affirmed the following ratings: BInbursa: --Foreign Currency Long-Term IDR at 'BBB+'; Outlook Negative; --Foreign Currency Short-Term IDR at 'F2'; --Local Currency Long-Term IDR at 'BBB+'; Outlook Negative; --Local Currency Short-Term at 'F2'; --Viability rating at 'bbb+'; --Support Rating at '3'; --Support Rating Floor at 'BB+'; --10-year 4.125% Senior Unsecured Notes at 'BBB+'; --10-year USD1.5 billion Senior Unsecured Notes at 'BBB+(EXP)'; --National scale long-term rating at 'AAA(mex)'; Outlook Stable; --National scale short-term rating at 'F1+(mex)'. Sofom Inbursa: --National scale long-term rating at 'AAA(mex)'; Outlook Stable; --National scale short-term rating at 'F1+(mex)'; --National scale short-term rating for a short-term portion of a senior unsecured debt program at 'F1+(mex)'. CF Credit: --National scale long-term rating at 'AAA(mex)'; Outlook Stable; --National scale short-term rating at 'F1+(mex)'. --National scale short-term rating for a short-term portion of a senior unsecured debt program at 'F1+(mex)'. --National scale long-term rating for a long-term senior unsecured debt issuance at 'AAA(mex)'. Contact: Alejandro Tapia (Primary Analyst: BInbursa / Secondary Analyst: CF Credit & Sofom Inbursa) Director +52 81 8399-9156 Fitch Mexico, S.A. de C.V. Prol. Alfonso Reyes 2612, Monterrey, N.L. Mexico Priscila Garcia (Primary Analyst: CF Credit & Sofom Inbursa / Secondary Analyst: BInbursa) Analyst +52 81 8399-9100; ext. 1515 Fitch Mexico, S.A. de C.V. Committee Chairperson Alejandro Garcia, CFA Managing Director +1-212-908-9137 Summary of Financial Statement Adjustments - Pre-paid expenses and other deferred assets were re-classified as intangibles and deducted from Fitch Core Capital due to low loss absorption capacity under stress. Fitch has made adjustments to the Risk Weighted Assets (RWAs) following its criteria, and the agency consolidated the bank's RWAs with those of its main subsidiaries. Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020696 Solicitation Status here Endorsement Policy here 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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