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Fitch Affirms GFNorte and Banorte's VR & IDRs at 'bbb+' / 'BBB+'; Outlook Negative
March 16, 2017 / 8:46 PM / 8 months ago

Fitch Affirms GFNorte and Banorte'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 Grupo Financiero Banorte, S.A.B. de C.V. (GFNorte) and Banco Mercantil del Norte, S.A.'s (Banorte) Viability Ratings (VRs) at 'bbb+', as well as their Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB+'. The Rating Outlook is Negative. In addition, Fitch has affirmed GFNorte and Banorte's Short-Term Foreign- and Local-Currency IDRs at 'F2'. Fitch has also affirmed Banorte and GFNorte's non-banking subsidiaries the national scale ratings of at 'AAA(mex)' and 'F1+(mex)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS Negative Rating Outlook GFNorte and Banorte's IDRs are driven by their stand-alone credit profiles as reflected by their VRs. The Negative Outlook on the Long-Term IDRs highlights the downside potential from a sovereign downgrade because GFNorte and Banorte's performance and prospects could be affected as a result of a worsening operating environment. Fitch's expectation is that the relativities of GFNorte and Banorte's VR/IDRs versus the sovereign rating will be maintained in the event of a potential sovereign downgrade. Banorte's VR, IDRs Banorte's VRs and IDRs are driven by its robust franchise in the Mexican banking system. The ratings also consider its resilient financial performance sustained mainly by continued loan growth and fee income, progressive optimization of operational expenses, and well-controled credit costs. Operating return to risk weighted assets (RWAs) stood at almost 3% at YE2016, in line with previous-year results. Although the ratings consider the bank's still adequate capitalization, ratings also incorporate the recent decline in the Fitch core capital (FCC) ratio to 12.7% (YE15: 15.8%). Banorte's FCC fell mainly due to the Afore XXI split-off, INB's sale accounting effect, dividend payment and a creation of reserves effect registered versus equity during the year. Hybrid securities have historically supported Banorte's regulatory capital position; regulatory metrics are well above the minimum. As of December 2016, the Tier 1 regulatory capital ratio was 12.7% and total regulatory capital ratio stood at 15.3%. During 2016, Banorte was designated as a systemically important financial institution, which implies the bank must constitute a capital buffer of 0.90pp over the next four years. Further reliance on hybrids cannot be ruled out in the foreseeable future in order to sustain growth. Fitch considers Banorte's risk appetite as a factor of higher importance for the bank's VR. The bank has been active in government lending with some individual concentrations on its balance sheet. As of December 2016, the top 20 largest exposures by economic group were mainly related to government. Two main debtors represented nearly 23% and 16% of total equity, which Fitch considers high. Banorte reduced its government lending growth pace during 2016, and continues working on reducing concentrations. Banorte's impaired loans ratios continued improving during 2016, sustained by well-performing loans and some improvement in almost all products, but again underpinned by a resolution of a portion of the exposure to homebuilders (Urbi). The resolution consisted of an exchange of unsecured past due loans for shares and warrants to subscribe shares of Urbi, the first registered as securities available for sale at the bank level and the second as derivatives. Fitch expects Mexican financial system asset quality to moderately deteriorate if the operating environment worsens, mainly for consumer and SMEs lending, which could be driven by slow economic growth, increasing inflation and rising interest rates. Banorte has a strong and stable deposit franchise in Mexico. The loan to deposit ratio was at 99% as of December 2016. Deposit mix continues to rely on low-cost funding demand accounts (67%), while the rest are term accounts. Although the bank has access to traditional bank funding such as interbank short- and long-term borrowing, loans from development banks and public trusts, maturity mismatches remains a challenge in the long-term buckets. As of December 2016, the liquidity coverage ratio (LCR) decreased to 89.7% (above the regulatory requirement of 70%). The entity expects to continue optimising liquidity on the balance sheet according to regulatory requirements. GFNorte's VR and IDRs GFNorte's ratings reflect its growing franchise and improved business diversification after several acquisitions made over the past few years. Ratings also consider its current position as one of the largest local financial groups, and one of the market leaders in most of its subsidiaries. Double leverage is non-existent at present at the holding company level. Although product mix has been improving, GFNorte's performance continues to be underpinned by its major subsidiary, Banorte. Subordinated Debt The bank's Tier 2 subordinated preferred capital notes are rated three notches (-3) below the bank's VR; one notch for loss severity (-1) and two notches for non-performance risk (-2). Banorte's global junior subordinated debt is rated four notches (-4) below the bank's VR. The ratings are driven by Fitch's approach to factoring non-performance risk (-2 notches) and degrees of subordination (-2). SUPPORT RATING AND SUPPORT RATING FLOOR Banorte's SR and SRF were affirmed at '2' and 'BBB-', respectively, given Banorte's systemic importance and its role as the largest domestically-owned bank in Mexico. Fitch's SRFs indicate a level below which the agency will not lower the bank's Long-Term IDRs as long as the assessment of the support factors does not change. GFNorte's SR and SRF were affirmed at '5' and 'NF', respectively, in view of its position as a holding company, indicating that, although possible, external support cannot be relied upon. NATIONAL RATINGS Banorte'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. The ratings of GFNorte's non-banking subsidiaries (AyF Banorte, Banorte Ixe CB, and Almacenadora Banorte) are aligned with Banorte's National scale ratings, and consider GFNorte's legal obligation to support its subsidiaries, as well as Fitch's perception that these remain core to the group's overall strategy and business profile. RATING SENSITIVITIES VR and IDRs The ratings and Outlook for GFNorte and Banorte are sensitive to any further changes in Mexico's sovereign ratings, or material deterioration in the local operating environment over the foreseeable future. In Fitch's view, there is a material possibility that the IDRs would be downgraded in the event of a sovereign downgrade. Short-term ratings do not have an Outlook, but any downgrade of GFNorte and Banorte's IDRs could trigger a one-notch downgrade on its Short-Term IDRs. Also, Banorte's VR and IDRs could be downgraded if the bank is exposed to higher credit losses as net charge-offs rise above 3% of average gross loans. In addition, ratings could be affected by a consistent operating profit to RWAs below 2% and/or a FCC consistently below 11% of risk weighted assets. Fitch believes there is limited upside potential for Banorte's VR and IDR at the present time, in line with the expectations for the Mexican sovereign ratings and its operating environment. However, Banorte's ratings could benefit over the medium term from sustained consolidation of its franchise, substantial enhancements of its business mix, and material improvements in its liquidity profile and financial performance, including an operating return on RWAs above 4%, while maintaining asset quality and capitalization metrics. SUPPORT RATING AND SUPPORT RATING FLOOR Upside potential for the SRs and SRFs is limited, and, for Banorte, can only occur over time with a material gain of the bank's systemic importance. Fitch does not expect SRs to change in the event of a potential sovereign downgrade. In turn, since Banorte's SRF is below the sovereign rating, this rating is unlikely to be affected in the event of a moderate sovereign downgrade. However, it could be downgraded from a multi-notch downgrade of the sovereign rating. NATIONAL RATINGS Since Banorte's National ratings are local relative rankings of creditworthiness within a particular jurisdiction, Fitch does not expect these relativities to change in the event of a moderate downgrade in the sovereign rating. Any downgrade to GFNorte's non-banking subsidiaries' (AyF Banorte, Casa de Bolsa Banorte-Ixe and Almacenadora Banorte) National ratings would be driven by a decrease of GFNorte's ratings, if the group's IDR is not aligned with the sovereign rating. Fitch has affirmed the following ratings: Grupo Financiero Banorte, S.A.B. de C.V. (GFNorte) --Long-Term Foreign and Local Currency IDRs at 'BBB+'; Outlook Negative; --Viability rating at 'bbb+'; --Short-Term Foreign and Local Currency IDR at 'F2'; --Support Rating at '5'; --Support Rating Floor at 'NF' Banco Mercantil del Norte, S.A. (Banorte) --Long-Term Foreign And Local Currency IDRs at 'BBB+'; Outlook Negative; --Viability rating at 'bbb+'; --Short-Term Foreign And Local Currency IDR at 'F2'; --Support rating at '2'; --Support rating Floor at 'BBB-'; --USD500 million TIER 2 subordinated preferred capital notes at 'BB+'; --USD120 million junior subordinated securities at 'BB'; --National scale long-term rating at 'AAA(mex)'; Outlook Stable; --National scale short-term rating at 'F1+(mex)'. Arrendadora y Factor Banorte, S.A. de C.V. SOFOM, E.R. (AyF Banorte): --National scale long-term rating at 'AAA(mex)'; Outlook Stable; --National scale short-term rating at 'F1+(mex)'; --National scale long-term rating for local issues of senior unsecured debt at 'AAA(mex)'; --National scale short-term rating for local issues of senior unsecured debt at 'F1+(mex)'. Almacenadora Banorte S.A. de C.V., Organizacion Auxiliar de Credito, Gpo Financiero Banorte (Almacenadora Banorte): --National scale long-term rating at 'AAA(mex)'; Outlook Stable; --National scale short-term rating at 'F1+(mex)'. Casa de Bolsa Banorte - Ixe, S.A de C.V., Grupo Financiero Banorte (Banorte Ixe CB): --National scale long-term rating at 'AAA(mex)'; Outlook Stable; --National scale short-term rating at 'F1+(mex)'. Contact: Veronica Chau (Primary Analyst: GFNorte, Banorte, Banorte Ixe CB / Secondary Analyst: AyF Banorte & Almacenadora Banorte) Senior Director +52 81 83 99 91 69 Fitch Mexico S.A. de C.V. Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8 Col. Del Paseo Residencial 64920 Monterrey, N.L., Mexico Omar Rojas (Primary Analyst: AyF Banorte & Almacenadora Banorte, Secondary Analyst: GFNorte, Banorte, Banorte Ixe CB) Associate Director +52 81 83 99 91 67 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, as they have low loss absorption capacity. Fixed assets related to operational leasing were reclassified as earning assets in AyF Banorte. 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=1020695 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. 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. 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