November 1, 2017 / 1:57 AM / 2 years ago

Fitch Places GFNorte on Watch Negative and Interacciones on Watch Positive Upon Merger Announcement

(The following statement was released by the rating agency) MONTERREY, October 31 (Fitch) Following the recent announcement of a binding agreement to merge Grupo Financiero Banorte, S.A.B. de C.V. (GFNorte) and Grupo Financiero Interacciones, S.A.B. de C.V. (GFInteracciones), Fitch has placed most of GFNorte's ratings, as well as those of its subsidiaries, on Rating Watch Negative. In addition, Fitch has placed the ratings of GFInteracciones subsidiaries Banco Interacciones, S.A. (Interacciones) and Interacciones Casa de Bolsa, S.A. de C.V. (Interacciones CB) on Watch Positive. A full list of rating actions follows at the end of this release. Once the respective approvals from both entities' assemblies and the financial regulators are obtained, GFNorte and GFInteracciones' subsidiaries will be integrated, following the completion of the merger between the two financial groups. The Negative Watch on GFNorte reflects that the ratings could be downgraded or affirmed and removed from Watch once Fitch has completed a thorough review of the business and financial implications of the proposed merger. The Positive Watch on the GFInteracciones subsidiaries' ratings reflects Fitch's expectation that upon completion of the potential merger these ratings will likely be upgraded to the level of GFNorte's or those of its main operating subsidiary, Banco Mercantil del Norte, S.A. (Banorte). Fitch expects to resolve the Watches on both entities simultaneously and as soon as possible after the transaction has been approved and confirmed. This could potentially take more than the six-month period in which Rating Watches are usually solved. KEY RATING DRIVERS GFNorte and Subsidiaries' IDRs, VRs, National Scale, and Debt Issue Ratings Fitch has placed these ratings on Rating Watch Negative based on the agency's initial assessment that there could potentially be some moderate downside pressure on GFNorte's overall credit profile, and therefore a rating downgrade cannot be ruled out at this early stage of the deal. Fitch considers that its assessment of GFNorte's risk appetite could potentially weaken moderately, considering the entity's willingness to grow inorganically in the segment of public sector financing, which generally has a higher exposure per borrower and a longer duration relative to Banorte's other lending businesses. In addition, Fitch does not rule out that the deal could potentially have mildly negative implications in more than one of the financial elements that are factored in into GFNorte's ratings. For instance, there could be moderate, although potentially temporary, negative implications in terms of capital adequacy and liquidity. The impact on earnings and overall profitability is yet to be determined. Fitch also believes that some mildly negative outcomes could arise in terms of asset quality. While GFInteracciones would add a loan portfolio with very low impairment levels, after the planned merger, concentration in public sector loans would increase from nearly 21% to almost 30% of GFNorte's total lending. While effective credit losses in this business line are historically very low due to the presence of good collateral and guarantee structures, problems in the debtors' repayment capacity arise from time to time, which could lead to loan restructurings and additional challenges in terms of asset liability management. However, in the event that a rating downgrade is triggered, Fitch believes that the downside potential on GFNorte's international ratings could be limited to one notch from the current levels. National scale ratings are local relativities of creditworthiness, and therefore there is no lineal relationship between international scale and national ratings. However, Fitch believes that if a one-notch downgrade occurs at GFNorte's global ratings, the downside potential for its subsidiaries' national scale ratings would be limited to no more than one or two notches. The potential merger with GFInteracciones will likely increase GFNorte's market share and competitive position (reaching or consolidating as the second largest bank in Mexico per loans and deposits), particularly in the few business lines in which GFInteracciones would add a material contribution to GFNorte's overall volumes especially in public sector and infrastructure lending. However, Fitch does not expect an immediate improvement in its assessment of GFNorte's company profile, since the business model is not expected to change materially, while certain business, revenue, and risk concentrations could potentially exacerbate upon the potential merger of GFInteracciones. GFNorte's and Banorte's Support Ratings (SR) and Support Rating Floors (SRF) are not affected by these ratings actions and they remain unaffected. The rationale for those ratings is not materially influenced by the potential merger, and therefore their respective drivers and sensitivities remain unchanged from Fitch's previous press release on these entities. Since AyF Banorte, Casa de Bolsa Banorte-Ixe and Almacenadora Banorte's National Ratings are based on the likely support from their ultimate parent, GFNorte's, whose creditworthiness is highly associated with Banorte's, any rating action on the subsidiaries is contingent on any actions taken on the bank's National Ratings. As a result, these subsidiaries' national-scale ratings have also been placed on Rating Watch Negative. Interacciones and Interacciones CB's IDRs, VRs, National Scale, and Debt Issue Ratings The Rating Watch Positive on Interacciones and affiliates' ratings reflects that they are likely to be upgraded and aligned to Banorte's once the merger is approved and confirmed. Interacciones' SR and SRF are not affected. Fitch believes those ratings will likely to be upgraded and aligned to Banorte's once the merger occurs and simultaneously withdrawn. RATING SENSITIVITIES GFNorte and Subsidiaries GFNorte and Banorte's IDRs, VRs and national-scale ratings could be affirmed and removed from Rating Watch Negative once the merger with GFInteracciones is confirmed and when Fitch has completed a thorough review of the financial and business implications of such deal, in the event that no material negative implications arise for the financial profile and risk appetite of these entities. Alternatively, these ratings could be downgraded to the extent previously indicated, if there are material negative financial or business implications arising from this deal. In particular, if Banorte's is exposed to higher credit losses as net charge-offs rise above 3% of average gross loans; or if the operating profit-to-RWAs ratio falls below 2% and/or the FCC ratio is consistently below 11% of RWAs. Also, a material weakening of Fitch's assessment on GFNorte's risk appetite, funding and/or liquidity profile could also trigger a downgrade of these ratings. 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 potential downgrade of the respective Banorte's ratings, and considering the relativities of the latter as compared to Mexico's sovereign rating. Interacciones and Interacciones CB The Rating Watch Positive on Interacciones and its affiliates' ratings will be resolved once the transaction is confirmed. The ratings of Interacciones and Interacciones CB are likely to be upgraded and aligned to those of GFNorte and Banorte in order to reflect the implicit support received from a higher rated holding company. If these entities are to be merged into other of GFNorte's current subsidiaries, the ratings of Interacciones and Interacciones CB are likely to be eventually withdrawn, but only after such potential mergers have been completed. Fitch has placed the following ratings on Rating Watch Negative: GFNorte: --Long-Term Foreign and Local Currency IDRs 'BBB+'; --Viability rating 'bbb+'; --Short-Term Foreign and Local Currency IDR 'F2'; Banorte: --Long-Term Foreign and Local Currency IDRs 'BBB+'; --Viability rating 'bbb+'; --Short-Term Foreign and Local Currency IDR 'F2'; --USD500 million TIER 2 subordinated preferred capital notes 'BB+'; --USD120 million junior subordinated securities 'BB'; --National scale long-term rating 'AAA(mex)'; --National scale short-term rating 'F1+(mex)'. Arrendadora y Factor Banorte, S.A. de C.V. SOFOM, E.R. (AyF Banorte): --National scale long-term rating 'AAA(mex)'; --National scale short-term rating 'F1+(mex)'; --National scale long-term rating for local issues of senior unsecured debt 'AAA(mex)'; --National scale short-term rating for local issues of senior unsecured debt 'F1+(mex)'. Almacenadora Banorte S.A. de C.V., Organizacion Auxiliar de Credito, Gpo Financiero Banorte (Almacenadora Banorte): --National scale long-term rating 'AAA(mex)'; --National scale short-term rating 'F1+(mex)'. Casa de Bolsa Banorte - Ixe, S.A de C.V., Grupo Financiero Banorte (Banorte Ixe CB): --National scale long-term rating 'AAA(mex)'; --National scale short-term rating 'F1+(mex)'. Fitch has not taken a rating action on the following ratings: GFNorte: --Support Rating '5'; --Support Rating Floor 'NF'. Banorte: --Support rating '2'; --Support rating Floor 'BBB-'. Fitch has placed the following ratings on Rating Watch Positive: Interacciones: --Long-term foreign and local currency IDRs 'BB+'; --Short-term foreign and local currency IDRs 'B'; --Viability rating 'bb+'; --National scale long-term rating 'A+(mex)'; --National scale short-term rating 'F1(mex)'; --National scale long-term rating for local senior unsecured debt issues 'A+(mex)'; --National scale long-term rating for local subordinated debt issues 'BBB+(mex). Interacciones CB: --National scale long-term rating 'A+(mex)'; --National scale short-term rating 'F1(mex)'. Fitch has not taken a rating action on the following ratings: Interacciones: --Support rating '5'; --Support Rating Floor 'NF'. 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 Bertha Perez (Primary Analyst: Interacciones / Secondary Analyst: Interacciones CB) Associate Director +52 818 399 9161 Alejandro Tapia (Secondary Analyst: Interacciones) Director +52 818 399 9156 Priscila Garcia (Primary Analyst: Interacciones CB) Analyst +52 818 399 9100 Ext.1515 Committee Chairperson Theresa Paiz Fredel Senior Director +1-212-908-0534 Summary of Financial Statement Adjustments: Pre-paid expenses and other deferred assets were re-classified as intangibles and deducted from Fitch Core Capital or tangible equity due its low loss absorption capacity. 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