TEXT-S&P affirms Infonavit ratings
Oct 1 - Overview -- As the largest mortgage originator in Mexico, we consider Infonavit has a strategic role in the implementation of the government's housing policy. -- Infonavit has maintained its strong cash flow generation and adequate adjusted capitalization levels during 2012. -- We are affirming our 'BBB+/A-2' local currency, 'BBB/A-2' foreign currency, and 'mxAAA/mxA-1+' national scale ratings on Infonavit. -- The stable outlook reflects our expectations that during the newly elected administration, Infonavit will continue having a key role in reducing the housing deficit in the country. Rating Action On Oct. 1, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+/A-2' local currency, 'BBB/A-2' foreign currency, and 'mxAAA/mxA-1+' national scale counterparty credit ratings on Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Infonavit). The outlook is stable. Rationale The ratings on Infonavit are based on our assessment of its 'critical' role in the development and implementation of the public housing policy and its 'very strong' link with the government, according to our criteria for government-related entities (GREs). As a result, we consider there is an 'extremely high' likelihood of timely and sufficient extraordinary government support in the event of a severe financial distress, based on: -- Infonavit's 'critical role' in the implementation of the public housing policy in Mexico. With nearly 219,580 mortgage loans originated during the first half of 2012, Infonavit remains as the largest mortgage originator in the country. We consider that, due to the volume and the niche market and the importance of Infonavit's activities, it would be difficult that a private entity would undertake this activity. -- Its 'very strong' link with the Mexican government, a financial distressed Infonavit could hamper the development of the housing industry in Mexico and might impair market access for other GREs. Infonavit's strong business profile, good earnings and cash flow generation, and adequate adjusted capitalization metrics support the ratings. The negative rating factors are the entity's below-average asset quality due to the low-income segment it serves, and inherent exposure to political risk. Infonavit's stand-alone credit profile (SACP) is at the same level as our foreign currency rating on Mexico (foreign currency BBB/Stable/A-2; local currency A-/Stable/A-2). Infonavit's sound market position in the residential mortgage industry and its status as the largest pension fund manager in the country underpin its strong business profile. With a total on-balance loan portfolio of MXN832.4 billion ($60.9 billion) as of June 2012, Infonavit remains the largest mortgage originator in the country with a 76% market share in terms of number of loans (including those in the home improvement program, funded by commercial financial intermediaries). We expect Infonavit to maintain its strong business position as it helps reduce the housing deficit in Mexico. The development of new products, following the reform in its bylaws in January 2012, will also allow Infonavit to keep expanding its loan portfolio. Infonavit's strong cash flow generation is due to a recurrent stream of interest income from its loan portfolio and its fiscal attributions that allow it to receive workers' contributions for the housing fund (by law, Infonavit receives these funds from the employers). As of June 2012, revenues from its loan portfolio accounted for 51% of the entity's cash flow, and workers' contributions, 33%. Infonavit's strong income generation and good efficiency levels have allowed it to absorb a higher proportion of loan-loss provisions and to report consistent profits. In our opinion, as long as the entity is able to contain the levels of past due loans, we would expect its loan portfolio to keep generating the bulk of its revenues. We consider Infonavit's adjusted capitalization levels to be adequate and consistent with its financial risk profile. As of June 2012, its adjusted total equity (ATE) to adjusted assets was 8.3%, slightly better than its average of 7.9% for the past three fiscal years. The entity's decision to cap the proportion of residuals from its CEDEVIS issuances in its equity should reduce the pressures on its adjusted capitalization. In addition, the high levels of loan loss reserves--17.1% of the on-balance portfolio and 2.2x the ATE--also help protect the capital base. Expected sound internal capital generation and a moderate growth of the loan portfolio should help preserve adequate capitalization. Although we still consider Infonavit to manage its credit risk adequately, nonperforming loans (NPAs) plus foreclosed assets are higher than in previous years. At June 2012, NPAs accounted for 6.9% of the on-balance portfolio, up from the 6.1% average of the past five years. The entity's solid loan loss reserves have been able to absorb the credit losses, and at the end of the second quarter, they covered nonperforming assets at 246.8%, mitigates its credit risk. In the coming months, we do not expect significant changes in Infonavit's credit quality. We consider that the measures that the entity is implementing to strengthen its origination and collection practices might result in a better asset quality in the medium term. In our opinion, due to its significant social influence, Infonavit remains exposed to political risk, despite the improvements in its institutionalization and corporate governance practices. We also continue to believe that any political intervention could undermine Infonavit's strategic direction and, as a result, damage its financial profile. Our base-case scenario incorporates our expectation that Infonavit will maintain a key role in reducing the housing deficit in the country. We expect that NPAs will be about 7% in the next two years, and that they will be fully reserved. The moderate growth of the on-balance loan portfolio, coupled with sound internal capital generation, should maintain adjusted capitalization above 8.0%. Outlook The stable outlook reflects our expectation that Infonavit will remain a critical player for the implementation of the government's housing policy and in addressing Mexico's housing deficit, particularly in the low-income population segment. A sustained deterioration of its financial performance, with increasing levels of NPAs or bottom-line losses, could lead us to revise its SACP. If capitalization continues to improve and nonperforming assets start to decrease, we could revise Infonavit's SACP upward. However, the foreign-currency ratings will continue to be limited by the foreign-currency rating on the sovereign. Related Criteria And Research -- Bulletin: Instituto del Fondo Nacional de la Vivienda para los Trabajadores Ratings Unaffected By Reforms To Its Bylaws, Jan. 17, 2012 -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 Ratings List Ratings Affirmed Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Infonavit) Counterparty Credit Rating Foreign Currency BBB/Stable/A-2 Local Currency BBB+/Stable/A-2 Caval - Mexican Rating Scale mxAAA/Stable/mxA-1+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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