TEXT-S&P Rates Consubanco, S.A. 'BB'; Outlook Stable
-- Mexico-based Consupago transferred almost all of its assets to its affiliate, Consubanco, S.A.
-- We are assigning our 'BB' global scale and 'mxA/mxA-2' national scale issuer credit ratings to the bank.
-- We are affirming the 'BB' rating on the MXN750 million unsecured notes.
-- The stable outlook reflects our expectation that Consubanco's strong internal capital generation will maintain its risk-adjusted capital ratio around 18%.
On Nov. 20, 2012, Standard & Poor's Ratings Services assigned its 'BB' global scale and 'mxA/mxA-2' national scale issuer credit ratings to Consubanco, S.A. Institucion de Banca Multiple (Consubanco; previously known as Banco Facil S.A.).
At the same time, we affirmed our 'BB' rating on the MXN750 million unsecured notes, which were transferred to Consubanco from its affiliate Consupago S.A. de C.V. S.F.O.L. The outlook is stable.
The ratings on Consubanco reflect its "weak" business position, "very strong" capital and earnings, "moderate" risk position, and "below average" funding and "moderate" liquidity.
Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic and industry risk scores to determine a bank's anchor, which is the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in Mexico is 'bbb'.
In our view, the main risk for the banks operating in Mexico is economic risk. This is because of the population's low income level (from a global perspective), and a decrease in payment capacity amid a low level of domestic savings. Mexican banks face challenges associated with lending within a legal framework that is still establishing a track record of creditor rights. However, underwriting standards have improved.
Also, we have not observed any asset bubbles in the Mexican economy. Industry risk is not as high, because of conservative regulation, but supervision still needs to be strengthened. Healthy competitive dynamics drive the lending system. Funding is based on stable deposits, while the domestic debt markets are rapidly expanding.
We classify the Mexican government as "supportive" to its banking system, based on past experience and our belief that it has the capacity to help banks withstand problems.
We evaluate Consubanco's business position as "weak," due to the concentration of revenues from a single business line (payroll loans to public employees), the geographic concentrations of its loan portfolio, expected small market share, and the stiff competition in the payroll discount sector.
We view concentration as negative to Consubanco's business profile because the bank depends on agreements with government entities for loan origination volumes, and the market for public employees is limited.
In addition, the portfolio exhibits some geographic concentrations in the states of Veracruz, Distrito Federal, and the State of Mexico, because that's where most of its largest exposures are located.
We don't expect the bank to offer new products in the medium term.
Although we consider that Consubanco is well positioned in the payroll lending market for public employees, we expect Consubanco to have a small market share, of less than 0.3% in terms of loans. Increased regulation for payroll lending and competition could hurt the bank's financial profile.
We consider that Consubanco faces the challenge of managing the expected aggressive growth of its loan portfolio in the next two years. Our "very strong" assessment of Consubanco's capital and earnings is based on our expectation for a projected risk-adjusted capital (RAC) ratio of 18% in the next 18 months and a strong earnings buffer which can absorb forecasted credit losses. Despite expected aggressive growth of the loan portfolio in the next two years, 45% for 2013 and 20% for 2014 based on our forecast, as well as a high dividend payout ratio, we expect internal capital generation to strengthen the bank's capital base.
In our opinion, Consubanco's capital will have good quality, since it will be comprised only of paid-in capital, retained earnings, and reserves. We don't expect the bank to report goodwill or tax-loss carryforwards in the coming months.
In our view, Consubanco's earnings quality is strong, since net interest income will represent the majority of its revenues, and we expect the bank to maintain core earnings to average adjusted assets ratio of around 9% in the next 18 months, which compare favorably with the industry average. Consubanco's earnings capacity is strong, and we expect a three-year average earnings buffer of 7.2%, reflective of high net interest margins and an adequate efficiency. As long as the bank maintains high margins and adequate asset quality, we would expect it to post good profitability ratios.
Our risk position assessment for the bank is "moderate," reflecting the concentration of the loan portfolio in the public sector, the expected high growth of the portfolio, and the operational issues that arise from its collection mechanism. In 2012, Consupago resumed organic growth of its loan portfolio and we expect Consubanco's loan portfolio to grow aggressively in the coming two years.
Its loan portfolio concentration compares unfavorably with the average of the banking industry. Although the collection mechanism that depends on government entities' payroll deductions remains generally efficient, the bank is subject to operational risk due to the delays in the transfer of deducted cash flows, although these delays have not resulted in significant credit losses in the past.
Greater diversification of the loan portfolio could mitigate this risk. We don't expect the bank to have foreign-currency mismatches, and we expect that high active rates will mitigate interest rate risk. In our opinion, Consubanco will be challenged to manage the growth of its portfolio by maintaining good underwriting practices and controls.
Sustained deterioration of the bank's asset quality, with increasing levels of charge-offs, or the offering of riskier products could lead us to revise Consubanco's risk position. In our opinion, Consubanco's funding is "below average" and liquidity is "moderate". We expect the bank to rely on wholesale funding to support its growth. The bank's funding structure will consist mainly of bank credit facilities and debt issuances, while we anticipate that deposits will represent less than 10% of its total funding in the next 18 months. We consider Consubanco's liquidity levels to be "moderate" to meet its funding needs.
Although the bank will benefit from the bimonthly repayment of its loan portfolio, we expect it to use most of those funds to support future growth. Therefore, we expect that Consubanco will seek to refinance its cross-border issuance due April 2013. The bank will be challenged to maintain a stable funding structure that is adequately matched with its loan portfolio. Outlook The stable outlook reflects our expectation that Consubanco's strong internal capital generation will maintain its RAC ratio around 18% in the next 18 months, with nonperforming assets hovering around 4.5% and 5%.
We expect the bank to remain focused on payroll loans in the medium term. Loan portfolio growth rates above our expectations, that are not compensated with internal capital generation and that take our RAC ratio under 15%, would likely lead to a downgrade.
A sustained increase in charge-offs, the offering of riskier products, or increased regulation or competition that affects Consubanco's business position could also lead us to revise the ratings.
We do not expect to raise the ratings in the next 18 months. Ratings Score Snapshot Issuer Credit Rating BB/Stable/-- SACP bb Anchor bbb Business Position Weak (-3) Capital and Earnings Very Strong (+2) Risk Position Moderate (-1) Funding and Liquidity Below Average and Moderate (-1) Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 Additional Factors 0 Related Criteria And Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Bank Capital Methodology and Assumptions, Dec. 6, 2010 Ratings List New Rating; CreditWatch/Outlook Action Consubanco, S.A. Institucion de Banca Multiple Global Scale BB/Stable/-- Caval - Mexican Rating Scale mxA/Stable/mxA-2 Ratings Affirmed Consubanco, S.A. Institucion de Banca Multiple Senior Unsecured BB
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Primary Credit Analyst: Barbara Carreon, Mexico City (52) 55-5081-4483; firstname.lastname@example.org Secondary Contact: Claudia Sanchez, Mexico City (52) 55-5081-4418; email@example.com