UPDATE 2-China's reforms not enough to arrest mounting debt - Moody's
* China facing dilemma of deleveraging without hurting growth
Dec 11 - Fitch Ratings has affirmed the ratings of Grupo Financiero Banorte (GFNorte) and its major banking subsidiary Banco Mercantil del Norte (Banorte), following the announcement of the agreement to acquire the pension fund company Afore Bancomer from Spain's BBVA. The Rating Outlook on the long-term international and/or national scale issuer ratings of these entities remains Stable. A full list of rating actions follows at the end of this release. In Fitch's view, the acquisition of Afore Bancomer could somewhat pressure GFNorte and Banorte's capital adequacy metrics, given the sizable goodwill that will arise. However, Fitch expects that capital ratios will remain consistent with the 'bbb' Viability Ratings (VR) of GFNorte and Banorte, even under the more aggressive scenarios of this acquisition being fully funded with internal resources or short-term debt at the parent company level. Core capital metrics have improved materially during 2012, providing GFNorte and Banorte with some flexibility to absorb the impact of this relatively large and ambitious acquisition. GFNorte will invest between USD800 million and USD870 million for the 50% stake of Afore Bancomer (the Mexican Social Security Institute is GFNorte's partner in the pension fund business with equal stakes). Financing details are yet to be determined, but GFNorte is already exploring different alternatives, which should be disclosed in first quarter 2013 (Q1'13), when the acquisition is expected to be completed after receiving some pending regulatory approvals. The pension fund regulator has already approved this transaction. If the acquisition is financed with internal resources, when completed, Fitch estimates that core capital metrics for Banorte (direct owner of GFNorte's interest in the pension fund business) relative to risk-weighted assets could deteriorate by roughly 180 basis points (bps), which is relatively in line with the bank's estimated impact on regulatory capital ratios. In turn, the impact on a more stringent measure of tangible common equity to tangible assets will be roughly 100 bps. Both measures, although affected when the transaction is completed, will remain roughly in line with recent records during the 2010-2011 period. If the acquisition is financed with a short-term loan at the parent company level, Fitch's perception of Banorte's capital metrics will not vary materially, since little credit will be given to the equity contributed by the group from the proceeds of such loan, given that projected adjusted capital metrics will remain constrained by the need to upstream dividends over a relatively short timeframe for debt servicing purposes. Under this scenario, Fitch estimates that double leverage at GFNorte will not exceed 115%, while liquidity risk would be partially mitigated by the subsidiaries' ability to upstream enough dividends. Therefore, GFNorte's ratings will likely remain aligned with those of its major subsidiary, Banorte. Fitch's affirmation of GFNorte's and Banorte's ratings and the Stable Outlook also reflect the strategic benefits of this acquisition. GFNorte's franchise will be enhanced, while Fitch also expects a gradual positive impact on the group's revenue diversification and overall risk profile. The Stable Outlook is also driven by the group's management objective to restore capital metrics to pre-acquisition levels within the 24 months following the completion of the deal. This will likely be achieved through a combination of internally generated capital and other strategic alternatives that will be assessed over the near future. GFNorte's and Banorte's ratings could be negatively affected if the tangible common equity to tangible assets ratio deteriorates beyond 6.5%. A Fitch core capital-to-risk-weighted assets ratio at Banorte below 10.5% could also pressure the ratings. Downside risk could also arise from execution risk and/or lower than expected positive effects on revenue diversification and overall earnings. GFNorte's and Banorte's VRs are driven by its overall adequate financial condition, relative resilience during the recent economic crisis, and gradually improving franchise and competitive position. The ratings also factor in GFNorte's still moderate loss absorption capacity, and the challenges to sustain capital and liquidity metrics in view of higher expected loan growth and still moderate profitability. Given Banorte's systemic importance and its role as the largest domestically-owned bank, its support rating and support rating floor were affirmed at '2' and 'BBB-', respectively. Fitch's support rating floors indicate a level below which the agency will not lower the bank's long-term IDRs. In view of GFNorte's nature as a holding company, its support rating and support rating floor were affirmed at '5' and 'NF', respectively, which indicates that, although possible, external support cannot be relied upon. The hybrid securities of Banorte were affirmed at 'A+(mex)', which reflects Fitch's approach to rate these capital securities. The following ratings have been affirmed with a Stable Outlook: GFNorte: --Long-term foreign and local currency IDRs at 'BBB'; --Short-term foreign and local currency IDRs at 'F2'; --Viability rating at 'bbb'; --Support rating at '5'; --Support rating floor at 'NF'. Banorte: --Long-term foreign and local currency IDRs at 'BBB'; --Short-term foreign and local currency IDRs at 'F2'; --Viability rating at 'bbb'; --Support rating at '2'; --Support rating floor at 'BBB-'; --National scale long-term rating at 'AA+(mex)'; --National scale short-term rating at 'F1+(mex)'; --National scale long-term rating for a local issue of subordinated unsecured debt (BANORTE 09) at 'A+(mex)'. Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: -- 'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); -- 'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 05, 2012); -- 'National Ratings Criteria' (Jan. 19, 2011). Applicable Criteria and Related Research: National Ratings Criteria Assessing and Rating Bank Subordinated and Hybrid Securities Global Financial Institutions Rating Criteria
* China facing dilemma of deleveraging without hurting growth
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