August 9, 2017 / 8:27 PM / 2 years ago

Fitch Affirms GFNorte and Banorte's VR & IDRs at 'bbb+' and 'BBB+'; Outlook Revised to Stable

(The following statement was released by the rating agency) MONTERREY, August 09 (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 was revised to Stable from 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 national scale ratings at 'AAA(mex)' and 'F1+(mex)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. Banorte's IDRs are sensitive to changes in Mexico's sovereign rating on the down side. Therefore, the bank's Outlook revision follows the Aug. 3, 2017 affirmation of Mexico's sovereign rating at 'BBB+' and revision of the sovereign Outlook to Stable from Negative. The bank's Outlook has been revised to Stable from Negative as part of a peer review of major Mexican banks. (See "Fitch Revises Mexico's Outlook to Stable; Affirms IDRs at 'BBB+'" at ''). KEY RATING DRIVERS GFNorte and Banorte's IDRs are driven by their stand-alone credit profiles as reflected by their VRs. Fitch believes that the operating environment and Banorte and GFNorte's strong company profiles highly influence their VRs. These ratings are also driven by their resilient financial performance sustained mainly by continued loan growth and fee income, progressive optimization of operational expenses, and well-controlled credit costs. Operating return-to-risk weighted assets (RWAs) stood at almost 3.9% at 1H17, above previous-year results (2013-2016: 3.0% on average). Although the ratings consider the bank's still adequate capitalization, they also incorporate the recent decline in the Fitch core capital (FCC) ratio to 12.6% as of June 2017 (YE15: 15.8%). Banorte's FCC fell during 2016, mainly due to the Afore XXI split-off, INB's sale accounting effect, dividend payment and the effect of the creation of reserves 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 June 2017, total regulatory capital ratio stood at 15.1%. 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. The bank has been active in government lending with some individual concentrations on its balance sheet. As of June, the top 20 largest exposures by economic group represented 1.5x equity, the major ones were mainly related to government. Four main debtors jointly represented nearly 66% of total equity, which Fitch considers high. Banorte has been reducing the pace of its government lending growth, and continues working on reducing concentrations. Banorte's impaired loans ratios continued improving during the first six months of the year, sustained by well-performing loans and some improvement in commercial and corporate loans which absorbed moderate increases in consumer non-performing loans (NPLs). Fitch analyzes as well a more stringent and real measure of asset quality, including charge-offs, which improved to 3.9% as of May 2017 from 4.1% in 2016, mainly benefiting from a partial resolution of the homebuilder exposure during 2016. Fitch expects Mexican financial system asset quality to deteriorate moderately, mainly for consumer and SMEs lending, which could be driven by slow economic growth, increasing inflation and rising interest rates. Banorte has a strong deposit franchise. As of June 2017, about 97% of its loan portfolio is deposit-funded. Funding has proved to be stable and has shown an increasing trend over the past few years (around 8% annual average). The bank has access to traditional banking funding like interbank short- and long-term borrowing, loans from development banks, and has also issued subordinated notes in the capital markets. 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) 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 Fitch will not lower the bank's Long-Term IDRs as long as 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 as 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 There is limited upside potential for the VRs in the foreseeable future, and could only be upgraded in the medium term if GFNorte and Banorte materially strengthen their competitive position and franchise, while further improving their liquidity profile and financial performance, including an operating return on RWAs above 4%, while maintaining asset quality and capitalization metrics. 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. 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. SR and SRFs could be downgraded from a multi-notch downgrade of the sovereign rating. NATIONAL 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 decrease of GFNorte's ratings, if the group's IDR is not aligned with the sovereign rating. Fitch has affirmed the following ratings and revised Outlooks as indicated: Grupo Financiero Banorte, S.A.B. de C.V. (GFNorte) --Long-Term Foreign and Local Currency IDRs at 'BBB+'; Outlook Revised to Stable from 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 Revised to Stable from 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. Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on 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 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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