Fitch Affirms Financiera Independencia's Ratings at 'BB-/B'; Outlook Stable
In addition, the national scale ratings for Findep and its Mexican subsidiary Apoyo Economico Familiar S.A. de C.V. Sofom, E.N.R. (AEF) have been affirmed at 'A-(mex)' for the long-term and 'F2(mex)' for the short-term rating. Also, the national scale ratings for the group-lending subsidiary Financiera Finsol, S.A. de C.V. Sofom E.N.R. (Finsol Mexico) have been affirmed at 'BBB+(mex)' and 'F2(mex)'.
The Outlook is Stable. A full list of rating actions follows at the end of this rating action commentary.
FINDEP's IDRs AND NATIONAL SCALE RATINGS
KEY RATING DRIVERS
Fitch considers Findep's franchise in the microfinance sector as one of its key strengths. Findep has a strong position in the unsecured personal lending sector in Mexico, while it has expanded its geographical and group lending niche presence mainly through its subsidiaries in Mexico, U.S. and Brazil.
Fitch believes that the company's actions to focus its strategy not only on loan growth but on portfolio quality, revenue diversification, and capital and profitability enhancement has enabled it to maintain a relatively stable performance in a struggling competitive environment and weak macroeconomic conditions that have affected the microfinance industry. The micro-lending industry in Mexico continues to be pressured by low entrance barriers and less formal participants that have increased the indebtedness of Findep's customer base.
Findep's profitability has remained stable. Operating return on assets moderately rose in 2014 to 4.1% (ROA 3%) despite stability in loan portfolio size; sustained by the entity's ample interest margins and modest improvements in efficiency and funding costs. Profits have also benefited by the growing diversification by product and country, which have partially reduced the adverse effects of the concentration.
Total write-offs plus impaired loans are elevated in the microfinance sector due to the target customer segment (low-income and unbanked clients), and have been pressured over the past three years. On a consolidated basis, during 2014 Findep managed to somehow sustain its asset quality ratios; however, they are still high. During 2014, non-performing loans (NPLs) plus 12-month written-off loans rose to 22% from 21% at YE2013, but remained below the 2009-2012 average of 25%. Loan quality indicators in 2014 were not as good as anticipated by the entity given the slowdown of the Mexican and the Brazilian economies which saw further delinquency deterioration in some of Findep's subsidiaries (AEF, Independencia and Finsol Brazil). Findep expects to strengthen asset quality indicators in the future, and to maintain 100% loan loss reserve coverage.
Profits from past two years and moderate organic growth allowed Findep to preserve its capital base, although it has not yet compensated for the goodwill generated from the acquisitions of the subsidiaries. Fitch believes Findep has enhanced its capacity to generate internal capital; however, the ratings are constrained by its still tight capital ratios. Findep's profitability together with management's decision to temporarily suspend dividends will continue supporting Findep's commitment to restore capitalization. As of December 2014, tangible equity-to-tangible assets was 12.3% (YE2013 12.8%). Despite the internal capital generated in 2014, tangible capital was moderately reduced given the increased deferred expenses from the public debt issuances.
Findep is structurally reliant on wholesale funding, given its legal limitation to receive retail deposits. Fitch believes that the entity has access to a reasonably diversified funding mix by source and maturity, with a combination of commercial and development bank facilities, and national and international public debt placements.
The short-term nature of its loan portfolio supports Findep's cash flow generation and flexibility. Fitch considers that liquidity management is adequate for Findep, and relies on its revolving portfolio and adequate liability maturities which drive the positive cumulative gaps for the next three years.
RATING SENSITIVITIES
Findep's ratings could be downgraded if the operating return on assets (ROA) weakens to below 2%; the NPLs plus 12-month written-off loans ratio is sustained above 25%; and/or the tangible equity-to-tangible assets ratio fall below 12%. A downgrade could also arise from negative changes in its funding profile. Findep's ratings could only benefit from a substantial enhancement of its tangible capital ratios and from a quicker than expected improvement on its overall performance.
AEF AND FINSOL MEXICO's NATIONAL SCALE RATINGS
KEY RATING DRIVERS
National ratings of AEF and Finsol Mexico are based on the likelihood of support from its parent, Findep, if needed.
Fitch believes that AEF is a core subsidiary to its parent, given its strong and sustained contribution to the consolidated results and internal capital generation. Its importance is marked by the growing synergies in funding, corporate governance and operation, and also on the knowledge transfer between the two entities. The acquisition of AEF was relevant to the parent in terms of geographical diversification. AEF's loans represent 19.3% of Findep's total loans. AEF's ratings are affirmed at the same national scale rating level of its parent.
Fitch considers Finsol Mexico as a strategically important subsidiary to Findep given the strong synergies among the entities in terms of corporate governance, operation and funding. Although Finsol Mexico has been relevant to Findep in terms of product diversification, representing 11% of the total loan portfolio, its contribution to total results has been limited given the slower than expected recovery of the subsidiary performance in a heavily competitive environment. Findep's actions to strengthen the behavior of the working capital loans, and the increasing integration of strategies among the entities sustain Fitch's assessment of support. Finsol?s long-term rating is notched down by one level from the national scale rating of its parent.
RATING SENSITIVITIES
Any downside potential for Findep's subsidiaries (AEF and Finsol Mexico), will be driven by any potential downgrade of Findep's ratings and/or a change of each entity's strategic importance to the parent.
Fitch affirms the following ratings:
Findep:
--Long-Term foreign and local currency IDRs at 'BB-'; Outlook Stable;
--Short-Term foreign and local currency IDRs at 'B';
--USD200m senior unsecured notes at 'BB-';
--National-scale Long-Term rating at 'A-(mex)'; Outlook Stable;
--National-scale Short-Term rating at 'F2(mex)'.
AEF:
National-scale Long-Term rating at 'A-(mex)'; Outlook Stable; and
National-scale Short-Term rating at 'F2(mex)'.
Finsol Mexico:
National-scale Long-Term rating at 'BBB+(mex)'; Outlook Stable; and
National-scale Short-Term rating at 'F2(mex)'.
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