OREANDA-NEWS. Fitch Ratings has upgraded the foreign- and local-currency long-term Issuer Default Ratings (IDRs) of Consubanco, S.A., Institucion de Banca Multiple (Consubanco) to 'BB' from 'BB-'. The short-term IDR was affirmed at 'B'. Its Viability Rating (VR) was also upgraded to 'BB' from 'BB-', its long- and short-term National Scale ratings to 'A(mex)' from 'A-(mex)' and 'F1(mex)' from 'F2(mex)', respectively. A full list of rating actions is at the end of this rating action commentary.

The Outlook on the long-term rating is Stable.

KEY RATING DRIVERS - VR, IDRs, NATIONAL RATINGS AND SENIOR DEBT RATINGS

The upgrade of the bank's IDRs, VR, National Scale and Senior Debt ratings reflects its consistent financial performance throughout the economic cycle, reflected in sound and recurring profitability ratios driven by ample margins and strong efficiency levels, which underpin its strong capitalization metrics. Additionally, the upgrade is driven by the bank's substantial and sustained improvement in the flexibility of its funding mix which shifted towards unsecured and more stable funding sources and by the moderate improvement in asset quality exhibited during 2014. Consubanco's ratings also consider its strong and growing business franchise in the public sector employee's pay-roll-deducted loan segment.

Consubanco's ratings are constrained by the bank's high level of balance sheet concentration, the challenging operating and competitive environment of its business segment, and the relatively high impaired loan ratio - although the latter is compensated by its ample loan loss reserve coverage and strong capital base.

Consubanco's National Scale ratings are supported by the same factors that drive its VR, which result in a strong financial profile and prospects.

Consubanco's profitability has been historically strong and stable given the high net interest margins in its core products, coupled with its leading market position, ample business volumes, sound efficiency and moderately contained credit costs. Additionally, most performance metrics remain robust and higher than most of its peers.

Operating return on assets (ROA) and operating return on equity (ROE) were 10% and 38.4%, respectively, higher than the 7.7% and 26.8% registered in 2013. Fitch considers Consubanco's consistent profitability ratios as one of its main strengths and believes core earnings are sustainable in the foreseeable future.

As of December 2014, the impairment ratio as adjusted by Fitch (considering employer delays of more than 90 days) stood at 8.5%; this represents an improvement to the 10.3% impairment ratio registered in 2013. During 2014, net charge-offs amounted to MXN146 million, which represented 3.5% of gross loans (2013: 3.7%) while restructured loans represented 0.8% of average gross loans as of December 2014. Consubanco's loan loss reserves are strong and amply cover the impaired loans balance.

The limited flexibility and concentration of Consubanco's funding base has been one of its major challenges. Fitch considers there have been material improvements over the past years, shifting away from secured funding towards unsecured issuances and more stable funding sources. Nevertheless, Consubanco's funding base remains highly concentrated on debt issuances (60.5% as of December 2014).

Historically, Consubanco has had strong capitalization metrics. Its hefty capital base and its high capacity to internally generate equity are major strengths in Fitch's opinion. The bank's Fitch Core Capital Ratio stood at 17.3% as of December 2014 (2013: 15%).

Fitch considers that, other than traditional credit risks, Consubanco is also somewhat exposed to operational, political and event risk. Failure to properly implement the agreements with employers or unwillingness from public sector entities to timely and fully disburse retained collections, changes in municipal and federal leadership, among others, are potential risk factors that could affect Consubanco under certain circumstances.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

The bank's SR of '5' and SRF of 'NF' are driven by its low systemic importance and reflect Fitch's opinion that external support for the bank in case of need, although possible, cannot be relied upon.

RATING SENSITIVITIES -VR, IDRs, NATIONAL RATINGS AND SENIOR DEBT RATINGS

Fitch believes that Consubanco's ratings upside potential is limited in the short term. Fitch would consider upgrading these ratings in the medium term, when the bank's business volume increases while it achieves important balance sheet diversification, both in terms of its loan portfolio and funding mix, and while maintaining asset and liability tenors relatively matched, and a comfortable cash flow schedule.

The bank's VR, IDRs, National and senior debt ratings could be downgraded if asset quality deteriorates to such an extent that operating (ROA) and/or the Fitch core capital ratio fall below 5% or 15%, respectively. Negative developments in political and/or business risks could also affect the ratings.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
Given the limited systemic importance of the bank and negligible share of retail deposits, Fitch believes that the SR and SRF are unlikely to change in the foreseeable future.

The rating actions are as follows:

Consubanco, S.A., Institucion de Banca Multiple:

--Long-term IDR upgraded to 'BB' from 'BB-';
--Short-term IDR affirmed at 'B';
--Long-term local currency IDR upgraded to 'BB' from 'BB-';
--Short-term local currency IDR affirmed at 'B';
--Viability rating upgraded to 'bb' from 'bb-';
--Long-term senior unsecured notes upgraded to 'BB' from 'BB-';
--Support rating affirmed at '5';
--Support rating floor affirmed at 'NF';
--Long-term national-scale rating upgraded to 'A' from 'A-(mex)';
--Short-term national-scale rating upgraded to 'F1(mex)' from 'F2(mex)';
--Long-term national-scale rating for local unsecured debt upgraded to 'A' from 'A-(mex)'.

The Rating Outlook is Stable.