Fitch Upgrades Banco Interacciones' IDR to 'BB+'; Outlook Revised to Stable
Interacciones' Support Rating is affirmed at '5' and Support Rating Floor at 'NF'. The bank's local issuances of subordinated securities are upgraded to 'BBB+(mex)' from 'BBB(mex)', and the local senior unsecured issues are upgraded to 'A+(mex)' from 'A(mex)'. See the full list of rating actions at the end of this rating action commentary.
The upgrade of Interacciones' IDRs and VR are driven by Fitch's expectation of sustained strengths of the bank's profitability and loss absorption capacity, which partially offsets Interacciones' concentrated loan portfolio and pressured maturities mismatches. Interacciones' upgrade factors in its consistent and good profitability over the last five years and the continued advances in terms of ALM. In addition, the upgrade considers its enhanced loss absorption capacity reflected in the further improved capitalization metrics and ample cushion of reserves, together with a historically very low level of loan impairments (0.15% as of March 2015).
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The bank's ratings consider its strong franchise in its core market, as it stands as the third largest provider of government lending in the Mexican banking system; and the willingness of the bank to diversify its business lines by introducing new products associated to the government sector, exploiting its competitive position. The bank's good financial performance benefits by its steady and recurrent income, low funding costs and exceptionally low operating efficiency, aided by the lack of branches. Its operating ROAA stood at 1.8% in the first quarter of 2015 (1Q15) and at 1.6% on average from 2011-2014 and an important component of the bank's income stream are net fees and commissions, which Fitch considers stable.
The bank's impairment ratios are outstanding compared to the banking system given that government lending's source of payment is guaranteed by government budgetary resources, but Fitch recalls the bank's loan portfolio exhibits high borrower concentrations of its main creditors (largest 20th loan exposures were 5.9 times the bank's FCC as of March 2015). A lower dependence on a limited number of debtors could occur gradually as the bank's new business lines start to weight on its portfolio.
Fitch recognizes the bank's funding profile has been improving recently in view of its efforts to diversify its funding sources by increasing its customer deposit base (although it is mainly institutional) and accessing longer tenor sources. However, there are still significant asset-liabilities mismatches, driven by the long-term nature of its loans and the notably high concentrations that are also present at the customer deposits of the bank.
The bank's capital position was strengthened relatively recently as a result of its recurring and high profits, a relatively conservative dividend pay-out policy and the IPO of the Group in 2013. The bank's FCC stood above 14% by year-end 2014 (YE14) and 1Q15, and its FEC stands above those levels, aided by hybrid securities.
The bank has local senior unsecured certificates (long term), which were also upgraded to the same level as its national scale rating given Fitch's appreciation that the likelihood of default of any given senior unsecured obligation is the same as the likelihood of default of the bank.
SUPPORT RATING AND SUPPORT RATING FLOOR
Interacciones' Support Rating and Support Rating Floor are affirmed at '5' and 'NF', respectively, in view of the bank's low systemic importance. In Fitch's view, external support cannot be relied upon.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The local subordinated hybrids of Interacciones were upgraded to 'BBB+(mex)' from 'BBB(mex)', three notches below the applicable anchor rating, the bank's long-term national scale rating of 'A+(mex)', in order to maintain the relativity. The issue's rating is notched down reflecting the loss severity and non-performance risk. The notching for non-performance risk (-2) is typical for hybrids issued by Mexican banks, since Fitch considers that the triggers for coupon deferrals or cancellations are relatively high, according to applicable local regulations. In turn, the notching for loss severity (-1) reflects that these securities are plain-vanilla subordinated debt (subordinated preferred, under the local terminology).
AFFILIATED COMPANY
The ratings of ICB are driven by Fitch's view that its importance for GFI's is high, given that ICB's activities are core for the group's strategy and business model; especially given its position as funding mechanism for the bank. The ratings also consider the legal obligation of GFI to support its subsidiaries, according to local regulations. The credit profile of GFI is associated with that of its main subsidiary, Interacciones.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
A downgrade of Interacciones' ratings will be given by any deterioration or deviation of its loss absorption capacity and stable profitability, as a FCC below 14%; together with higher concentrations or in an event of a material deterioration of its impairment loans. An upgrade for Interacciones' ratings is hardly conceivable at present, as Fitch considers significant declines on its concentrations at the loan portfolio and customer deposit base, and a material reduction of its assets and liabilities maturity mismatches, are not foreseeable over the rating horizon.
The bank's senior debt ratings would mirror any change in the bank's national scale ratings.
SUPPORT RATING AND SUPPORT RATING FLOOR
A potential upgrade of Interacciones' Support Rating and Support Rating Floor is limited at present, since external support cannot be relied upon, although it is possible.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The bank's subordinated debt ratings will likely mirror any change in the bank national scale ratings, as these are expected to maintain the same relevance to Interacciones' credit rating.
SUBSIDIARY AND AFFILIATED COMPANIES
Any potential changes of ICB's ratings will be driven by any changes in Interacciones' ratings or in the legal framework that could alter the propensity of the group to support them, an unlikely scenario at present. A modification on the entity's strategic importance to GFI could also, lead to changes of its ratings.
Fitch has taken the following rating actions:
Banco Interacciones, S.A.:
--Long-term foreign and local currency IDRs upgraded to 'BB+' from 'BB', Outlook revised to Stable from Positive;
--Short-term foreign and local currency IDRs affirmed at 'B';
--Viability rating upgraded to 'bb+' from 'bb';
--Support rating affirmed at '5';
--Support rating floor affirmed at 'NF';
--National scale long-term rating upgraded to 'A+(mex)' from 'A(mex)', Outlook revised to Stable from Positive;
--National scale short-term rating affirmed at 'F1(mex)';
--National scale long-term rating for local senior unsecured debt issues upgraded to 'A+(mex)' from 'A(mex)';
--National scale long-term rating for local subordinated debt issues upgraded to 'BBB+(mex) from 'BBB(mex)'.
Interacciones Casa de Bolsa, S.A. de C.V.:
--National scale long-term rating upgraded to 'A+' from 'A(mex)', Outlook revised to Stable from Positive;
--National scale short-term rating affirmed at 'F1(mex)'.
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