Fitch Revises Outlook on Banamex's LC IDR to Positive; Affirms VR at 'a'
Also, Fitch has affirmed the national scale ratings of Banamex and Acciones y Valores Banamex, S.A. de C.V., Casa de Bolsa (Accival) at 'AAA(mex)' and 'F1+(mex)'. Additionally, Fitch affirmed the national scale ratings of the local debt issued by Citi Mexico Investments, S. de R.L. de C.V. (Citi Mexico Investments) at 'AAA(mex)emr'. A full list of rating actions follows at the end of this press release.
The Rating Outlook is Stable for Banamex's Foreign Currency (FC) IDR, as well as for the long-term national ratings of both Banamex and Accival.
The Outlook revision for Banamex's LC IDR reflects the identification of Banamex as a material legal entity in Citigroup's resolution plan document and Fitch's expectation that internal recapitalisation resources in the form of total loss absorbing capacity (TLAC) will be placed with Banamex in due course. The substantial debt buffer at the holding company, Citigroup Inc. (Citigroup) should enable it to recapitalise its material legal entity operating subsidiaries in the event of resolution.
The complexities of cross-border resolution of Global Systemically Important Banks (GSIBs), which include conflicting interests of national regulators, is scheduled for discussion at the Financial Stability Board's autumn summit of G20 ministers. Fitch will consider the placing of internal TLAC will foreign subsidiaries as a strong signal that capital resources from the holding company will be extended to the subsidiary in the event of group resolution. However, placement could take some time. The Positive Outlook reflects the likelihood that Fitch could upgrade the LC IDR by one notch once internal TLAC is in place. The Outlook on Banamex's long term FC IDR remains Stable, since this rating is capped at Mexico's Country Ceiling of 'A'.
KEY RATING DRIVERS
VR AND IDRS
Banamex's local and foreign currency IDRs are driven by its VR of 'a', which reflects the bank's ability to sustain its ample loss absorption capacity, strong and resilient earnings, robust franchise, and sound liquidity and funding. The bank's VR also reflect its ample capacity to recover rapidly from adverse operational and credit events from previous years. However, the VR also factors in the lower than pre-crisis core earnings than its closest peers, above-average credit costs, and challenges related to corporate governance practices and risk controls.
Banamex current VR is two notches above Mexico's foreign currency sovereign rating, a rare case within Fitch rated portfolio. As such, Banamex performance and balance sheet integrity not only compares well with similarly rated banks around the world, but show a special resilience compared to changes in the economic cycle. Ample capitalization, very strong funding and good profitability are required to preserve such above average notching compared to Mexico's foreign currency Sovereign Rating.
Banamex's capital position is a key strength and is enhanced by its sound and recurrent generation of earnings, and moderate dividend payments. As such, Banamex's capital position is not only ample but also make up solely on core equity, and negligible amounts of encumbered assets. The loss absorption capacity is further enhanced by an ample base of loan loss reserves. Banamex's Fitch Core Capital (FCC) to Risk Weighted Assets (RWA) ratio quickly recovered from the losses resulting of adverse events in previous years, which affected its ratios at the end of 2013 and to a lesser extent in 2014. As of June 2015, the FCC ratio recovered and reached levels of 16%, from 13% and 15% at YE13 and YE14, respectively.
Banamex maintains sound and consistent margins and diversified revenues. In Fitch's view, operating and net ROA should gradually return to historical levels above 1.5%. It is noteworthy that in 1H15 Banamex's profits benefited from extraordinary revenues (MXN3,540 million) from the sale of Banamex's acquiring business to a subsidiary of Citigroup. Banamex's adjusted ROA would have been 1.41% from the reported 2.07%. Banamex's earnings remain sound despite some one-time events that occurred in previous years (e.g. homebuilders loan exposures and the Oceanografia event). Since such exposures occurred, Banamex's credit and operating expenses increased (more loss loan provisions and charge-offs); however the bank's consistent core earnings allowed to recover rapidly of such loses. Fitch expects that Banamex will be able to recover its profitability to its historical levels aided by controlled costs and the expected growth on its loan portfolio.
Banamex has an ample, low-cost domestic and broadly diversified retail deposit base. It is perceived as one of the country's strongest banks, as evidenced by the stability of its existing funds and new deposits in times of stress. Among local dominant banks in Latin America, Banamex's funding profile excels in terms of diversification, costs and stability, a required condition to have a VR above the sovereign rating. Customer deposits are Banamex's primary funding source, accounting for 94% of traditional banking liabilities at the end of 1H15 and for over 110% of gross loans. The loans-to-deposits ratio stood at a reasonable 89% at 1H15, increasing steadily in line with loan growth. Demand account deposits funded 91% of loans. As expected, regulatory LCR (under Basel III rules) is beyond the legal requirement of 60% for 2015. As of June 2015, Banamex's LCR stood at satisfactory 179%.
Banamex's delinquency levels are sound and compare favorably with those of its closest national and international peers. When delinquency increases, Banamex has been characterized by the use of ample provisions and charge-offs in order to contain negative impacts. Unlike the Mexican banking system, Banamex's delinquency levels are improving as a result of better credit process and its origination strategy oriented on its existing client base. Banamex's adjusted impairment ratio (impaired loans plus charge-offs) is better than the average of the system. Fitch expects that charge-offs and impairment ratios could potentially pick up in the foreseeable future given sustained recent and projected loan growth, especially in retail lending and SMEs. Reserve coverage and other asset quality metrics also are sound.
NATIONAL RATINGS AND SENIOR DEBT
Banamex national-scale ratings are driven by its strong intrinsic profile, reflected in its relatively higher VR. Fitch rates at the same rating level the local debt issued by Banamex as the debt is senior unsecured.
In turn, the national-scale ratings of Accival, one of the largest brokerage firms in Mexico, have been affirmed because it is perceived by Fitch as a core entity of Banamex. Fitch believes that Accival is a core and highly integrated affiliate of the bank and its local parent company, Grupo Financiero Banamex (GFBanamex). In addition, GFBanamex is legally enforced to provide support to its subsidiaries. Therefore, the national scale ratings of the brokerage unit are aligned with the bank's ratings.
The local debt issued by Citi Mexico Investments, an indirect subsidiary of Citigroup, was affirmed at 'AAA(mex)emr' as a result of an irrevocably and unconditionally guarantee in favour of the bond holders provided by Citigroup.
SUPPORT RATING
Banamex Support Rating (SR) of '1' reflects the extremely high probability of external support from Citigroup. Fitch considers that Banamex is a core subsidiary of Citigroup (rated 'A'/Stable Outlook by Fitch; VR 'a'), and support should be forthcoming in case of need.
RATING SENSITIVITIES
VR
In Fitch's opinion, there is no upside potential of Banamex's VR considering the current sovereign rating, since this rating is already two notches above Mexico's sovereign foreign currency rating.
In turn Banamex's VR may be negatively affected under a scenario of sustained weaker performance, expressed with and/or: a FCC ratio below 14% and impairment ratios above 3% and credit costs (loan loss reserves and charge-offs) sustained above 6%. Also, if the bank does not show Operating ROAs consistently around 2%, its VR could be negatively affected. Further negative corporate governance events or weaknesses in operational procedures, also could affect negatively Banamex's VR.
IDRS
An upgrade of Citigroup's IDRs could positively affect Banamex's IDRs, since the latter is considered core to the former. However, Banamex's FC IDR is capped by sovereign and/or country ceiling considerations. In turn, Banamex's LC IDR could be upgraded by one notch once internal TLAC is in place.
The downside potential for Banamex's IDRs and its national-scale ratings is currently low, since Fitch considers that Banamex is a core subsidiary of Citigroup. Even if Banamex's VR were eventually downgraded, its IDRs will likely remain aligned with Citigroup's IDRs.
NATIONAL RATINGS AND SENIOR DEBT
Banamex, Accival and Citi Mexico Investments' national scale ratings could only be negatively affected by a multi-notch downgrade of its own VR, or a multi-notch downgrade of Citigroup's IDRs, or a change in their propensity to support these affiliates. The notch will be applying to Banamex's senior debt since is a senior unsecured debt.
SUPPORT RATING
Banamex's SR could be affected if Fitch changes its view of Citibank's ability or willingness to support the Mexican bank.
Fitch has affirmed the ratings as follows:
Banamex
--Foreign Currency Long-Term IDR at 'A'; Outlook Stable;
--Foreign Currency Short-Term IDR at 'F1';
--Local Currency Long-Term IDR at 'A'; Outlook Revised to Positive from Stable;
--Local Currency Short-Term IDR at 'F1';
--Viability rating at 'a';
--Support Rating at '1';
--Long-term National-scale rating at 'AAA(mex)'; Outlook Stable
--Short-term National-scale rating at 'F1+(mex)';
--Long-term National-scale rating for local senior debt issuances at 'AAA(mex)'.
Accival
--Long-term National-scale rating at 'AAA(mex)'; Outlook Stable;
--Short-term National-scale rating at 'F1+(mex)'.
Citi Mexico Investments
--Long-term National-scale rating for local senior debt issuances at 'AAA(mex)emr'.
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