OREANDA-NEWS. Fitch Ratings has affirmed the foreign and local currency long- and short-term Issuer Default Ratings (IDRs) of Financiera Independencia S.A.B. de C.V. (Findep) at 'BB-' and 'B'. The long-term and short-term 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)' and 'F2(mex)'; while the long-term and short-term national scale ratings of Findep's group-lending subsidiary Financiera Finsol, S.A. de C.V. Sofom E.N.R. (Finsol Mexico) were affirmed at 'BBB+(mex)' and 'F2(mex)'. The Rating Outlook of Findep's long-term IDR is Stable.

Findep's senior unsecured debt issuance was affirmed at 'BB-'. A full list of rating actions follows at the end of this rating action commentary.

KEY RATING DRIVERS
FINDEP's IDRS, NATIONAL RATINGS AND SENIOR DEBT
Findep's IDRs, National and senior debt ratings considers its stable and well-anchored franchise in the microfinance sector through a strong position on unsecured personal lending in Mexico and its still relatively small presence in the U.S. and Brazil. The ratings also consider its relatively improved capitalization base given its adequate and stable capital internal generation and its low loan growth, its weak asset quality although sustained year over year (2015-2014) and its funding structure which although it is entirely wholesale, Fitch believes it has access to a reasonably diversified funding mix by source and maturity. Findep's adequate liquidity management which benefits from its revolving portfolio and adequate liability maturities was also factored in this ratings affirmation.

The ratings also reflect the recently pressured financial performance of Findep given the challenges of the entity to resume lending and revert asset quality trends, factors that led by year-end 2015 (YE15) to pressured operating profits and overall profitability metrics. However, Fitch also considers the ability of Findep to rapidly adapt its strategies to a more complex operating environment that has deteriorated consumer portfolio quality over the past few years.

Findep has several years focusing its strategy on enhancing its loan portfolio quality and profitability, rather than loan growth. Although revenue diversification has been improving and earnings have been relatively resilient, given the unfavorable economic conditions in Mexico and Brazil's economies together with an affected microfinance industry; Fitch believes that the company has been active in identifying areas for improvement on its processes and underwriting standards in order to sustain its earnings in the near future.

As of December 2015, the company's operating return on assets (ROA) diminished to 2.5% from 4.11% in 2014 mainly affected by a planned reduction in Independencia's (core product) loans in order to enhance origination standards and credit quality, personnel cuts and other operational reductions (branches, offices). The company is planning to continue working on the improvement of the operation and portfolio quality of Independiencia, while enhancing the growth of its more profitable subsidiaries such as AEF and AFI, while continuing reinforcing Finsol Mexico and Brazil (group based methodology subsidiaries). Given the economic expectations and the higher interest rates in Mexico, Fitch considers its profitability metrics could be further pressured. Nevertheless, a less competitive environment due to a more stringent regulation regarding this type of entities could aid on Findep's earnings recovery.

During 2015, Findep managed to somehow sustain its asset quality ratios; however, these are still considered high by Fitch. By YE15, on a consolidated basis, the non-performing loan (NPL) adjusted ratio considering 12-month charge-off loans, stood at 22.5% and remained practically unchanged compared to YE14 (22.2%). Fitch recalls that total charge-offs are elevated in the microfinance sector due the customer segment targeted (low-income and unbanked clients). Adjusted delinquency ratios were mainly affected by further deterioration at Independencia's loan portfolio, in which the company took actions to contain impairments increase by establishing more stringent criteria for acceptance which resulted in a reduction of the total portfolio. In Fitch's opinion, Finsol Mexico and AEF indicators also remain elevated, although contained or moderately improving. The company still maintains 100% loan loss reserve coverage.

Findep's capital base was further improved in 2015, as a result of low organic growth and a stable internal capital generation, although it still has not compensated for the goodwill generated from the acquisitions of its subsidiaries. An element that has also aided on a relatively strengthened capital base and will continue supporting Findep's commitment to restore capital, is the management's decision to temporarily suspend dividends, As of December 2015, tangible equity-to-tangible assets stood at 13.70% (YE14 11.90%). If loan growth is resumed, the entity faces the challenge to avoid its deterioration.

The nature of Findep's funding base is concentrated 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, as well as foreign currency liabilities to meet its loans placements abroad. 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.

AEF AND FINSOL MEXICO'S NATIONAL SCALE RATINGS

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, sustained and growing contribution to the consolidated results and internal capital generation. AEF offers individual loans. Its importance is marked by the strong synergies in funding, corporate governance and operation, and also on the knowledge transfer between the two companies. As of December 2015, AEF's loans represented 20.8% of Findep's total loans and 27.1% of its equity. The acquisition of AEF was relevant to the parent in terms of product and geographical diversification. 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 companies in terms of corporate governance, operation and funding. Over the past years, Findep has focused on enhancing the performance and loan quality of Finsol Mexico. The company specializes in group based lending (working capital loans mainly granted to women) and it has been relevant to Findep in terms of product diversification, representing 11.4% of the total loan portfolio and 6.5% of the equity as of December 2015. Findep's actions to strengthen the performance of Finsol Mexico, resulted in an enhancement of the profits over the past two years. At YE15, operational ROAA and ROAE were 5.4% and 24.2% respectively. Finsol's long-term rating is notched down by one level from the national scale rating of its parent.

RATING SENSITIVITIES
FINDEP'S IDRS, NATIONAL RATINGS AND SENIOR DEBT
Findep's ratings could be downgraded if the operating ROA weakens consistently 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 falls below 12%. A downgrade could also arise from a compromised funding profile and liquidity management. On the other hand, Findep's ratings could only benefit from a substantial enhancement of its tangible capital ratios to above 20% steadily and from a quicker than expected recovery and substantial improvement of its overall performance.

AEF AND FINSOL MEXICO'S NATIONAL SCALE RATINGS

National ratings of AEF and Finsol Mexico are based on the likelihood of support from its parent, Findep, if needed.

Fitch has affirmed the following ratings:

Findep

--Long-term foreign and local currency IDRs at 'BB-'; Outlook Stable;
--Short-term foreign and local currency IDRs at 'B';
--USD200 million 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;
--National scale short-term rating at 'F2(mex)'.

Finsol Mexico

--National scale long-term rating at 'BBB+(mex)'; Outlook Stable;
--National scale short-term rating at 'F2(mex)'.