OREANDA-NEWS. Fitch Ratings has affirmed the Viability ratings (VRs) of Grupo Financiero Banorte, S.A.B. de C.V. (GFNorte) and Banco Mercantil del Norte S.A. (Banorte) at 'bbb+', as well as their Long term foreign- and local-currency Issuer Default Ratings (IDRs) at 'BBB+'. In addition, Fitch affirms GFNorte and Banorte's Short-term foreign- and local-currency IDRs and Local currency short-term IDRs at 'F2'.

GFNorte's Support Rating (SR) was affirmed at '5', while Banorte's SR was affirmed at '2' and its Support Rating Floor (SRF) at 'BBB-'.

The Rating Outlook for the long-term ratings is Stable.
See the full list of rating actions including GFNorte's non-banking subsidiaries National scale ratings at the end of this release.

KEY RATING DRIVERS
Banorte's VR, IDRs and National scale ratings
Banorte's VR, IDRs and National scale ratings are driven by its ample franchise and strong market position as the fourth-largest commercial bank in Mexico in terms of total assets and total loan portfolio and third in terms of customer deposits. The ratings also consider its adequate and stable financial performance, which have been tested through the cycle, and is supported by continued expansion of loans (organic and inorganic), institutional programs to reduce operational expenses and credit cost reduction. Operational ROA and ROE stood at 1.8% and 16.8% at YE2015, in line with previous-year results.

The bank's adequate loss absorption capacity is also factored into the rating. Banorte has improved its capital position over the past few years through a mix of internal capital generation and new equity raised in the market (USD2.5 billion in 2013). Banorte's Fitch core capital-to-risk weighted assets was 15.7% at YE2015. The bank also maintains reasonable reserve cushions to absorb losses (1.14x impaired loans). Capital ratios and internal capital generation give some space for growth; however, Fitch believes capitalization will remain adequate in the foreseeable future.

Banorte's ratings also reflect the relatively rapid recovery of asset quality from its highest peak in 2013 (3.07%), after the default of the three largest homebuilders. GFNorte's asset quality continued improving during 2015 (2.23%) sustained by well-performing loans in all product segments, but mainly underpinned by resolution of a portion of the exposure to homebuilders which drove the corporate lending non-performing loans (NPLs) from 6.3% at YE14 to 4.1% at YE15.

The affirmations also incorporate the challenge of maturity mismatches, as they continue to be important especially in long-term buckets, given the long-term tenor of the government and mortgage's portfolio where the bank lacks sufficient funding to match. However, Fitch considers this risk as partially mitigated by the bank's stable and growing customer deposit base, and its efforts to change the mix between current and term deposits.

GFNorte's VR and IDRs
GFNorte's ratings reflect its growing franchise and improved business diversification after several acquisitions made in recent years. Its current position as one of the largest local financial groups, and as one of the market leaders in most of its subsidiaries in banking, brokerage, long-term savings, other financial services and recovery banking are also factored into the ratings. Double leverage is non-existent at present at the holding company level. These rating drivers as well as the Stable Outlook are underpinned by GFNorte's major subsidiary, Banorte.

Support Rating and Support Rating Floors
Banorte's SR and SRF were affirmed at '2' and 'BBB-', respectively, given Banorte's systemic importance and its role as the largest domestically-owned bank in Mexico. Fitch's SRFs indicate a level below which the agency will not lower the bank's Long-term IDRs as long as the assessment of the support factors does not change.

GFNorte's SR and SRFs were affirmed at '5' and 'NF', respectively, in view of its position as a holding company, indicating that, although possible, external support cannot be relied upon.

Subordinated Debt and Hybrid Securities
Banorte's global junior subordinated debt is rated four notches below the bank's IDR. The ratings are driven by Fitch's approach to factoring non-performance risk (-2 notches) and degrees of subordination (-2).

GFNorte's Subsidiaries' National ratings
The ratings of GFNorte's non-banking subsidiaries (AyF Banorte, Casa de Bolsa Banorte Ixe, and Almacenadora Banorte) are aligned with GFNorte's National scale ratings, and consider GFNorte's legal obligation to support its subsidiaries, as well as Fitch's perception that these remain core for the group's overall strategy and business profile.

RATING SENSITIVITIES
Banorte VRs, IDRs and National Scale Ratings
Banorte's VRs and IDRs could be downgraded if the bank is exposed to higher credit losses as net charge-offs rise above 3% of average gross loans which could alter its improved asset quality metrics. In addition, if lower operating profits, such as a consistent operating ROA below 1.5% and/or a Fitch core capital consistently below 12% of risk weighted assets, a downgrade could occur.

Fitch considers there to be limited upside potential for Banorte's VR and IDR at present, in line with the expectations for the Mexican sovereign ratings and its operating environment. However, Banorte's ratings could benefit over the medium term from sustained consolidation of its franchise, substantial enhancements of its business mix, and material improvements in its liquidity profile and financial performance, including the maintenance of an operating ROA above 2%.

GFNorte's VR and IDRs
The group's IDRs are aligned with Banorte's. GFNorte's VR could be affected as well by a potential change in the ratings of its main banking subsidiary (Banorte). Also, the group's ratings could be affected if its intrinsic performance importantly deviates from the one of the bank.

Support and Support Rating Floors
A potential upgrade or downgrade of Banorte's SR and SRF would be driven by a change in Mexico's sovereign rating and/or a change in the expected propensity of support from the Mexican government; both unlikely factors at present.

GFNorte's SR and SRF upside potential is limited as a holding company. External support cannot be relied upon, although it is possible.

Subordinated Debt and Hybrid Securities
Banorte's subordinated debt ratings will likely mirror any change in the bank's VR, since these are expected to remain the same relative to the bank's credit rating.

GFNorte's Subsidiaries' National ratings
Any change to GFNorte's non-banking subsidiaries (AyF Banorte, Casa de Bolsa Banorte-Ixe and Almacenadora Banorte) ratings will be driven by any movement of GFNorte's ratings.

Fitch affirms the following ratings:

GFNorte:
--Long-term foreign and local currency IDRs at 'BBB+';
--Short-term foreign and local currency IDRs at 'F2';
--Viability rating at 'bbb+';
--Support rating at '5';
--Support rating floor at 'NF'.

Banorte:
--Long-term foreign and local currency IDRs at 'BBB+';
--Short-term foreign and local currency IDRs at 'F2';
--Viability rating at 'bbb+';
--Support rating at '2';
--Support rating floor at 'BBB-';
--National scale long-term rating at 'AAA(mex)';
--National scale short-term rating at 'F1+(mex)';
--USD120 million 10-year junior subordinated securities at 'BB';

Arrendadora y Factor Banorte, S.A. de C.V. SOFOM, E.R. (AyF Banorte):
--National scale long-term rating at 'AAA(mex)';
--National scale short-term rating at 'F1+(mex)';
--National scale long-term rating for local issues of senior unsecured debt at 'AAA(mex)';
--National scale short-term rating for local issues of senior unsecured debt at 'F1+(mex)'.

Almacenadora Banorte S.A. de C.V., Organizacion Auxiliar de Credito, Gpo Financiero Banorte (Almacenadora Banorte):
--National scale long-term rating at 'AAA(mex)';
--National scale short-term rating at 'F1+(mex)'.

Casa de Bolsa Banorte - Ixe, S.A de C.V., Grupo Financiero Banorte (Casa de Bolsa Banorte Ixe):
--National scale long-term rating at 'AAA(mex)';
--National scale short-term rating at 'F1+(mex)'.

The Rating Outlook is Stable.