MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Banca Mifel, S.A.'s (Mifel) Viability Rating (VR) at 'bb', and Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB'. The Rating Outlook is Stable.
A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
VR, IDRs AND NATIONAL-SCALE RATINGS
Mifel's IDRs and National ratings [Long-Term 'A(mex)'/Short-Term 'F1(mex)'] are driven by its 'bb' rated VR, which reflects the bank's modest franchise in the Mexican banking system, in terms of market share, where its total loans and deposits represent less than 1% of the total system. Mifel is a corporate-oriented bank with brand recognition in its areas of influence, which has translated in adequate asset quality and a relatively sound liquidity profile. Fitch has also taken into account the bank's higher risk appetite reflected in high growth, which can occasionally overcome the institution's capital generation.
The ratings also factor in the company's improved profitability metrics driven by higher and more consistent interest margins, controlled credit costs and operational expenses. The bank's sound capitalization also supports Mifel's ratings. The bank's capital adequacy was enhanced by capital injections and sustained internal capital generation. In Fitch's opinion, maintaining a robust capital adequacy is necessary for the bank to offset concentration risk and sustain business growth.
At YE15 the bank's capitalization levels were strengthened by an additional capital injection from the private equity fund Advent, and to a lesser extent by Mifel's profits. As of 1Q16, Mifel's Fitch internal capital generation stood at 11.2% and 15%, respectively. The ratios are an improvement over what the bank has reported in the past. In Fitch's view, Mifel faces challenges in maintaining its healthy capital ratios in light of projected rapid loan growth.
Prior to 2012, the bank's non-performing loan (NPL) ratio was pressured by the bank's exposure to government loans; however, since 2013 NPL ratios have shown a positive trend and by 1Q16 this ratio stood at 1.64%. The level of loan reserves to impaired loans continues to recover compared to 2012 levels (below 67% of impaired loans), reaching 100% at 1Q16.
Despite the improvements in asset quality there are still high borrowers concentrations among Mifel's main creditors. The bank's 20 largest loan exposures accounted for 1.8x Tier 1 equity capital and 22% of total loans.
Mifel has a stable funding base which has benefitted from well-positioned customer deposits that have proven steady. Mifel's liquidity and loans to deposit ratio below the industry still require improvements in Fitch's opinion.
SR and SRF
Mifel's Support Rating and Support Rating Floor were affirmed at '5' and 'NF', respectively, in view of the bank's low systemic importance, which indicates that although possible, external support cannot be relied upon.
Subordinated Notes
The bank's global subordinated securities were affirmed at 'B+', two notches below the applicable anchor rating, Mifel's VR of 'bb'. The ratings are driven by Fitch's approach to factoring certain degrees of subordination. Similar securities would typically be two notches lower for non-performance risk and an additional notch lower for loss severity. However, in Mifel's case, the overall notching is limited to two notches, due to compression considerations (as per Fitch's existing criteria).
The notching factor in its non-performance risk (-1) since Fitch considers that the triggers for coupon deferrals or cancellations are relatively high, according to applicable local regulations and an additional (-1) for loss severity, which reflects that these securities are plain-vanilla subordinated debt (subordinated preferred, under the local terminology).
This issue receives no equity credit under Fitch's approach, since these are dated securities without a loss absorbing feature that triggers before the point of non-viability.
RATING SENSITIVITIES
VR, IDRs, and National Ratings
Mifel's ratings could be upgraded if the bank continues consolidating its financial performance and franchise; specifically, if the bank shows operating ROA to RWAs consistently above 2% together with a controlled asset quality and capitalization metrics.
The ratings could be affected negatively if the bank fails to sustain improving trends in overall profitability and capitalization metrics. Fitch believes a downgrade could be occur if operating ROA returns to levels below 1% and if Fitch's core capital is not sustained at least above 9%. Material deteriorations of Mifel's asset quality metrics and additional pressures on its liquidity profile could also trigger a downgrade.
SR and SRF
A potential upgrade of Mifel's Support Rating and Support Rating Floor is limited at present, since external support cannot be relied upon.
Subordinated Notes
The bank's subordinated debt ratings will likely mirror any change in the bank's VR, as these are expected to maintain the same relative to Mifel's credit rating.
Fitch has affirmed the following ratings:
Banca Mifel, S.A.:
--Long-Term Foreign- and Local-Currency IDRs at 'BB';
--Short-Term Foreign and Local-Currency IDRs at 'B';
--Viability Rating at 'bb';
--Support Rating at '5';
--Support Rating Floor at 'NF';
--National-Scale Long-Term Rating at 'A(mex)';
--National-Scale Short-Term Rating at 'F1(mex).
--Long-Term cumulative subordinated preferred notes at 'B+'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Date of Relevant Rating Committee: May 24, 2016.
Applicable Criteria
Global Bank Rating Criteria (pub. 20 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501
Metodología de Calificaciones Nacionales (pub. 13 Dec 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=727099
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005113
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005113
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.