MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Banco del Bajio, S.A., Institucion de Banca Multiple's (BanBajio) Long-Term and Short-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' and 'F3'. The Viability Rating (VR) is affirmed at 'bbb-'.
In addition, BanBajio and Financiera Bajio, S.A de C.V., Sociedad Financiera de Objeto Multiple, Entidad Regulada's (Financiera Bajio) long-term and short-term national scale ratings are affirmed at 'AA-(mex)' and 'F1+(mex)'. The Rating Outlook for the long-term ratings is Stable. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - BANCO DEL BAJIO
VR, IDRS AND NATIONAL RATINGS
BanBajio's IDRs are driven by its 'bbb-' VR, which reflects the bank's adequate financial performance and consolidated business model based on lending to SMEs and agribusiness. The ratings also consider BanBajio's challenges to further improve profitability, capital and funding. Recent metrics show a positive trend in profits and funding, that Fitch believes still need to be further consolidated. Capitalization is still a major challenge, as it compares weaker to its closest peers.
BanBajio is a regional bank well positioned in Central Mexico. Despite its modest franchise, it is gradually expanding to other regions in the country. As of March 2016, BanBajio was the eighth largest bank of the Mexican banking system, with a loan portfolio and total customer deposits market share of around 3%.
The bank's asset quality is adequate and consistent over the economic cycle: BanBajio's non-performing loans (NPLs) ratio has been under 3% for the past four years, in line with the commercial banks' ratios; reserve coverage of impaired loans is adequate (around 120% average). Given its business profile, BanBajio shows geographic and borrower concentrations; its top 20 obligors account for around 1.5x its Tier I equity. In Fitch's view, BanBajio's risk appetite is higher than its peers due to the business lines that it serves. The bank has an exposure to the oil-industry (37% of the bank's equity), which Fitch believes can be manageable, given the bank's adequate cushion of loan reserves.
BanBajio's operating profits have benefited from lower credit costs and a better control of operating expenses. The latter is aided by a strategy of slowing its branch network expansion and the consolidation of the existing base. The adequate asset quality drives BanBajio's low loans impairment charges, benefiting the bank's performance. Its Operating Profits to RWAs shows a positive trend, recently reaching the 2% level. Fitch expects that the bank will consolidate its recently improved profitability, which will continue to enhance the bank's capitalization and operating efficiency.
Fitch believes that BanBajio has a reasonable capital base, although pressured by sustained asset growth and the room for improvement in earnings. As of March 2016, Fitch Core Capital to RWAs stood at 11.6%, comparing weaker than its closest peers. Capital is supported by a relatively conservative cash dividend policy and an internal capital generation above its asset growth rate. Steady growth of core deposits and a more astringent liquidity management policy are aiding on the reduction of the historically high asset-liability tenor mismatches.
SUPPORT RATING AND SUPPORT RATING
The bank's SR and SRF are driven by BanBajio's moderate market share of core customer deposits. BanBajio is one of the few regional banks that, in Fitch's opinion, could receive sovereign support if needed, due to the growing share of retail deposit and the widespread geographical and customer dispersion of such accounts. Fitch's SRFs indicate a level below which the agency would not lower the bank's Long-Term IDRs.
FINANCIERA BAJIO
Financiera Bajio's ratings are driven by Fitch's view that its importance for the bank is high, given that it performs a strategic role for its parent company, BanBajio. Financiera Bajio carries out the factoring and leasing activities, which complement the range of products offered by the bank.
RATING SENSITIVITIES
VR, IDRS AND NATIONAL RATINGS- BANCO DEL BAJIO
BanBajio's ratings could be upgraded if the bank consolidates its positive tendency on profitability metrics, coupled with a material improvement of its capital strength. If the bank continues improving its funding profile, the ratings could also benefit. Rating upside potential could arise from a FCC ratio consistently above 13%; Operating ROAA to RWAs consolidated around 2.5%; and a loan to deposit ratio below 110%. A reduction of the prevailing tenor mismatches could also be positive.
On the other hand, the ratings could be downgraded if the bank has an asset quality deterioration that pressures its financial metrics, such as a FCC ratio below 10% and/or operating ROAA to RWAs consistently under 1.5%.
SUPPORT RATING AND SUPPORT RATING FLOOR
Upside potential for the SR and SRF is limited and can only occur over time with a material gain of the bank's systemic importance. These ratings could be downgraded if the bank loses material market share in terms of retail customer deposits.
FINANCIERA BAJIO
Any potential changes to Financiera Bajio's ratings will be driven by any changes to BanBajio's ratings or a modification on the entity's strategic importance to the bank.
Fitch has affirmed the following ratings:
BanBajio
--Foreign Currency Long-Term IDR at 'BBB-'; Outlook Stable;
--Foreign Currency Short-Term IDR at 'F3';
--Local Currency Long-Term IDR at 'BBB-'; Outlook Stable;
--Local Currency Short-Term IDR at 'F3';
--Viability Rating at 'bbb-';
--Support Rating at '4';
--Support Rating Floor at 'BB-'.
--National Long-Term Rating at 'AA-(mex)'; Outlook Stable;
--National Short-Term Rating at 'F1+(mex)'.
Financiera Bajio
--National Long-Term Rating at 'AA-(mex)'; Outlook Stable;
--National Short-Term Rating at 'F1+(mex)'.
Adjustment to Financial Statements:
BanBajio: Goodwill, intangibles and deferred tax assets and equity investment in associates were deducted from Fitch Core Capital. Financiera Bajio's RWA were added to BanBajio's RWA.
Financiera Bajio: Licensing fees and prepaid expenses were reclassified as other intangibles. Operating leasing was reclassified as other loans from 'other assets'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Bank Rating Criteria (pub. 20 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501
Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351
National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1007935
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007935
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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