Fitch Assigns Banorte's Upcoming Basel III Tier 2 Subordinated Preferred Capital Notes 'BB+(EXP)'

MONTERREY, Mexico--()--Fitch Ratings has assigned an expected Long-Term Rating of 'BB+(EXP)' to Banco Mercantil del Norte, S.A.'s (Banorte) proposed USD-denominated Basel III-compliant T2 subordinated preferred capital unsecured notes.

The proposed debentures will have a maturity of 10 to 15-years and a call option after 5 to 10 years. The total issue size may be up to USD1.5 billion. The final rating is contingent on the receipt of final documents conforming materially to the preliminary documentation.

KEY RATING DRIVERS

The notes are rated three notches (-3) below Banorte's Viability Rating (VR) of 'bbb+'; one notch for loss severity

(-1) and two notches for non-performance risk (-2).

Fitch applies one notch down from the issuer's anchor rating to reflect the issue's subordinated status and its below-average recovery prospects in a liquidation scenario relative to the bank's senior debt.

Fitch considers two notches (-2) for non-performance risk mainly to account for the coupon deferral features, with deferral of payments likely to be triggered at relatively high capitalization levels before partial write-down occurs. The bank has established mandatory coupon deferral to be activated accordingly to Mexican capitalization regulatory requirements which are currently 8% of total net capital and 6% of Tier 1 capital (plus any applicable supplements), or if Banorte is classified by the regulator as a "Class III or IV" bank, which currently implies a total regulatory capital ratio below 8%.

Banorte's Basel III-Tier 2 securities incorporate partial write-down clauses which do not imply incremental non-performance risk, given the relatively low trigger (CET1 or Core Capital at or below 4.5%) that Fitch considers is effectively the point of non-viability (PONV), and also considering the ample cushion of Banorte's equity and recurrent internal capital generation, as well as the strong supervision framework that partially mitigates the likelihood of breaching the write down trigger.

The notching for loss severity (-1) and non-performance risk (-2) of the proposed notes is similar to that applied for comparable Basel III-compliant Tier 2 Subordinated Notes issued by other Mexican private banks.

Under the current criteria, Fitch no longer assigns equity credit to bank's hybrid capital instruments.].

RATING SENSITIVITIES

The notes' rating is primarily sensitive to a change in the bank's VR. Fitch expects that, under most circumstances, the proposed notes will remain rated 3 notches below the VR.

For further information about the rating sensitivities for Banorte's VR please check the bank's latest press release (Fitch Affirms GFNorte and Banorte's Ratings at 'BBB+'; Outlook Stable) at www.fitchratings.com.

Date of Relevant Rating Committee: August 31, 2016

Summary of Financial Statement Adjustment: [Pre-paid expenses and other deferred assets were re-classified as intangibles and deducted from Fitch Core Capital. Fitch has made adjustments to the Risk Weighted Assets (RWAs) following its criteria and the agency consolidated the bank's RWAs with those of its main subsidiaries.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012119

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012119

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Veronica Chau
Senior Director
+52 818 399 9169
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Alejandro Tapia
Director
+52 818 399 9156
or
Committee Chairperson
Alejandro Garcia, CFA
Managing Director
+1-212-908-9137
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Veronica Chau
Senior Director
+52 818 399 9169
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Alejandro Tapia
Director
+52 818 399 9156
or
Committee Chairperson
Alejandro Garcia, CFA
Managing Director
+1-212-908-9137
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com