MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has today affirmed the international and national-scale ratings of the Mexican bank Banco Interacciones (Interacciones), as well as the national scale ratings of its brokerage affiliate, Interacciones Casa de Bolsa (InteraccionesCB). A full list of rating actions follows at the end of this release.
Interacciones' ratings reflect the bank's capacity to sustain good profitability metrics and overall sound financial condition after challenging the distress and restructuring of its largest exposure last year, relatively low impairment charges and well contained non-interest costs. The ratings also factor in the bank's strong franchise in the public sector financial business, the large borrower concentrations that expose the bank to significant event risk, considerable maturity mismatches between its long term assets and short-term deposits together with ample opportunities to improve its funding structure.
The Stable Outlook reflects Fitch's view that the bank was able to absorb the impact of its high exposure to a sub-national government whose ratings have been affected over the last 12 months, without materially affecting the bank's overall credit profile and appropriately containing loan impairment charges, although exhibiting capitalization levels challenged by rapid loan growth and a wholesale funding primarily.
A potential upgrade of Interacciones' ratings will be driven by a significant decrease on the bank's risk concentration levels or an improvement on the main borrower's credit quality, which Fitch does not expect in the near future. Also, an enhanced funding structure and sustained achievements in the bank's liquidity profile could underpin a potential upgrade. On the other hand, a scenario of further negative credit events among its major borrowers, as well as further pressures on the bank's capitalization levels (Fitch Core Capital and/or tangible common equity ratios below 10% and 5%, respectively), or a higher non-performing loan ratio (above 3%) could trigger a downgrade of Interacciones' ratings.
Interacciones is a niche bank focused on lending activities to government entities at the federal, state and municipal levels (2Q'12: 76% of total loans), as well as infrastructure projects, factoring and credit. Government lending has been gradually increasing since 2006 and at the same date, Interacciones market penetration is quite large given its relative size as a niche bank (10% of the total banking system subnational financing).
The bank has managed to sustain good profitability metrics in recent years, underpinned by a consistent loan growth, relatively low impairment charges, and well contained non-interest costs. While competition from larger and smaller banks could intensify, Fitch considers the bank's franchise on public sector financing as a core contributor for sustained performance. Fitch expects that Interacciones' earnings could also be challenged by the relatively weak environment in its core business line, but overall profitability should remain roughly in line with recent metrics.
Total impairments have been very low throughout different phases of the economic cycle, but large borrower concentrations remain an important source of event risk. However, the majority of total lending is secured by direct or indirect government guarantees. The loans granted to recently restructured sub-nationals remain performing, and Fitch does not expect this to change in the foreseeable future, allowing the bank to maintain a low impairment ratio (0.58% as of June 2012).
Interacciones' funding profile has mostly a wholesale nature and does not benefit from a retail network-driven deposit base. However, cross selling with large government agencies and institutions, and strengthening relations with domestic development banks provide some comfort for funding stability. The restructurings of some of its largest exposures have exacerbated Interacciones' challenges regarding assets and liabilities maturities mismatches, although the bank has been actively addressing this risk by improving the diversity, tenor and availability of funding sources.
The bank's capitalization levels have been historically challenged by rapid loan growth, but sustained profits have prevented material deterioration of capital adequacy. Regulatory capital ratios benefit from low risk weights assigned to public sector loans, but Fitch considers that its tangible common equity to tangible assets ratio is relatively tight (2Q12: 5.56%). Nevertheless, borrower concentration persists as a major risk factor on loss absorption capacity. Fitch expects the regulatory and core capital ratios to remain at roughly 15% and 10%, respectively.
The ratings of Interacciones' local hybrid issues (plain-vanilla subordinated notes) are three notches below the bank's rating in the national scale, according to Fitch's criteria for rating these securities. This difference arises from the two notches associated to non-performance risk, plus one extra notch in recognition of loss severity.
InteraccionesCB is perceived by Fitch as a core affiliate of Interacciones and fully integrated to its operations and franchise, its ratings factor in the legal support provided by its ultimate parent company, Grupo Financiero Interacciones, whose credit quality is regarded by Fitch as similar to that of its principal subsidiary (Interacciones). Therefore, the national scale ratings of the brokerage unit are aligned to the bank's ratings.
Fitch affirms the following ratings:
Banco Interacciones, SA:
--Long-term Issuer Default Rating (IDR) at
'BB';
--Short-term IDR at 'B';
--Long-term local currency IDR
at 'BB';
--Short-term local currency IDR at 'B';
--Viability
rating at 'bb';
--Support rating at '5';
--Support rating
floor at 'NF';
--Long-term national-scale rating at 'A(mex)';
--Short-term
national-scale rating at 'F1 (mex)';
--Long-term national-scale
rating for local senior unsecured debt issues at 'A(mex)';
--Long-term
national-scale rating for local subordinated debt issues at 'BBB(mex)'.
Interacciones Casa de Bolsa, SA de CV:
--Long-term National-scale
Rating at 'A(mex)';
--Short-term National-scale Rating at 'F1(mex)'.
The
Rating Outlook is Stable.
Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
-- Global Financial Institutions Rating Criteria (Aug. 15, 2012);
--
National Ratings Criteria (Jan. 19, 2011);
-- Rating Bank
Regulatory Capital and Similar Securities (Dec. 15, 2011);
--
Treatment of Hybrids in Bank Capital Analysis (July 09, 2012);
--
Securities Firm Criteria (Aug. 15, 2012);
-- Rating FI Subsidiaries
and Holding Companies (Aug. 10, 2012).
Applicable Criteria and Related Research:
Global Financial
Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
National
Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Rating
Bank Regulatory Capital and Similar Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656371
Treatment
of Hybrids in Bank Capital Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682453
Securities
Firms Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686137
Rating
FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
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