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Fitch Affirms Credito Real's IDRs at 'BB+'; Outlook Stable
February 23, 2017 / 7:43 PM / 7 months ago

Fitch Affirms Credito Real's IDRs at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, February 23 (Fitch) Fitch Ratings has affirmed Credito Real S.A.B. de C.V. Sofom, E.R.'s (Credito Real) Long- and Short-Term Local- and Foreign-Currency Issuer Default Ratings (IDRs) at 'BB+' /'B'. The Rating Outlook is Stable. A full list of rating actions is at the end of this release. KEY RATING DRIVERS IDRS, NATIONAL RATINGS AND SENIOR DEBT The affirmation and Stable Outlook consider Credito Real's strong competitive positioning in several of its business lines, the gradual diversification of its business model, its robust and sustained profitability metrics supported by high-yield products and volume growth, as well as its peer-superior asset quality and adequate funding flexibility. The ratings are constrained by the company's low participation in the Mexican financial system, increased leverage as a result of its most recent acquisitions, risks inherent to its rapid growth strategy, and operational, political and reputational risks related to its payroll business. Ratings are also limited by Credito Real's above-average risk appetite, reflected in its inorganic growth strategy. Credito Real's participation in the Mexican financial system is low; however, it continues to be the market leader in the public payroll loans segment in Mexico and maintains adequate brand recognition and competitive positioning in most of its business lines. At approximately 63% of its portfolio, payroll loans still represent its core offering; however, the company has diversified gradually toward other types of consumer lending, such as used car loans and personal loans in Mexico, the U.S. and Central America through acquisitions. Credito Real's particular business model attributes, such as the sharing of income and risk with its distributors, together with its concentration in federal government entities in its payroll portfolio, has resulted in asset quality ratios that compare favourably to those of its peers. Fitch expects that asset quality ratios remain fairly stable during 2017, as the company is still heavily concentrated in payroll loans, which tend to exhibit a steady performance throughout the economic cycle. Furthermore, the company will be more restrictive with SME and used car loans in Mexico, which are relatively more sensitive to deterioration in the operating environment. Non-Performing Loans represented 2.5% of gross loans as of the third quarter of 2016 (3Q16), a level which Fitch considers adequate for Credito Real's segments. The impaired loan ratio adjusted by gross charge-offs of the last nine months was 5.4%, above the 4.3% registered at the close of 2015. Fitch calculates an impaired loan ratio adjusted for the amounts owed by distributors. This adjusted ratio stood at 4.9% as of 3Q16 (2015: 4.8%) and at 7.7% if charge-offs are considered (2015: 6.6%). Loan loss reserve coverage continues to be adequate; it stood at 142.2% as of 3Q16. The concentration of its payroll portfolio per employer/agreement decreased to 0.6x its equity as of 3Q16, compared to 1.2x in 2015; this concentration risk is mitigated by the fact that the main agreements are held with federal government entities. Credito Real's sound profitability ratios continue to represent one of its main strengths. The company's net interest margin (NIM; net interest income as a percentage of average earning assets) proved to be resilient during 2016 despite the increases in Mexico's reference interest rates; it stood at 19.5% as of 3Q16 compared to 18.4% in 2015. This moderate improvement was mainly driven by the contribution of Instacredit's wider margins. However, NIM is below that of its closes peers as a result of the company's income-sharing model with its distributors and the company faces the challenge of sustaining NIMs amid the possibility of more interest rate hikes in Mexico. Its operating return over assets (ROA) decreased to 7% as of September 2016, compared to 8% in 2015. This was mainly caused by increased operating costs as a result of the consolidation of recent acquired businesses, which have higher operating costs compared to Credito Real's original businesses that rely on third-parties for loan distribution. Additionally, the company experienced a negative carry derived from unused funds from the issuance of the senior notes due 2023; this resulted in an additional interest expense of MXN66 million during 3Q16. Credito Real's leverage, measured as debt to tangible equity, has exhibited an increasing trend over the past few years as a result of the acquisition of businesses that generate goodwill. However, Fitch believes they are still adequate for its rating level. Credito Real plans to maintain a debt to equity ratio below 4x. As of September 2016, this ratio was 2.8x, while its debt to tangible equity ratio increased to 5x from 4.3x in 2016, and stands at 5.3x after adding back debt issuance costs that are netted from the balance sheet debt. Its high balance sheet growth which exceeds capital generation also affected leverage. Credito Real's funding mix is concentrated in wholesale funding; nevertheless, it has a diverse base of funding sources that include local and international commercial banks, local development banks, as well as local and international unsecured bond issuances; this compares favorably with other rated non-bank financial institutions (NBFIs). Approximately 86% of Credito Real's funding is unsecured, which adds flexibility to its funding mix. Additionally, its subsidiaries in the U.S. and Central America have access to their own funding sources, except for Don Carro, one of its used car loans subsidiaries in the U.S. Credito Real successfully refinanced 38% of its debt during 2016 and was able to extend its maturity; as a result, it has a relatively more comfortable amortization schedule. Credito Real's positive maturity gaps which benefit from a loan portfolio with an average tenor of 1.6 years, financed with debt with average maturity of 3.9 years, mitigate refinancing and liquidity risk. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT Ratings could be downgraded if Credito Real's leverage ratio (debt to tangible equity) increases consistently above 7x as a result of pressure from goodwill of potential acquisitions, organic growth or deterioration of financial performance. A weakening of asset quality metrics that result in relevant pressure of its operating ROA, increased unhedged exposure to foreign currency debt and a deterioration of its liquidity position could also adversely affect ratings. Fitch could upgrade Credito Real's ratings in the medium term if the company is able to diversify its loan portfolio and maintain strong financial performance. This would be reflected in an operating ROA consistently above 8% and internal capital generation that is sufficient to maintain its debt to tangible equity ratio consistently below 5x with loan loss reserves covering at least 100% of impaired loans. At the same time, Credito Real must maintain adequate asset and liability management as reflected in positive liquidity gaps. Fitch affirmed the following ratings: Credito Real S.A.B. de C.V. Sofom, E.R. --Long-Term Foreign Currency IDR at 'BB+'; --Short-Term Foreign Currency IDR at 'B'; --Long-Term Local Currency IDR at 'BB+'; --Short-Term Local Currency IDR at 'B'; --Long-term senior unsecured notes due 2023 at 'BB+'. --National long-term rating at 'A+(mex)'; --National short-term rating 'F1(mex)'; --National long-term rating for senior unsecured local notes at 'A+(mex)'; --National short-term rating for short term debt program at 'F1(mex)'. The Rating Outlook is Stable. Contact: Primary Analyst Alba Maria Zavala, CFA Associate Director +52 81 83 99 9137 Fitch Mexico, S.A. de C.V. Prol. Alfonso Reyes 2612, Monterrey, N.L. Mexico Secondary Analyst Monica Ibarra Director +52 81 83 99 9150 Committee Chairperson Alejandro Garcia, CFA Managing Director +52 81 83 99 9146 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Summary of Financial Statement Adjustments: Pre-paid expenses were reclassified as other intangibles and deducted from Fitch Core Capital. Results from investments in associates were reclassified as operating. The extraordinary gain that resulted from the unwind of derivatives was classified as non-recurring. Additional information is available on www.fitchratings.com Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019456 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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