February 23, 2017 / 7:23 PM / 9 months ago

Fitch Affirms Consubanco at 'BB'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, February 23 (Fitch) Fitch Ratings has affirmed the Long- and Short-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Consubanco, S.A., Institucion de Banca Multiple (Consubanco) at 'BB'/ 'B'. The Viability Rating (VR) is affirmed at 'bb'. Fitch has also affirmed Consubanco's long- and short-term National ratings at 'A(mex)'/'F1(mex)'. In addition Fitch has withdrawn the National long-term 'A(mex)' rating of a planned debt issuance (CSBanco 16), since the company no longer intends to place this issue. The Rating Outlook on the Long-Term ratings is stable. See the full list of rating actions at the end of this release. KEY RATING DRIVERS VR, IDRS, NATIONAL RATINGS AND SENIOR DEBT The bank's IDRs, National and senior debt ratings reflect the bank's well-known but still small franchise in its areas of influence that places it among the leaders in the pay-roll-deducted loans segment, its consistent profitability track record throughout the economic cycle, and its manageable impaired loans levels. The ratings also weigh in the company's steady and strong profitability that supports its acceptable capital base, which still provides good loss absorption capacity. Funding and liquidity remain as a major challenge, as it its wholly reliant on wholesale funding. Consubanco's ratings are still constrained by the challenging operating and competitive environment of its business segment, and the operational and political risks inherent to the sector. The bank's financial performance track record is characterized by its consistent and robust profitability reached over the years, supported by its high net interest margin (NIM), the containment of its credit costs and adequate operating cost control despite the upward trend shown in 2016. As of December 2016 its operating ROAA and ROAE were 9.5% and 32.4%, respectively, lower than those reached in 2015 (11.0% and 43.2%), due to higher fees paid to brokers and a decrease in net interest income. NIM remains strong, although moderately affected in recent periods by increased competition and recent reference interest rate increases in Mexico given the rate mismatches between its loans and funding; it stood at 35.2% (2015:37.6%). Consubanco's asset quality has been improving during the past years, due to the strengthening of its underwriting standards and its strategy to focus on public entities whose payroll disbursements are done by the federal government, which has proven successful in decreasing loan delinquency related to the unwillingness of public sector entities to timely and fully disburse retained collections. The bank's non-performing loan (NPL) ratio is manageable for the segment it targets. As of December 2016, the impairment ratio stood at 6.5%, while this ratio adjusted for gross charge-offs (impaired loans + gross charge-offs / gross loans + gross charge-offs) was 11.5% (2015: 7.6% and 9.9%, respectively). Loan loss reserves remain at adequate levels underpinned by Consubanco's policy to fully reserve all receivable from employers overdue by 90 days or more. As of December 2016, the reserve coverage ratio was 143.3% (2015: 155.8%). Consubanco's funding and liquidity have remained stable; however, as it is wholly reliant on wholesale funding it might face challenges to access the market under uncertain and volatile conditions as happened during the last trimester of 2016. Consubanco's funding base is constituted of unsecured issuances such as long-term unsecured debt issuances (45%) and certificates of deposits (44%). Despite its banking license, deposits represent only 6% of its funding mix; Consubanco foresees smooth deposit growth in the medium term as the expansion of its saving accounts product will be deployed slowly along the year. Consubanco maintains active surveillance over its liquidity levels in compliance with Basel III requirements. The company has met this regulatory ratio at satisfactory levels and above the minimum mandatory level of 70%, reflecting the proactive measures to optimize its liquidity. Consubanco's cumulative liquidity gap is positive considering total assets; however, there are some individual negative gaps at each unsecured senior issuance maturity date.] In Fitch's view Consubanco's steady and strong profitability supports its acceptable capital base, which still provides good loss absorption capacity given its current loan loss reserves and its low borrower concentration. During 2016, the company saw a minor improvement in its capitalization metrics as its internal capital generation exceeded its total assets growth. Despite this progress, there is still room for improvement, since its capital adequacy could be pressured by any accelerated loan growth and its inherent prepaid fees to brokers. By year-end 2016, FCC (Fitch Core Capital) to weighted-risks ratio stood at 12.1% (2015: 11.5%). Fitch considers that, other than traditional credit risks, Consubanco is also somewhat exposed to operational, political and event risk. Failure to properly implement agreements with employers or unwillingness of public sector entities to timely and fully disburse retained collections, changes in municipal and federal leadership, among others, are potential risk factors that could affect Consubanco under certain circumstances]. RATING SENSITIVITIES VR, IDRS, NATIONAL RATINGS AND SENIOR DEBT Fitch believes that Consubanco's ratings upside potential is limited in the short term. Fitch would consider upgrading these ratings in the medium term, when the bank's business volume increases as it achieves important balance sheet diversification on both sides of its balance sheet, while maintaining asset and liability tenors relatively matched, and a comfortable cash flow schedule. The bank's VR, IDRs, National and senior debt ratings could be downgraded if asset quality declines to such an extent that it generates a relevant deterioration of its operating ROA or if its FCC ratio (adjusted for capitalized fee expenses) decreases below 10%. A material impact derived from negative developments in political and/or business risks could also affect the ratings.] SUPPORT RATING AND SUPPORT RATING FLOOR [Given the limited systemic importance of the bank and negligible share of retail deposits, Fitch believes that the SR and SRF are unlikely to change in the foreseeable future. Fitch has affirmed the following ratings: Consubanco, S.A., Institucion de Banca Multiple --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'; --Viability rating at 'bb'; --Long-term senior unsecured notes 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 unsecured debt at 'A(mex)'. Fitch has withdrawn the following rating: -- Long-term national-scale rating for local unsecured debt (CSBanco16) of 'A(mex)'. The Rating Outlook is Stable Contact: Primary Analyst Omar Rojas Analyst +52 81 83 99 9167 Fitch Mexico, S.A. de C.V. Prol. Alfonso Reyes 2612, Monterrey, N.L., Mexico Secondary Analyst Alba Maria Zavala, CFA Associate Director +52 81 83 99 9137 Committee Chairperson Alejandro Garcia, CFA Managing Director +1-212-908-9137 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Summary of Financial Statement Adjustments - Account Receivables from employers are reclassified as loans, with those overdue by more than 90 days classified as impaired. Loan loss reserves are increased by the amount of reserves related to these account receivables. Capitalized fee expenses are deducted from Fitch Core Capital. Fees paid in advance to brokers are reclassified as commissions from interest expenses. 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