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Fitch Affirms Financiera Independencia at 'BB-/B'; Outlook Stable
February 23, 2017 / 7:38 PM / 10 months ago

Fitch Affirms Financiera Independencia at 'BB-/B'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, February 23 (Fitch) Fitch Ratings has affirmed the Foreign- and Local-Currency Long- and Short-Term Issuer Default ratings (IDRs) of Financiera Independencia S.A.B. de C.V. SOFOM, E.N.R. (Findep) at 'BB-'/'B'. The long- and short-term National scale ratings for Findep and its Mexican subsidiary Apoyo Economico Familiar S.A. de C.V. Sofom, E.N.R. (AEF) have been affirmed at 'A-(mex)'/'F2(mex)', and the long- and short-term National scale ratings of Findep's group-lending subsidiary Financiera Finsol, S.A. de C.V. Sofom E.N.R. (Finsol Mexico) at 'BBB+(mex)'/'F2(mex)'. The Rating Outlook is Stable. Findep's senior unsecured debt issuance was affirmed at 'BB-'. See the full list of rating actions at the end of this release. IDRS, NATIONAL RATINGS AND SENIOR DEBT KEY RATING DRIVERS The affirmation of Findep's ratings consider its moderate franchise in comparison to globally rated financial entities although well-positioned and stable in the microfinance and personal loans sector in Mexico, as well as its much lower position in the U.S. and Brazil. The ratings also reflect the entity's recently strengthened tangible capital ratios as of December 2016 which is mainly due to a reduction of intangibles, lower asset growth, and partially due to recurrent internal capital generation on a consolidated basis. The adequate liquidity management was considered as well, and it benefits from the relatively high turnover of its portfolio and the favorable maturities of liabilities. Findep's ratings also factor in its still weak asset quality metrics, its funding structure, which Fitch believes that even with its wholesale nature, is reasonably diversified by source and maturity. The gradual recovery of its loan portfolio growth in an especially challenged microfinance sector that has remained complex over a long period, and will more likely remain challenged due to higher uncertainty in the Mexican economy, was also considered. Findep has consistently delivered profits over the past four years. However, its financial performance has been pressured since 2015. Although its net interest margin (NIM) is still relatively high (2016: 44.5%), it deteriorated during 2015 and 2016 due mainly to a changing product mix given the increased proportion of AFI's loans with lower effective rates and the increased proportion of less riskier products/segments such as payroll deductible loans and loans to the formal sector. The entity did manage to contain funding costs in an increasing interest rate environment in the country. In addition, Findep's earning generation capabilities continue to be affected by elevated charge-offs from the high-risk loan portfolio of Independencia (Findep's core subsidiary) and some asset quality deterioration at AEF, the extraordinary expenses associated with the entity's personnel reduction (liquidation costs) and higher loan loss provisions which continue to drain its earnings. By YE2016, its pre-tax income-to-average assets ratio was 2.1%, below the average of 3.3% from 2013-2015. Although steps taken to improve underwriting standards have reduced delinquency levels in Independencia and strategies for consolidating the business model have been positive for Finsol, AEF's portfolio recently deteriorated; therefore, Fitch believes the entity's earnings could remain moderate for this business model. Findep has usually been able to rapidly take actions to adapt its operations to unfavorable market conditions and internal operating challenges which could affect profits. In 2016, the company maintained its asset quality metrics as a result of its strategy of improving the quality and profitability of its loan portfolio. As of December 2016, Findep's adjusted impairment ratio (impaired loans + net charge-offs from past 12 months (FPTM) / gross loans + net charge-offs FPTM) stood at 16.3%, an improvement compared to December 2015 (23.2%) and against the average of 23.4% from 2012-2014. Although Fitch believes these are still relatively high, this is the lowest level that Findep has reached in the past five years. Asset quality at Findep is underpinned by charge-offs that are typically high at consumer-oriented entities, since these target low income and non-banked clients, which were especially pressured in the past years. Findep's capital position has been improving since 2015. Among other factors stated earlier, management's decision to suspend dividends has also aided stronger capital ratios. The tangible equity-to-tangible assets ratio stood at 17.8% by YE2016 and improved from the previous year's levels (average 2012-2015: 12.7%). Fitch recalls that tangible capital is mainly affected by MXN1,587 million of goodwill generated after the acquisitions in 2010-2011. On the other hand, its debt-to-tangible equity ratio stood at 4.2x by the end of 2016, a stronger ratio than the average of the past four years (6.5x). In the near future, Findep's capitalization ratios could be affected if growth is resumed, but also if the entity issues debt in the local markets and becomes a regulated entity. This plan may not occur in 2017 but if market conditions allow, Fitch does not rule it out. The relatively recent financial reform requires Sociedades Financieras de Objeto Multiple (Sofomes) that are issuing public debt in the financial market to become regulated entities, and one of the key elements of this conversion is to enhance loan loss reserves. Findep is calculating additional reserves to be charged directly to capital of MXN552 million as of December 2016 when authorized. Therefore, Fitch estimated pro forma capitalization metrics since once this hits will be absorbed through capital. Considering the latter, the tangible capital-to-tangible assets ratio is adjusted to 12.2% and its debt-to-tangible equity ratio to a higher 6.2x. These ratios are weaker, but the agency highlights that although capital is affected, reserves will be strengthened, and will cover impaired loans 2.3x, from a reserves coverage ratio of 1x that has historically prevailed at Findep. Findep has access to reasonably diversified funding by source and maturity with a combination of commercial and development bank lines as well as foreign currency-denominated credit facilities. The entity has a global debt issuance and is planning to place debt in the local market through a program for up to MXN5,000 million that allows the placement of either short- or long-term issuances. Its funding also relies on securitizations. In terms of unsecured funding, 41% of Findep's total funding as of December 2016 was unsecured, while from 2012 to 2015 it fluctuated from 42% to 50%. This proportion compares favorably against other non-bank financial institutions (NBFIs) in Mexico and Findep has earned it and benefited through the years from its relatively well-positioned franchise that has allowed it to reach better funding conditions. In 2016 and just recently, relevant changes in senior management have occurred. Findep appointed a new CEO and CFO, who started their managerial activities in October and April 2016, respectively. In addition, the entity recently announced the exit of Independencia's CEO (Findep's most relevant subsidiary), expected by the end of March 2017. Therefore, Fitch believes the entity faces the challenge to sustain the continuity and stability of its growth and financial targets for 2017. Fitch rates the global debt issuance by Findep at its respective corporate rating level, as the debt is senior unsecured. It also rates local long- and short-term debt at the same level of its corporate long- and-short term National-scale ratings. AEF AND FINSOL MEXICO's NATIONAL SCALE RATINGS National ratings of AEF and Finsol Mexico are based on the likelihood of support from its parent, Findep, if needed. Fitch believes that AEF is a core subsidiary to its parent, given its important participation in Findep's total assets and its strong and sustained contribution to the consolidated results and internal capital generation. Its importance is marked by the growing financial and corporate governance and operational synergies, and also on the knowledge transfer between the two entities. The acquisition of AEF was relevant to the parent in terms of geographical diversification. AEF's loans represent 20.5% of Findep's total loans. During 2016, AEF declared a dividend to Findep for about MXN450 million which was used to partially prepay international debt issuance. AEF's ratings are affirmed at the same National scale rating level as its parent. Fitch considers Finsol Mexico as a strategically important subsidiary to Findep given the strong synergies among the entities in terms of corporate governance, operation and funding. Although Finsol Mexico has been relevant to Findep in terms of product diversification, representing 11.5% of the total assets, its contribution to total results has been limited. Finsol Mexico reported positive earnings over the past three years; however, performance has been challenged by competition and a worsening operating environment. Findep's actions to strengthen the behavior of the working capital loans, and the increasing integration of strategies between the entities sustain Fitch's assessment of support. Finsol's long-term rating is notched down by one level from the National scale rating of its parent. RATING SENSITIVITIES Findep's IDRS, NATIONAL RATINGS AND SENIOR DEBT Findep ratings could be revised downwards if its pre-tax income to average assets weakens to consistently below 2%, if the impairment adjusted ratio is maintained above 25%, or if the tangible capital-to-tangible assets ratio is steadily below 12%. A downgrade could also occur as the result of pressures on its funding profile and or liquidity management. On the other hand, Findep's ratings could only benefit from substantial financial performance progress and a tangible equity to tangible assets ratio above 20% consistently, or a faster than expected and considerable improvement in its overall performance. Senior debt ratings would mirror any changes in Findep's IDRs or National-scale ratings. AEF AND FINSOL MEXICO's NATIONAL SCALE RATINGS Any downside/upside potential for Findep's subsidiaries (AEF and Finsol Mexico), will be driven by any potential downgrade/upgrade of Findep's ratings and/or a change of each entity's strategic importance to the parent. Fitch affirms the following ratings: Findep: --Long-Term Foreign and Local Currency IDRs at 'BB-'; Outlook Stable; --Short-Term Foreign and Local Currency IDRs at 'B'; --USD200 million senior unsecured notes at 'BB-'; --National scale long-term rating at 'A-(mex)'; Outlook Stable; --National scale short-term rating at 'F2(mex)'; --National scale long-term unsecured debt at 'A-(mex)'; --National scale short-term unsecured debt at 'F2(mex)'. AEF: --National scale long-term rating at 'A-(mex)'; Outlook Stable; --National scale Short-Term rating at 'F2(mex)'. Finsol Mexico: --National-scale long-term rating at 'BBB+(mex)'; Outlook Stable; --National-scale short-term rating at 'F2(mex)'. Contact: Primary Analyst Monica Ibarra (Primary Analyst: Findep / Secondary Analyst: AEF and Finsol Mexico) Director +52 818 399 9150 Fitch Mexico, S.A. de C.V. Prol. Alfonso Reyes 2612, Monterrey, N.L. Mexico Secondary Analyst Veronica Chau (Primary Analyst: AEF and Finsol Mexico / Secondary Analyst: Findep) Senior Director +52 818 399 9169 Committee Chairperson Alejandro Garcia, CFA Managing Director +1-212-908-9137 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Summary of Financial Statement Adjustments - Other assets as pre-paid expenses and other deferred assets were re-classified as intangibles and deducted from capital due to their low loss-absorption capacity under stress. 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