Fitch Ratings has affirmed the Long - and Short-Term Foreign - and Local-Currency Issuer Default Ratings (IDRs) of Banco Interacciones, S. A. Institucion de Banca Multiple (Interacciones) at 'BB+' and 'B', respectively. Fitch also has affirmed Interacciones' Viability Rating (VR) at 'bb+' and Long - and Short-Term National Ratings at 'A+(mex)' and 'F1(mex)'.

Fitch has also affirmed the Long - and Short-Term National ratings of Interacciones Casa de Bolsa, S. A. de C. V. Grupo Financiero Interacciones (ICB) at 'A+(mex)' and 'F1(mex)', respectively.

The Rating Outlook on the Long-Term ratings is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Interacciones

VR, IDRs AND NATIONAL SCALE RATINGS

Interacciones' IDRs and National ratings are driven by its VR of 'bb+', which reflects the bank's concentrated business model but with a strong recognition and performance in its core market, the public sector lending sector, standing as the second largest provider of financing to states and municipalities.

Interacciones' VR also factor in its adequate asset quality, which impairment ratios are lower compared to the banking system given its government lending nature, where the source of payment of the loan is secured by federal transfers. The bank's asset quality is adequate, adjusted NPL ratio (loan at 90 days overdue plus charge-offs during the last twelve months) averaged 0.4% for the last three years; while the banking system's was 2.9%.

However, asset quality also factors in Interacciones' high concentration by product and client, albeit gradually declining. The largest 20 loan exposures accounted for 5.5x the bank's Tier I equity capital as of March 2016 (1T15: 6.0x). The bank has a sizeable exposure to the oil-industry (54% bank's equity). In Fitch's view Interacciones' sound loss abortion capacity could help to partially reduce the negative effects of this exposure, in case of a material credit event.

The VR and IDRs also consider the challenges that the bank faces improving its liquidity profile, considering its significant asset-liabilities mismatches, mainly driven by the long-term nature of its loan portfolio. The loan-to-deposit ratio is also high and stood around 120% by March 2016. Fitch considers as positive the bank's efforts to diversify its funding sources by increasing its customer deposit base and accessing longer tenor financing sources.

The bank's good financial performance benefitted by its steady and recurrent income, low funding costs, and controlled operational expenses, in turn supports its sound capitalization metrics. Fitch Core Capital (FCC) to risk weighted assets stood at a comfortable range of 13% - 14% in the last five years. The bank's loss absorption capacity is underpinned by an ample loan loss reserves but these are moderate when considering the high borrower concentration among Interacciones' creditors, since those reserve only cover 1.6% of the gross credit portfolio in the last three years.

Operating Profits to RWA is stable and remains around 3% since 2013. Interacciones' profitability is supported by reasonable interest margins benefited by an important component of stable fees derived from loan origination. Fees generally covered about 1x the bank's non-interest expenses. Fitch believes that given the new sub-sovereign legal framework, the bank would face challenges and more competition, but the ample expertise that the bank has in its core business will likely allow it to maintain its competitive position and sound financial performance.

The bank has local senior unsecured certificates, which were also affirmed to the same level as its national scale rating given Fitch's assessment that the likelihood of default of any given senior unsecured obligation is the same as the likelihood of default of the bank.

SR and SRF

Interacciones' Support Rating and Support Rating Floor are affirmed at '5' and 'NF', respectively, in view of the bank's low systemic importance. In Fitch's view, external support cannot be relied upon.

Subordinated Notes

The local subordinated hybrids of Interacciones were affirmed at 'BBB+(mex)', three notches below the applicable anchor rating, the bank's Long-Term National Rating of 'A+(mex)', in order to maintain the relativity. The issue's rating is notched down reflecting the loss severity and non-performance risk. The notching for non-performance risk (-2) is typical for hybrids issued by Mexican banks, since Fitch considers that the triggers for coupon deferrals or cancellations are relatively high, according to applicable local regulations. In turn, the notching for loss severity (-1) reflects that these securities are plain-vanilla subordinated debt (subordinated preferred, under the local terminology).

ICB

The National Ratings of ICB are driven by the support it would receive, if needed, from its ultimate parent, Grupo Financiero Interacciones (GFI) whose credit quality profile is reflected in its main subsidiary, Interacciones. The support is based on the local regulatory framework regarding the legal obligation of financial groups with its subsidiaries, if needed.

RATING SENSITIVITIES

Interacciones

VR, IDRs, and National Ratings

An upgrade of Interacciones' ratings is hardly conceivable at present; Fitch believes it could occur if the bank materially reduces its risk concentrations in the loan portfolio and customer deposit base, coupled with sustained improvements in its assets and liabilities maturity mismatches.

In turn, a downgrade of Interacciones' ratings would arise by any deterioration of its loss absorption capacity and profitability - Specifically, a FCC-to-RWAs ratio consistently below 12.5%. Material deteriorations of the bank's asset quality metrics and additional pressures on its liquidity profile could also negatively impact the bank's ratings.

The bank's senior debt ratings would mirror any change in the bank's national scale ratings.

SR and SRF

A potential upgrade of Interacciones' Support Rating and Support Rating Floor is unlikely in the foreseeable future, since this would arise from a material gain in systemic importance.

Subordinated Notes

The bank's subordinated debt ratings will likely mirror any change in the bank national scale ratings, as these are expected to maintain the same relevance to Interacciones' credit rating.

SUBSIDIARY

Any potential changes in ICB's ratings will be driven by any changes in Interacciones' ratings or in the legal framework that could alter the propensity of the group to support it, an unlikely scenario at present.

Fitch has affirmed the following ratings:

Banco Interacciones, S. A.:

--Long-Term Foreign - and Local-Currency IDRs at 'BB+'; Outlook Stable;

--Short-Term Foreign and Local-Currency IDRs at 'B';

--Viability Rating at 'bb+';

--Support Rating at '5';

--Support Rating Floor at 'NF';

--National Long-Term Rating at 'A+(mex)'; Outlook Stable;

--National Short-Term Rating at 'F1(mex)';

--National Long-Term Rating for local senior unsecured debt issues at 'A+(mex)';

--National Long-Term Rating for local subordinated debt issues at 'BBB+(mex).

Interacciones Casa de Bolsa, S. A. de C. V.:

--National Long-Term Rating at 'A+(mex)', Outlook Stable;

--National Short-Term Rating at 'F1(mex)'.