Fitch Affirms Consubanco at 'BB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the foreign- and local-currency long- and short- term Issuer Default Ratings (IDRs) of Consubanco, S.A., Institucion de Banca Multiple (Consubanco) at 'BB' and 'B', respectively. Fitch also affirmed the bank's Viability Rating (VR) at 'bb' and its long- and short-term National Scale ratings at 'A(mex)' and 'F1(mex)', respectively. A full list of rating actions follows at the end of this press release.
The Rating Outlook on the long-term rating is Stable.
KEY RATING DRIVERS
VR, IDRs, NATIONAL RATINGS AND SENIOR DEBT RATINGS
The bank's IDRs, VR, National Scale and senior debt ratings reflect its strong and growing business franchise in the public sector employees' pay-roll-deducted loan segment, its consistent financial performance throughout the economic cycle, reflected in sound and recurring profitability ratios driven by wide margins and strong efficiency levels. Additionally, the ratings consider the bank's continued, albeit moderate, improvement in asset quality metrics and its sustained ample loan loss reserve coverage ratio. Consubanco's adequate loss absorption capacity reflected in its capitalization ratios were also factored on its ratings.
Consubanco's ratings are constrained by the high level of concentration of its balance sheet (business mix and funding base), the challenging operating and competitive environment of its business segment, and the operational and political risks inherent to the latter.
Consubanco's financial performance continues to be strong. Its profitability is underpinned by the consistently high net interest margins of its products, which, together with high balance sheet growth and contained credit costs, provide an ample and recurrent income base. This, coupled with adequate and stable operational efficiency metrics, results in strong profitability ratios that compare favorably to its peers. Operating ROA and ROE improved to 11.8% and 43.2%, respectively in 2015, compared to 10% and 38.4%, registered in 2014.
Fitch estimates that the NIM (net interest income / average earning assets) will be pressured moderately in 2016 given the recent increases in the reference interest rate announced by the central bank, considering that all of Consubanco's funding is composed of variable-rate lending, and it lends at fixed-rate for an average term of 44 months.
As of December 2015, the impairment ratio (considering employer delays overdue by more than 90 days) stood at 7.6%; while the impairment ratio adjusted for gross charge-offs (impaired loans + gross charge-offs / gross loans + gross charge-offs) stood at 9.9%. Both metrics improved in 2015, as they stood at 8.5% and 11.2%, respectively, in 2014, and compare favorably to those of its peers, though comparability is difficult due to the different non-performing loan recognition policies. Consubanco's loan loss reserves are strong and amply cover the impaired loans balance. Concentrations per employer continue to be high and increased over the past year; the 20 largest accounted for 65.6% of gross loans and 1.4x equity as of December 2015 (2014: 56.8% and 1.2x).
Over the past years, Consubanco's funding base has shifted towards more flexible sources and unsecured issuances, benefitting from the ability to issue commercial paper and certificates of deposit under its banking license. However, the bank's funding mix remains highly concentrated on wholesale funding (debt issuances: 44%; certificates of deposit: 51%). Consubanco expects to diversify its funding with retail deposits once its strategic efforts to grow its retail banking operations materialize. However, in Fitch's opinion, developing a sizable and stable base of core deposits is challenging under most circumstances and may only occur in the medium term.
The bank has been able to comfortably comply with the local regulatory requirement of attaining a 60% Basel III Liquidity Coverage Ratio (LCR) in 2015. Although it exhibited volatility throughout the year, it expects it to stabilize above the minimum requirement of 70% in 2016.
Consubanco's Fitch Core Capital (FCC) Ratio, which adjusts reported equity for intangible assets and capitalized fee expenses, decreased to 11% in 2015, compared to the 16.8% registered in 2014. The pressure arises from the 66.9% increase in pre-paid fees to brokers. The bank's strong earning generation capacity partially mitigates this decrease in its capitalization ratio. Its regulatory capital ratio stood at 18.1%, as it deducts less items related to deferred assets compared to the FCC ratio.
Fitch considers that, other than traditional credit risks, Consubanco is also somewhat exposed to operational, political and event risk. Failure to properly implement the agreements with employers or unwillingness from 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.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's SR of '5' and SRF of 'NF' are driven by its low systemic importance and reflect Fitch's opinion that external support for the bank in case of need, although possible, cannot be relied upon.
RATING SENSITIVITIES
VR, IDRs, NATIONAL RATINGS AND SENIOR DEBT RATINGS
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 while 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 deteriorates to such an extent that operating (ROA) falls below 5%, or if its Fitch core capital 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)'.
The Rating Outlook is Stable.
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