New York, October 26, 2022 -- Moody's Investors Service ("Moody's") affirmed the Baa2 and Prime-2 long- and short-term issuer and senior unsecured debt ratings assigned to Nacional Financiera, S.N.C. (Nafin), Banco Nacional de Comercio Exterior, S.N.C. (Bancomext), and Banco Nacional de Comercio Exterior, SNC (CI) (Bancomext Cayman). The baseline credit assessments (BCA) and adjusted BCAs assigned to Nafin and Bancomext were also affirmed at ba1 and ba2, respectively.
The long- and short-term counterparty risk assessments (CR assessments) and long-term- and short-term counterparty risk ratings (CRRs), in local and foreign currency, assigned to Nafin, Nacional Financiera S.N.C., London Branch (Nafin London), Bancomext and Bancomext Cayman were also affirmed at Baa2(cr) and Prime-2(cr) and Baa2 and Prime-2.
Moody's also affirmed the Ba1(hyb) subordinated debt rating assigned to Bancomext Cayman's outstanding subordinated capital notes.
The rating outlook remains stable, in line with the stable outlook of the Government of Mexico.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL470673 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Moody's affirmed Nafin's and Bancomext's Baa2 issuer ratings in line with Moody's assumption of a very high probability of support from the Mexican government. Moody's support assumption for both development banks considers the government's commitment to fulfill their financial obligations at all times, as stated in their respective founding laws. This statutory support reflects both banks' status as arms of the government with public-policy roles that are a strategic priority for the government. Nafin promotes the development of Mexico's private sector, with an emphasis on micro and small and midsize enterprises (MSMEs), while Bancomext promotes the export sector and those industries that attract foreign currency to the country. Bancomext also complements commercial banks' products, mainly in initial-stage projects, by offering US dollar long-term financing for investments, rather than short-term working capital in Mexican pesos.
The government's support statute for Nafin and Bancomext does not qualify for credit substitution because it excludes foreign individuals and does not include an explicit commitment to ensure timely payment.
AFFIRMATION OF NAFIN'S ba1 BCA
The affirmation of Nafin's ba1 BCA reflects the bank's risky core business and highly concentrated loan book with top 20 loan exposures accounting for more than four times its tangible common equity as of June 2022. These risks are intimately related to Nafin's policy mandate as a development bank, which could expose it to rapid asset quality deterioration in times of credit cycle turning. Between 2021 and 2022, Nafin reported a sharp increase in its problem loan ratio that jumped to 4.2% in June 2022, from its historical low average of 0.28% between 2018 and 2021. The deterioration was mainly a result of the high portfolio concentration to single borrowers in the telecommunications, financial services and clean energy industries. These risks, however, are partly mitigated by Nafin's indirect lending business where banks and finance companies onlend Nafin's resources (68% of the loan book in June 2022), the conservative loan loss reserves of 212.55% of problem loans, strong capitalization and consistent earnings generation capacity.
Historically, Nafin has maintained a strong capitalization, which will continue to be supported by the bank's good core earnings generation capacity, based on stable margins and ample fee income generation. Nafin's capital ratio measured by tangible common equity to risk-weighted assets stood at 14.93% in June 2022. Net revenues of the bank benefit from the fees generated from its sizable guarantee program that was equivalent to 52% of its loan book in June 2022.
The ba1 BCA also considers a challenging scenario for profitability in the coming quarters as Nafin will likely need to increase provisions for loan losses to cover its portfolio of loans to troubled single borrowers. In June 2022, net income to tangible assets stood at 0.35% benefited from tax credits, and was an improvement from the 0.5% loss reported in 2021, even excluding the aprovechamiento cost. Nafin's profitability figures are normally affected by its payment to the federal government for its statutory support (aprovechamiento) during the second half of each year, even as these payments are usually returned to the bank as capitalizations in the following period.
Nafin does not take deposits, therefore the bank is highly reliant on a market funding that benefits from the Mexican federal government providing statutory support for all its liabilities. The bank's liquidity profile is also strong, backed by ample holdings of liquid assets. Adjusted to exclude repos, liquid assets to tangible banking assets stood at 31.25% in June 2022.
AFFIRMATION OF BANCOMEXT'S ba2 BCA
Moody's affirmation of Bancomext's ba2 BCA acknowledges the bank's conservative loan origination practices that have historically sought to minimize the effects of its public policy mandate and high single borrower and industry concentrations, including the maintenance of good levels of loan loss reserves and capitalization, as well as a consistent core earnings generation.
Nevertheless, over the past two years, Bancomext, similar to Nafin, experienced significant deterioration in problem loan ratio, equivalent to 160 basis points between December 2020 and June 2022. In June 2022, Bancomext's problem loans reached 3.96%, well above its five-year historical average of 2.03%. This deterioration resulted from a handful of borrowers in the telecommunications, financial services, and entertainment industries that had problems during the pandemic. The bank continues to maintain a good loan loss reserve coverage of problem loans (132.05% in June 2022) and adequate tangible common equity to risk-weighted assets, that reached 11.13% in June 2022, providing good loss absorption capacity.
The affirmation also reflects Bancomext's strong core earnings generation capacity, based on stable margins and cost controls, despite much higher interest rates and inflation. Although Bancomext's profitability ratios were affected by the need to provision its troubled single borrower exposures, through June 2022, Bancomext's net income to tangible assets begun to recover to 0.6%, from 0.1% (excluding the aprovechamiento cost) during 2021, on lower provisioning needs, and a higher net interest margin of 1.7%, from 1.5% during 2021.
Bancomext does not take deposits, as such it has a high reliance on market funding. However, the bank benefits from a solid access to capital markets that is supported by the Mexican federal government's statutory support for all liabilities and adequate holdings of liquid assets at 19.63%, as of June 2022.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The Baa2 issuer ratings of Nafin and Bancomext are positioned at the same level of the sovereign bond rating and, therefore, there is no upward pressure on the entities' supported ratings at this point. Any upward pressure on these ratings would be in conjunction with an upgrade in Mexico's government bond rating. Pressure on Nafin's and Bancomext's BCAs would depend on an improvement in their standalone financial profiles, including lower concentration risk, more diversified funding mix, and higher profitability.
Conversely, if Mexico's government bond rating faced downward pressures, the entities' issuer and debt ratings would be negatively pressured. Downward pressure on Nafin's and Bancomext's BCAs would emerge if asset quality does not improve over the next 12 to 18 months as the banks begin to expand their loan books moderately and problem loans become performing or are effectively written off. Any further deterioration in asset quality would result in a downgrade, in an indication of a deterioration in loan origination practices.
The principal methodology used in rating Banco Nacional de Comercio Exterior, S.N.C. and Banco Nacional de Comercio Exterior, SNC (CI) was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. The principal methodologies used in rating Nacional Financiera, S.N.C. and Nacional Financiera S.N.C., London Branch were Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997, and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL470673 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:
• EU Endorsement Status
• UK Endorsement Status
• Rating Solicitation
• Issuer Participation
• Participation: Access to Management
• Participation: Access to Internal Documents
• Lead Analyst
• Releasing Office
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Felipe Carvallo
VP - Senior Credit Officer
Financial Institutions Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653
Ceres Lisboa
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
