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Rating Action:

Moody's affirms Banorte's cross border debt ratings

22 Oct 2018

New York, October 22, 2018 -- Moody's Investors Service (Moody's) today affirmed Banco Mercantil del Norte, S.A.'s (Banorte) cross border ratings of its debts issued through Banorte's Cayman Islands branch, Banco Mercantil del Norte, S.A. (Cayman I) (Banorte Cayman). The rating agency has affirmed the Ba2(hyb) the entity's foreign currency junior subordinated debt ratings of the perpetual callable subordinated non-preferred non-cumulative Additional Tier 1 (AT1) capital notes, with an optional redemption on the first call date. The capital notes totaled $900 million, split into two tranches of different maturities and coupons. The rating agency also affirmed the Ba1(hyb) junior subordinated debt rating of the cumulative, non-convertible, dated, loss-absorbing Tier 2 subordinated capital notes.

At the same time Moody's affirmed Banorte's long-term foreign currency senior unsecured debt rating of A3 of the CHF fixed-rate senior unsecured notes issued through its Cayman Islands branch. Moody's also has affirmed all other ratings of Banorte Cayman with stable outlook.

This rating action follows Moody's de México's (MDM) affirmation of Banorte's baseline credit assessment (BCA) and adjusted BCA at baa2. For details on the rating action please see the press release entitled " Moody's affirms Banorte's ratings and maintains stable outlook." The affirmations follow the bank's publication of its consolidated financial statements for the first time since its absorption of Banco Interacciones, S.A. (Interacciones) in July. Following the acquisition, Banorte is now the second largest bank in Mexico, up from fourth prior the acquisition, with a 15% loan market share as of August 2018.

The following ratings and assessments of Banco Mercantil del Norte, S.A.(Cayman I) (807394004) were affirmed:

$500 million cumulative, non-convertible, dated, loss-absorbing Tier 2 subordinated capital notes due 2031 (CUS:05962GAF6)

Long-term global foreign currency junior subordinate debt ratings of Ba1(hyb)

$350 million perpetual callable subordinated non-preferred non-cumulative AT1 capital notes (CUS:05962GAH2)

Long-term global foreign currency junior subordinate debt ratings of Ba2(hyb)

$550 million perpetual callable subordinated non-preferred non-cumulative AT1 capital notes (CUS:05962GAJ8)

Long-term global foreign currency junior subordinate debt ratings of Ba2(hyb)

CHF100 million Fixed Rate Senior Unsecured Notes Due 2021 (CUS:05533UAD0)

.Long-term global foreign currency debt rating of A3, stable outlook

.Long-term Counterparty Risk Assessment of A2(cr)

.Short-term Counterparty Risk Assessment of Prime-1(cr)

Stable Outlook

RATINGS RATIONALE

The affirmations reflect recent improvements in Banorte's earnings generation capacity, capitalization that remains strong despite a modest decrease as a result of the acquisition, and still low asset risks, notwithstanding increased single-borrower and industry concentrations also stemming from the acquisition. The affirmations also consider the bank's still very low reliance on market funding, notwithstanding a modest increase also as a result of the acquisition, though its deposit franchise nevertheless remains weaker than that of several of its peers, as reflected in its higher funding costs.

Major acquisitions and investments over the past eight years have begun paying off for Banorte, which is becoming more profitable as it taps into the largest customer base of any Mexican banking group. Net income increased to 1.8% of tangible banking assets on an annualized basis during the first nine months of 2018 from 1.5% during 2015 as a result of the bank's increased focus on higher-yielding retail lending and recent increases in Mexico's benchmark interest rate. This led to higher lending rates and securities income even as its funding costs remained relatively stable. Although the absorption of Interacciones increases the bank's exposure to lower yielding regional and local government loans, in the medium to long-term, Banorte will benefit from the incorporation of slightly higher fee income from cross-selling new products to Interacciones's former clients, as well as significant operating and funding cost synergies.

Capitalization will remain a key strength of Banorte even though tangible common equity to risk weighted assets fell by a about 70 basis points to an estimated 13.2% of adjusted risk-weighted assets as of September 2018. The rating agency expects capital to remain at about 13% over the next year supported by higher earnings and despite a higher expected dividend payout of 50%, as announced by management. This compares favorably with most of the bank's Mexican peers.

Banorte also maintained strong asset quality, as reflected in its a low nonperforming loan ratio of about 1.8% of gross loans as of September 2018. Despite the bank's continued expansion into retail lending through credit card and mortgages, as well as into small and middle-market companies, Moody's expects any resulting increase in asset risk to be limited by the bank's focus on its roster of well-known clients from its group. Banorte has access to Mexico's largest customer base, with 24.5 million clients through its holding company, Grupo Financiero Banorte, S.A.B. de C.V., which in addition to the bank also controls Seguros Banorte, S.A. de C.V., Afore XXI Banorte, and Casa de Bolsa Banorte, S.A. de C.V.

While non-performing loans are low, however, Banorte faces asset risks related to its high single borrower and industry concentrations, which were exacerbated by the incorporation of Interacciones's portfolio of loans to states and municipalities. That said, most of the bank's government and government-related loans are backed by trusts into which federal tax revenue transfers are deposited, which brings their credit risk closer to that of the Mexican federal government (A3 stable).

Banorte has a good funding structure, underscored by a large and granular deposit base, which limits its reliance on market funding. Although the bank's loan to deposits ratio increased slightly following the acquisition given Interacciones's much heavier reliance on market funding and repayment of certain expensive demand deposits, it remained relatively low at 105% as of September 2018, up from 100% as of June 2018. Moreover, market funding excluding repos remained very low at just 7% of tangible banking assets, up just slightly from 5% as of June 2018. Nevertheless, Banorte's depends more on term deposits than many of its peers, which are less reliable and more costly than retail deposits. As a result, its average funding costs are considerably higher than those of most of its peers, notwithstanding its limited reliance on market funds.

The stable outlook derives from the stable outlook on Mexico's sovereign debt rating, which reflects the government's capacity to provide financial support to Banorte in an event of stress. Moody's assesses a very high willingness by the Mexican authorities to provide support based on Banorte's importance to the country's payment system and considerable deposit market share of 15% as of July 2018. As a result, Banorte's senior unsecured debt rating benefits from two notches of ratings uplift.

WHAT COULD CHANGE THE RATING UP/DOWN

As a result of government support, Banorte's cross border senior unsecured rating would face upward pressure if Mexico's government bond rating is upgraded. Similarly, if Mexico's government bond rating were downgraded, Banorte's cross border senior unsecured rating would face downward pressure. Absent a corresponding improvement or deterioration in Mexico's operating environment, however, the subordinated rating would not be affected.

Banorte's BCA could face upward pressure if the bank is able to reduce its large single borrower and industry concentrations and increase capitalization, while maintaining its profitability gains. However, a higher BCA would not translate into a higher senior unsecured debt rating as the debt rating is already aligned with Mexico's sovereign rating, though it would put upward pressure on the subordinated rating.

The BCA would face downward pressure if Banorte's core capitalization declines significantly or if loan growth and its absorption of Interacciones lead to a substantial deterioration in the bank's asset quality and profitability. As the senior unsecured debt rating would receive more uplift from government support in this circumstance, however, a lower BCA would not translate into a lower senior unsecured debt rating, though it would put downward pressure on the subordinated rating.

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 ratings tab on the issuer/entity page for the respective issuer on www.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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Felipe Carvallo
Vice President - Senior Analyst
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

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
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

No Related Data.
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