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Rating Action:

Moody's affirms Banorte's ratings and maintains stable outlook

 The document has been translated in other languages

22 Oct 2018

Mexico, October 22, 2018 -- Moody's de México has affirmed all ratings and assessments of Banco Mercantil del Norte, S.A. (Banorte), including its A3/Prime-2 long- and short-term deposits, its baa2 baseline credit assessment (BCA) and baa2 adjusted BCA, and its A2(cr)/Prime-1(cr) long- and short-term counterparty risk assessments. Moody's also affirmed Banorte's subordinated debt rating of Baa3. The outlook remains stable.

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. (600017135) were affirmed:

.Adjusted Baseline Credit Assessment of baa2

.Baseline Credit Assessment of baa2

.Long-term global local currency deposit rating of A3, stable outlook

.Short-term global local currency deposit rating of Prime-2

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

.Short-term global foreign currency deposit rating of Prime-2

.Long-term Mexican National Scale deposit rating of Aaa.mx

.Short-term Mexican National Scale deposit rating of MX-1

MXN2.5 billion preferred subordinated non-convertible obligations (Obligaciones subordinadas preferentes y no susceptibles de convertirse en acciones, BANORTE 08 U)

.Long-term global local currency subordinated debt rating of Baa3

MXN2.5 billion preferred subordinated non-convertible obligations (Obligaciones subordinadas preferentes y no susceptibles de convertirse en acciones, BANORTE 08 U)

.Long-term Mexican National Scale subordinated debt rating of Aa3.mx

.Long-term counterparty risk assessment of A2(cr)

.Short-term counterparty risk assessment of Prime-1(cr)

.Outlook stable

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 an estimated an 70 basis points to about 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 an increase in the expected dividend payout to 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 Banorte's decision to repay some of Interacciones's more expensive deposits, it remained relatively low at 105% as of September 2018, up from 100% as of June 2018. Market funding excluding repos also remained very low at 7% of tangible banking assets, up just slightly from 5% as of June 2018. Nevertheless, Banorte 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 global scale long-term deposit ratings benefit from two notches of ratings uplift.

WHAT COULD CHANGE THE RATING UP/DOWN

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

In addition, the long-term global scale deposit rating could, and subordinated debt rating would, face downward pressure if Banorte's core capitalization or profitability decline significantly, and if increased loan growth and/or the absorption of Interacciones lead to a substantial deterioration in the bank's asset quality.

Banorte's BCA could face upward pressure if the bank reduces its large single borrower and industry concentrations and its tangible common equity ratio increases to at least 14%, while it maintains its recent profitability gains. However, a higher BCA would not translate into a higher global scale deposit rating as the deposit rating is already aligned with Mexico's sovereign rating, though it would put upward 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.mx for a copy of this methodology.

The period of time covered in the financial information used to determine Banco Mercantil del Norte, S.A.'s rating is between 1 January 2013 and 30 June 2018 (source: Moody's and issuer's financial statements).

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

The ratings have been disclosed to the rated entity prior to public dissemination.

A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx.

The date of the last Credit Rating Action was 13 April 2018.

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 further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.mx.

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.

This credit rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result.

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on www.moodys.com.mx for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com.mx for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see our website www.moodys.com.mx for further information.

Please see www.moodys.com.mx for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

The ratings issued by Moody's de Mexico are opinions regarding the credit quality of securities and/or their issuers and not a recommendation to invest in any such security and/or issuer.

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

Felipe Carvallo
VP-Sr 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

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
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

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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