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Rating Action:

Moody's downgrades Banco Ahorro Famsa to Caa1 from B1, outlook changed to negative

 The document has been translated in other languages

21 May 2020

Mexico, May 21, 2020 -- Moody's de México ("Moody's") today downgraded Banco Ahorro Famsa, S.A.'s (BAF) long-term global local and foreign currency deposit ratings to Caa1, from B1. In the same rating action, Moody's downgraded BAF's long-term counterparty risk assessment to B3(cr), from Ba3(cr). The rating action follows Moody's decision to downgrade BAF's standalone baseline and adjusted baseline credit assessments to caa1, from b1, as it concluded the ratings review initiated 25 March 2020. The outlook on the ratings was changed to negative.

Moody's also downgraded BAF's long-and short-term Mexican national scale deposit ratings to B2.mx/MX-4, from Baa3.mx/MX-3.

Moody's affirmed BAF's short-term global local and foreign currency deposit ratings at Not Prime and the bank's short-term counterparty risk assessment at Not Prime(cr).

Today's rating action reflects Moody's assessment that the Mexican economy will contract in 2020 as a result of the coronavirus outbreak, which will have a direct negative impact on BAF's and other Mexican banks' asset quality and profitability. Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety.

The following ratings and assessments of Banco Ahorro Famsa, S.A. (820539657) were downgraded:

. Baseline Credit Assessment to caa1, from b1

. Adjusted Baseline Credit Assessment to caa1, from b1

. Long-term global local currency deposit rating to Caa1, from B1, Negative from Ratings Under Review

. Long-term global foreign currency deposit rating to Caa1, from B1, Negative from Ratings Under Review

. Long-term Mexican National Scale deposit rating to B2.mx, from Baa3.mx

. Short-term Mexican National Scale deposit rating to MX-4, from MX-3

. Long-term counterparty risk assessment to B3(cr), from Ba3(cr)

Outlook changed to negative, from ratings under review

The following ratings and assessments of Banco Ahorro Famsa, S.A. (820539657) were affirmed:

. Short-term global local currency deposit rating of Not Prime

. Short-term global foreign currency deposit rating of Not Prime

. Short-term counterparty risk assessment of Not Prime(cr)

RATINGS RATIONALE

Moody's three-notch downgrade of BAF's ratings and negative outlook incorporates the deterioration in asset quality and profitability metrics, and the expectation that business activity will remain under pressure, further weakening the bank's ability to generate core earnings and to replenish its capital. The ratings also capture BAF's continued exposure to high-risk and illiquid assets, which weakens liquidity, despite the bank's ample access to core deposit funding which remains a credit strength relative to other rating factors.

BAF's nonperforming loans have continued to increase in 1Q 2020 to 16.8%, from 14.6% as of December 2019 because of the difficult operating environment in Mexico. The disruptions brought about by the coronavirus outbreak, which has led to stay-at-home measures and a sharp drop in economic activity in Mexico, is further straining operating conditions for the bank and its asset quality. This is because BAF's targeted borrowers are among the most vulnerable to the downturn, and its unsecured consumer lending business model dependents on foot traffic at its parent group's retail stores, severely limiting origination and collections under present circumstances. BAF's management has introduced enhancements to its origination and collections processes in 2019 and has started to diversify away from risky consumer finance, but given current conditions, any improvement in asset quality can only be anticipated in 2021.

Moody's therefore expects further deterioration in the bank's nonperforming loan ratio stemming from the deep contraction in Mexico's GDP in 2020 and the limited economic recovery we forecast in 2021. In addition, BAF holds real estate assets in the form of retail stores it received in lieu of payment from its holding company, Grupo Famsa, S.A.B. de C.V., and more recently, the acquisition of an MXN4.25 billion, 25-year available for sale security with at least a 10% yield, that represents an investment in a trust that will benefit from the earnings generation of its sister company, Impulsora Promobién, S.A. de C.V. The available for sale security, which accounted for 10% of the bank's total assets as of 1Q 2020, is of limited liquidity given the unfavorable market conditions for divestment, and does not materially lower the risk in BAF's balance sheet, materially weakening BAF's liquidity profile.

BAF's profitability continues to be affected by high provisioning needs, which led to a net loss in the 1Q 2020. Net income as a percent of tangible assets was a negative 3.6%, down from an already very modest 0.35% in December 2019. Recurring provisions represented almost 140% of the bank's preprovision income (resultado de la operación antes de estimaciones preventivas), up from 90% over the last three years, and are unlikely to decline in the short-term, because lower business volumes, though temporary, will limit earnings generation. Management anticipates being able to divest some real estate during 2020, generating an extraordinary net profit by year end. The bank's profitability will nevertheless benefit from lower funding costs following interest rates cuts in Mexico.

BAF's capitalization, measured as Moody's-adjusted tangible common equity to risk-weighted assets, declined 200 basis points to 12% during the first quarter of 2020 driven by BAF's negative bottom line results. The bank's newly acquired available-for-sale security is sizable and represents a large portion of the bank's tangible common equity as of 1Q 2020. In assessing BAF's capital Moody's incorporates the limited capacity to absorb losses of the available for sale security.

Moody's ratings on BAF also incorporate the limited business diversification and its focus on high risk unsecured consumer lending, which reflects the vulnerability of the bank's asset risk and earnings to shifts in current market conditions. In addition, BAF's asset allocation and overall balance sheet management, which is influenced by its parent group, carries a high degree of complexity that weakens our assessment of BAF's corporate governance. Corporate governance remains a key credit consideration particularly in terms of the high degree of intercompany relations.

In assigning a negative outlook to BAF's ratings, Moody's said the rapid spread of the coronavirus, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets, including Mexico. These conditions will challenge BAF to generate earnings and stabilize asset quality considering its direct lending exposures to consumer clients, which may be most affected by the pandemic.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

In line with the negative outlook, there is limited upward pressure on BAF's ratings. However, the outlook could be stabilized if BAF's asset quality stabilizes and profitability returns to historic levels, as the bank is able to offset Moody's expected increase in delinquencies in a weaker operating environment with a substantial reduction in problem assets.

Conversely, downward ratings pressure will mount if the bank's capitalization is further affected by losses or its funding mix, which remains a relative strength of the bank, were to be affected by BAF's increasing asset risks.

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, 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 Ahorro Famsa, S.A.'s rating is between 1 January 2016 and 31 March 2020 (source: Annual Financial Audited Statements 2016, 2017, 2018 , 2019 and Quarterly interim financial statements, Q1 2020)

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_1216309.

REGULATORY DISCLOSURES

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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 25 March 2020.

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 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 general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 - 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

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.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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