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20 May 2014
New York, May 20, 2014 -- Moody's Investors Service has today upgraded Banco Mercantil del Norte,
S.A. (Cayman Islands)'s global foreign currency senior debt
rating to A2, from A3. At the same time, Moody's upgraded
the bank's foreign currency subordinated and junior subordinated
debt ratings to Baa2(hyb) and Baa3(hyb), from Baa3(hyb) and Ba1(hyb),
respectively. The outlook on all these ratings is stable.
This action comes along Moody's decision to upgrade Banco Mercantil
del Norte, S.A.'s (Banorte) long- and
short-term global local currency deposit ratings to A2/Prime-1,
from A3/Prime-2. At the same time, Moody's raised
Banorte's standalone baseline credit assessment (BCA) to baa1,
from baa2. Moody's also upgraded the bank's subordinated
and junior subordinated debt ratings to Baa2(hyb) and Baa3(hyb),
from Baa3(hyb) and Ba1(hyb), respectively. The outlook on
all these ratings is stable. These actions conclude the review
for upgrade initiated on 12 February 2014.
A detailed list of ratings affected is provided below.
LIST OF RATINGS AFFECTED
Banco Mercantil del Norte, S.A.
The following ratings were upgraded:
- Long-term foreign currency subordinated debt rating to
Baa2(hyb), from Baa3(hyb)
- Long-term foreign currency junior subordinated debt rating
to Baa3(hyb), from Ba1(hyb)
Banco Mercantil del Norte, S.A. (Cayman Islands)
The following rating was upgraded:
- Global foreign currency senior debt rating to A2, from
STANDALONE BASELINE CREDIT ASSESSMENT
In raising Banorte's standalone BCA to baa1, from baa2,
Moody's took into account the bank's stronger franchise value
and increased earnings diversification derived from the significant expansion
of the bank and its holding company, Grupo Financiero Banorte's
(GFNorte) in the last few years, as well as meaningful improvements
in capitalization and corporate governance.
GFNorte's expansion has been driven by a combination of organic
growth and strategic acquisitions. With the 4th largest branch
network and 14% of all deposits in the country, Banorte has
consolidated its competitive position among the top three deposit-takers
in the country. This deposit base provides a stable source of financing
for continued organic growth, particularly in retail banking and
lending to small and medium-sized enterprises (SMEs), which
the government aims to promote through the recently approved financial
reforms. In addition, recent acquisitions have complemented
the bank's core lending operations with new non-capital intensive,
fee-driven businesses particularly in asset management.
Its subsidiary Afore XXI Banorte is now Mexico's largest pension
fund manager. These acquisitions have given the bank access to
the country's largest customer base with more than 24 million clients
spread across GFNorte's new and old business units. According
to Moody's Senior Credit Officer David Olivares, "the
acquisitions should provide ample cross-selling opportunities that
will support earnings growth going forward."
Moody's also cited improvements in Banorte's capitalization
and corporate governance as positive credit drivers. The bank has
utilized the proceeds of a capital injection funded by its parent's
recent equity offering to pay off expensive subordinated debt, thereby
replacing Tier 2 with higher quality Tier 1 capital and at the same time
improving its funding profile. Banorte's capitalization has
improved relative to that of its key peers, providing it a larger
cushion to absorb potential unexpected losses. The bank has made
significant improvements in corporate governance, including increasing
the number of independent board members, reducing the amount of
loans to related parties, and changing GFNorte's ownership
structure to diminish potential influence of a single shareholder to a
more broad and diversified shareholder influence in the board's
Nevertheless, Banorte's standalone intrinsic credit strength
continues to be constrained by business integration challenges related
to the bank's recent acquisitions. These challenges are reflected
in the bank's low operating efficiency, which continues to
limit its profitability.
Although the bank's new businesses will support growth in the future,
Olivares noted that "it will take time for management to consolidate
and streamline processes, centralize control, and realize
opportunities to grow revenues derived from its more diversified product
offerings and larger customer base." Timely and successful
cost cutting efforts are also needed to achieve management's goal
of bringing the operating cost to income ratio of the banking business
to a medium-term target around the mid-40%s,
from its current 51%, which is considerably higher than the
bank's peers. In turn, management hopes that this will
drive an improvement in its return on equity and assets in 2014 from 14%
and 1.4%, respectively, reported as of 1Q2014.
However, management's ability to cut costs will be limited
by its need to retain its recently acquired customers. Consequently,
"we believe its efficiency target is ambitious," Olivares
The rating agency also noted the bank also continues to face periodic
challenges with asset quality, which have required high levels of
provisions, thereby affecting profitability. Although delinquencies
remain elevated by historical standards at 3% (as of 31 March 2014)
after a sharp rise just last year, they appear to have peaked and
should remain manageable. However, the bank's growing
appetite for the riskier consumer and SMEs loan segments heightens credit
risk. In addition, exposures to large single borrowers persist,
leaving the bank vulnerable to a decline in credit quality of certain
large individual borrowers. This concentration risk is somewhat
mitigated because many of the bank's largest exposures are to sub-sovereign
borrowers secured by participations in transfers from the federal government.
With limited capacity for further acquisitions, Moody's expects
the bank's expansion to slow going forward as it focuses more on
organic growth. The stable outlook balances Banorte's significant
opportunities for organic growth and potential improvements in profitability
from efficiency gains with the challenges of integrating its new businesses
while reducing costs and managing asset quality risks. The rating
could face upward pressure if the bank is able to capitalize on its opportunities
for cross selling and to realize further gains in efficiency.
UPGRADE OF LOCAL CURRENCY DEPOSIT RATINGS
The upgrade of Banorte's global local currency deposit rating by
one notch to A2 reflects both the improvement in the bank's standalone
BCA and a higher probability of support from the Mexican government in
a stress situation given the bank's growing systemic importance
as a leading deposit-taker and lender in the Mexican market.
UPGRADE OF SUBORDINATED AND JUNIOR SUBORDINATED DEBT RATINGS
Given the absence of parental support factored into Banorte's rating,
its subordinated debt ratings are maintained one notch below its standalone
BCA. They have been upgraded to Baa2(hyb) from Baa3(hyb) in line
with the upgrade of the BCA. In turn, junior subordinated
debt ratings are notched from the BCA by two notches and thus have been
upgraded to Baa3(hyb) from Ba1(hyb).
The principal methodology used in these ratings was Global Banks published
in May 2013. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
Banorte is headquartered in Mexico City. As of 31 March 2014,
the bank reported Mx$861.0 billion in assets (source:
Issuer's financial statements).
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
David Olivares Villagomez
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
Maria Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
Moody's upgrades Banorte's foreign currency senior debt to A2; outlook stable
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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