GRUPO FINANCIERO BANORTE, S.A.B. DE C.V.
Fitch Ratings affirmed the Long- and Short-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of
Fitch has also affirmed GFNorte and Banorte's Government Support Rating (GSR) at 'ns' and 'bb+', respectively.
The Long- and Short-Term national scale ratings of Banorte, Arrendadora y
Fitch revised the trend of its assessment for the operating environment (OE) scored at 'bb+' for Mexican banks to Stable from Negative. Fitch believes banks will face downside risks once again in 2023 due to decelerating economic growth and high inflation; however, Fitch expects the banks' performance to remain resilient and most banks' core metrics have sufficient headroom to face these risks.
Key Rating Drivers
Stand-Alone Creditworthiness Drives Ratings: Banorte's IDRs are driven by its 'bbb-' VR. Fitch considers Banorte's VR is underpinned by its sound business profile marked by good market position, which has provided stability to its overall financial performance resulting in above-average asset quality and earnings metrics compared with domestic peers.
Banorte remains as the second/third bank in
Banorte's national scale ratings are relative rankings of creditworthiness within
High Exposure to Public Sector: Fitch's view on the risk profile considers the group's good underwriting practices, which were proven during the pandemic, as the entity reported lower credit losses and adjusted NPLs compared to domestic peers. Fitch incorporates the group's continuous plans for inorganic growth and its relevant concentration in public sector lending, that gradually have been reduced. As of 3Q22, lending related to the public sector accounted by 19% of total loan portfolio from 25% in YE 2018. Although Banorte's public sector loans are mostly concentrated in states and municipalities (64% of the government portfolio), they are mostly backed by fiduciary guarantees, and the remained exposure is on the federal government, with credit quality similar to
Healthy Asset Quality: At 3Q22, Banorte's total loan portfolio grew 6.8% from YE 2021, in line with its revised forecast 7%-9% range in 2022. Loan growth has been controlled, as non-performing loans (NPL) ratios remain below 1% and better than those of peers. Loan-loss allowances coverage of NPLs remained close to 2.0x. Fitch expects Banorte's asset quality in 2023 to slightly deteriorate but will remain controlled and commensurate with its rating level.
The bank's relatively low exposure below 5% in riskier industries such as oil, electricity, real estate, construction and leisure will benefit asset quality. Its retail loan portfolio is fairly diversified among payroll lending, credit cards and mortgages, which will also limit asset quality deterioration. Conversely, higher exposure to the Mexican sovereign versus its largest peers will remain a credit negative.
Marked Earnings Recovery: Banorte's earnings continued to be strong as a result of good net-interest margins. The banks' profits have been supported by consistent loan growth, especially at double-digit rates in consumer lending such as payroll lending, credit cards and mortgage loans. Also sustained growth in commercial and corporate lending helped. In addition, controlled loan-impairment charges (LICs, 3Q22: represented 18.6% of pre-impairment operating profit) and a better funding mix focused on demand deposits (70% of total deposits) supported the banks' profitability.
As of 3Q22, the operating profit-to-risk weighted assets (RWA) ratio was 5.8%, even surpassing pre-pandemic levels. Fitch expects Banorte's profitability to remain robust in 2023 due to its strong and diversified business model, but gradually will return to historic levels as LICs will begin to normalize.
Good Risk Absorption: Banorte's capitalization remains a credit strength, with a common equity Tier 1 (CET1)-to-RWA ratio of 14.7% as of 3Q22 and a total regulatory capital ratio at a high 23.0% due to additional loss absorption provided by hybrid capital securities. Banorte resumed its dividend payment practice, subsequently paying MXN26.4 billion as of 3Q22. Despite this practice, coupled with Banorte's demonstrated high appetite for inorganic growth, Fitch views the bank's capital to remain strong relative to local peers. The new total loss absorbing capital requirements and the bank's demonstrated ability to reconstitute capital amid the occurrence of company acquisitions will support good levels of capitalization in 2023.
Adequate Funding and Liquidity Profile: Banorte's funding and liquidity assessment is enhanced by its good market position in deposits, supported by ample banking infrastructure and digital transformation. As of 3Q22, the loan to deposit ratio was 101.1% and the liquidity coverage ratio was 160.4%, which Fitch considers is adequate for its business profile. Fitch consider, Banorte's funding and liquidity profiles still lags from largest peers by deposits structure and funding costs. However, the bank has continuously working on reducing de financing costs by increasing demand deposits.
GFNorte: GFNorte's IDRs continue to be driven by its intrinsic profile as reflected in its VR. The strong business profile of GFNorte as one of the most relevant financial groups in the country, its relevant market position in government-related businesses and the benefits of diversification in several financial businesses are relevant for the rating. Despite the relevance of the banking business for income generation, diversification continued to play positive during the crisis, as impacts from the insurance business have been partially offset by other activities. GFNorte's profitability is in a recovery trend, marked by the good earnings of the bank and the recovery of the profitability of the insurance company. This has partially offsetting the moderate performance of the Afore Banorte, due to regulatory reduction on fees.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Banorte and GFNorte's VRs and IDRs are sensitive to a rating action on
Ratings could also be downgraded if Banorte's operating profit-to-RWAs ratio reduces and it is sustained below 2% and if the CET1 to RWAs ratio decreases consistently below 11%. A weakening of Fitch's assessment on the risk profile or the funding and liquidity profile could also trigger a downgrade;
Banorte's national scale ratings will reflect any change in local relativities.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside potential is relatively limited due to Banorte's and the GFNorte's high exposure to the public sector;
Banorte's National ratings have no upside potential because they are at the highest level in the national rating scale.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Senior Debt: Fitch affirmed the senior unsecured debt at the same level as Banorte' long-term national scale rating of '
Banorte Classified as D-SIB: Banorte's 'bb+' GSR reflects its high systemic importance. The bank is defined as domestic systemically important bank; therefore Fitch considers that due to its market share and interconnectivity within the financial system, Fitch views the authorities' propensity to support as high to avoid contagion risks.
As of
GFNorte's 'No Support': GFNorte's GSR of 'ns' reflects Fitch expectation that there is no reasonable assumption that such support will be available due to its position as a holding company.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Banorte's senior debt rating would mirror any changes to the issuer's national scale ratings;
The rating of the hybrid capital securities will maintain the relativity in respect to the anchor rating.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade to Banorte's GSR is possible in the event of a sovereign upgrade if it coincides with a strengthening of the sovereign's ability and propensity to support the bank;
An upgrade to GFNorte's GSR is unlikely due to its nature as a holding company.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade to Banorte's GSR could occur if the sovereign's ability to support the bank weakened, as reflected in a sovereign downgrade, or if the sovereign's propensity to support the bank becomes less likely;
Fitch does not foresee a change in GFNorte's GSR.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
Legal Obligation to Support Subsidiaries: The support-driven ratings of GFNorte's subsidiaries (CB Banorte, AyF Banorte and Almacenadora Banorte) are aligned with Banorte's national ratings as they consider the legal obligation of GFNorte to support them in case of need and Fitch's perception that they are core to the group's strategy.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Any negative movement on GFNorte's non-bank subsidiaries' ratings would be driven by a negative action on Banorte's national ratings, which in turn will reflect any changes in local relativities.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
GFNorte's non-bank financial subsidiaries' ratings are at the highest level on the national scale, therefore there is no possibility of an upgrade in the ratings.
VR ADJUSTMENTS
The Asset Quality Score of 'bbb-' is assigned above the 'bb' category implied score due to the following adjustment reason: Collateral and Reserves (positive).
The Earnings & Profitability score of 'bbb-' is assigned above the 'bb' category implied score due to the following adjustment reason: Earnings stability (positive).
The Capitalization and Leverage score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reasons: Core capital calculation (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Summary of Financial Adjustments
Pre-paid expenses and other deferred assets were reclassified as intangibles and deducted from equity to reflect their low loss absorption capacity.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria. Financial figures are in accordance with the local banking regulator (Comision Nacional Bancaria de Valores) criteria. 1Q22, 2Q22 and 3Q22 figures include recent accounting changes in the process to converge to International Financial Reporting Standards. Prior years did not include this change, and Fitch believes they are not directly comparable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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