DBRS Initiates Ratings of A (low) and AAA.MX, Stable Trends, on Nacional Financiera, S.N.C.

DBRS Limited (DBRS) has today initiated ratings on Nacional Financiera, S.N.C. (Nafin or the Bank). Specifically, DBRS has assigned an Issuer Rating and Senior Debt Local Currency rating of A (low), a Senior Debt Foreign Currency rating of BBB (high), a Short-Term Instruments Local Currency rating of R-1 (low) and a Short-Term Instruments Foreign Currency rating of R-1 (low) on the Global Scale. In addition, DBRS has assigned an Issuer Rating and Senior Debt Local Currency rating of AAA.MX and a Short-Term Instruments rating of R-1 (high).MX on the National Scale. The trend on all ratings is Stable. Nafin is assigned a Support Assessment of SA1, reflecting DBRS’s expectation of timely support from the federal government of the United Mexican States (rated A (low) with a Stable trend by DBRS) owing to its ownership and control of Nafin.

The ratings are aligned with the sovereign ratings of the United Mexican States, reflecting the fact that Nafin is wholly owned and controlled by the federal government and acts as an agent of the state for public policy purposes. Moreover, DBRS believes the federal government is highly likely to support Nafin. The Bank is subject to an Organic Law (Ley Orgánica de Nacional Financiera), which states that the federal government of Mexico shall be responsible at all times for transactions entered into by the Bank with Mexican individuals and companies and for transactions entered into by Nafin with non-Mexican private, governmental and intergovernmental institutions. (Note: Under Article 10 of Nafin’s organic law, government support does not extend to transactions entered into with non-Mexican individuals.) Likewise, for the purposes of the Federal Law on Public Debt (Ley Federal de Deuda Pública), public debt comprises direct or contingent debt obligations derived from financing and assumed by, among others, development banking institutions. Consequently, the debt issued by Nafin is public debt for all legal and administrative purposes. Hence, DBRS considers the explicit support from the Mexican government in terms of obligations, liquidity and capital. In addition, Nafin deals directly with corporates and other financial institutions and thus is not exposed to retail credit risk.

In DBRS’s opinion, these positive factors are tempered by the change in the board of directors with each presidential term, which occurs every six years in Mexico. Furthermore, investment objectives are set by government policy and may expose Nafin to risks in certain high-priority sectors such as energy.

Nafin, which is one of Mexico’s largest development banks, is wholly owned and controlled by the Mexican government. The Bank was established in 1934 to provide financing to large companies and strategic projects in Mexico’s industrial sector. In 1989, Nafin began offering an array of products and expanded activities to cover the commercial, service and industrial sectors. With MXN 504 billion in assets as at December 31, 2016, Nafin’s primary objective is to promote economic development in Mexico, primarily by supporting micro, small and medium-sized enterprises (MSMEs). This is done by extending Second-Tier Loans to other financial institutions, which in turn lend to the private MSME sector throughout the country. In addition, the Bank offers First-Tier Loans to corporate borrowers involved in high-impact and -priority projects for development in Mexico, typically in renewable energy.

Nafin enjoys stable sources of both interest and fee income. Net interest income, which reached MXN 4.7 billion in 2016, makes up over 70% of total revenues. This proportion has grown from approximately 36% in 2011, as the Bank has aggressively grown its First- and Second-Tier Loan assets. Net commission and fee income, which grew by 5% in 2016 to MXN 2.5 billion, is mainly derived from Nafin’s guarantees on loans originated by third-party commercial lenders to MSMEs and typically covers up to 50% of the principal amount of the loan. A fee is earned on these guarantees, and losses are almost entirely covered by funds available from a trust funded principally by the Secretariat of Economy and the Secretariat of Finance and Public Credit, of which Nafin is a trustee. Because of its operating model with a limited number of branches, Nafin enjoys a good efficiency ratio of 48%.

The loan portfolio has almost doubled since 2012 to MXN 212 billion in 2016, with Second-Tier Loans forming almost 70% of the portfolio. Within this portfolio, the intermediary financial institutions that Nafin works with directly approve each loan application, with the intermediary bearing the ultimate credit risk of the borrower. Within First-Tier Loans, around 60% of the portfolio is related to corporate borrowers with the remainder going to fund project finance across Mexico. Non-performing loans have historically been low. In 2016, non-performing loans amounted to 1.02% of gross loans. Loans are well provisioned for, with allowances at 259% of non-performing loans. The Bank is heavily regulated and supervised by several ministries and the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores; CNBV). Nafin is managed by a board of directors that comprises 11 members, six of whom are representatives of the Mexican government.

Nafin’s main funding source comes from money market deposits. As at December 31, 2016, the Bank had MXN 143.5 billion in deposits, almost all of which had a term of less than one year. The Bank has been gradually reducing the portion of deposit funding in favour of bonds of longer maturity. In November 2013, Nafin implemented a new capitalization strategy focused on raising capital in pesos with medium- and long-term maturities, which concentrated on issuing multiple series of Certificados Bursátiles (Cebures) through the syndicated auction mechanism available in the Mexican market. As at the end 2016, there was a total of MXN 49 billion outstanding in Cebures of various maturities. Nafin also raised USD 500 million in a Green Bond in 2015, with the proceeds dedicated to renewable energy and infrastructure projects. In addition, Nafin has access to direct loans from multilateral organizations and international development banks, as well as access to liquidity through several lines with Banco de México.

Nafin is subject to Basel III requirements. The CNBV requires a minimum capital ratio of 8%. As at December 31, 2016, the capital ratio stood at 13.26% on an all-in standardized basis. Pursuant to Mexican federal income tax law, Nafin is required to pay the Mexican government a contribution (aprovechamiento). Such special tax is calculated by the Ministry of Finance; Nafin has no control over the amount of the payout. Disbursements, which totalled MXN 800 million in 2016, are considered part of other operating expense and are thus deducted prior to calculating net income.

RATING DRIVERS
Positive rating pressure would likely be linked to an improvement in the sovereign ratings of the United Mexican States. Alternatively, a downgrade of the sovereign ratings would likely have a negative effect on Nafin’s ratings.

In addition, any indication of a reduction of support from the Mexican federal government could affect DBRS’s support assessment and potentially have a negative impact on the Bank’s ratings.

Notes:
All figures are in Mexican pesos unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Global Methodology for Rating Banks and Banking Organisations (July 2016) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2017), which can be found on dbrs.com under Methodologies.

Lead Analyst: Maria-Gabriella Khoury, Vice President, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG & Sovereign Ratings

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.