DBRS Confirms Nacional Financiera, S.N.C. at BBB (high), Stable Trend

DBRS Limited (DBRS) confirmed the ratings of Nacional Financiera, S.N.C. (Nafin or the Bank), including the Bank’s Long-Term Issuer Rating of BBB (high) and Short-Term Issuer Rating of R-1 (low) on the Global Scale. In addition, DBRS assigned the Bank a new senior debt rating of AAA.MX on the National Scale to NAFR 210423. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
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 BBB (high) 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 acts as an agent of the state for public policy purposes.

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 (1) Mexican individuals, (2) Mexican companies and (3) 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 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. Current elections are slated for July 2017, which might result in a change in government and policy. As such, changes in investment objectives may expose Nafin to risks in certain high-priority sectors such as agriculture and energy.

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

Furthermore, any indication that support from the Mexican federal government has been reduced or is not sufficiently reliable could affect DBRS’s Support Assessment and potentially have a negative impact on the Bank’s ratings.

RATING RATIONALE
With MXN 516 billion in assets as of December 31, 2017, Nafin is one of Mexico’s largest development banks. Its primary objective is to promote economic development in the country, primarily by supporting micro, small and medium-sized enterprises (MSMEs). This is done by extending Second-Tier Loans to bank and non-bank financial institutions, which in turn lend to the private MSME sector throughout Mexico. In addition, the Bank offers First-Tier Loans to corporate borrowers involved in high-impact and -priority projects, typically in renewable energy and agriculture. With the upcoming elections in Mexico, and a potential change in government, Nafin might direct some of its credit towards other high impact sectors. However, given that any alteration to Nafin’s mission would require parliamentary approval, in DBRS’s opinion it is unlikely that a new government would implement significant changes to the Bank’s operations.

Owing to its business model of dealing with mainly corporates and other financial intermediaries, Nafin enjoys a stable base of both interest and fee income. Net interest income, primarily from First- and Second-Tier Loan assets, increased by 11% in 2017 to MXN 5.3 billion, comprising over 70% of total revenues. Net commission and fee income, which was up 5% in 2017 to MXN 2.6 billion, is mainly derived from Nafin’s guarantee programme. These guarantees typically cover over 50% of the principal on loans originated by third-party commercial lenders to MSMEs. A fee is earned on these guarantees, and losses are almost entirely covered by 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 relatively low-cost operating model, owing to the limited number of outlets, Nafin enjoys a good efficiency ratio relative to peers at 42%.

As of December 31, 2017, Second-Tier Loans formed almost 70% of the MXN 227 billion on a balance-sheet loan portfolio. Within this portfolio, the intermediary financial institutions directly approve each loan application, with the financial institution bearing the ultimate credit risk of the borrower; however, the credit supplied by Nafin enable the intermediaries to offer better terms on their loans to MSMEs. Within First-Tier Loans, around 60% of the portfolio is related to corporate borrowers, with the remainder going to fund project finance across Mexico. Asset performance is strong, with non-performing loans amounting to only 0.82% of gross loans in 2017. Loans are well-provisioned for, with allowances at 376% of non-performing loans.

Nafin funds its loan book mainly through money market deposits, which reached MXN 134 billion at YE2017. These deposits are secured through money markets, since Nafin has no direct access to retail deposits. Almost all of these deposits have a term of less than one year, creating a liquidity gap given the long-term nature of Nafin’s loans. As such, the Bank has been gradually reducing the portion of deposit funding in favour of bonds of longer maturity by issuing multiple series of Certificados Bursátiles (Cebures) through the syndicated auction mechanism available in the Mexican market. As at December 31, 2017, there was a total of MXN 58 billion outstanding in Cebures of various maturities. In addition, Nafin has MXN 41 billion outstanding from several thematic bond issuances and MXN 14 billion in certificates of deposit issued abroad, including through its London branch. DBRS considers Nafin’s liquidity to be adequate for its operations as the Bank has access to direct loans from multilateral organizations and international development banks, as well as several lines with the central bank, Banco de México.

The Bank is subject to Basel III under the Mexican Banking and Securities Commission’s (Comisión Nacional Bancaria y de Valores) supervision, with a minimum capital requirement of 10.5%. As at December 31, 2017, the capital ratio stood at 14.46% on an all-in standardized basis. Pursuant to Mexican federal income tax law, Nafin is required to pay the Mexican government a contribution (aprovechamiento), which is considered a special tax and is calculated by the Ministry of Finance, with Nafin having no control over the amount of the payout. Disbursements, which totalled MXN 550 million in 2017, are considered part of other operating expense and are thus deducted prior to calculating net income. Nevertheless, DBRS notes that, despite the yearly payout, historically the Ministry of Finance has injected capital into Nafin at times when the Bank’s capital ratios decreased to levels closer to the statutory minimums.

NEW ISSUANCES
DBRS assigned a rating of AAA.MX to the Certificados Bursátiles de Banca de Desarrollo (CD) NAFR 210423 issuance of up to MXN 7 billion. The issuance will have a tenor of 1,092 days (equivalent to approximately three years) with interest payable in two irregular payments and 37 payments of 28 days at a rate equivalent to the Interbank Equilibrium Interest Rate (TIIE) plus a surcharge which will be assigned at issuance. The principal will be repaid in a single payment at the expiration of the CD.

In addition, DBRS assigned a rating of AAA.MX to the third issuance under the NAFF 260925 CD of up to MXN 7 billion. The issuance will have a tenor of 3,068 days with a fixed interest rate of 6.20% payable in four irregular payments and 12 payments of 182 days. The principal will be repaid in a single payment at the expiration of the CD.

Both issuances combined cannot exceed MXN 7 billion.

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 methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on dbrs.com under Methodologies.

Lead Analyst: Maria-Gabriella Khoury, Vice President, Canadian Financial Institutions Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.