Banco Multipa Case

S&P affirmed Banco Multiva’s credit ratings on a national long-term scale of ‘MxA’ and short-term of ‘MxA-2’. The outlook is stable. At the same time, the credit agency affirmed their long-term rating on national scale ratings of ‘mxBBB-‘ of its issuance of subordinated debentures, and a rating of ‘mxA’ of stock certificates offered by the bank. The qualified ‘mxA’ debt is more susceptible to adverse effects of changes in circumstances or economic conditions that skilled at senior debt.

However, the payment capacity of the obligor to meet its financial commitment on long-term obligations is strong in relation to other issuers in the domestic market. The short-term debt rated at ‘mxA-2’ is slightly more susceptible to adverse changes in circumstances and economic conditions that emissions rated ‘mxA-1’. The issuer’s ability to fulfill its commitments on the obligations is satisfactory compared to other issuers in the domestic market.

Standard & Poor’s assessment of the bank’s position is moderate; derived from its low penetration is the Mexican banking system despite the strong growth recorded in recent years in terms of loan portfolio and deposits, and its high level of concentration by business lines (credit to municipalities and commercial loans). In addition, S&P’s rating consider an assessment of capital and earnings as appropriate, which reflects the support it receives from the shareholder base through capital injections and a conservative policy of re-investing profit which generates a RAC ratio projected at 7. % on average for the next 12 to 18 months.

The concentration of its loan portfolio by economic sector is considered adequate. The bank also displayed property management of maturities and short-term obligations. The stable outlook reflects S&P’s expectation that the bank maintains strong growth in its loan portfolio compared to the rest of the industry in Mexico, accompanied by an appropriate policy origination metrics to maintain stable asset quality. Overall, as per S&P, the institution has good liquidity, good asset quality, adequate capital, and its funding remains below average.

HR Ratings – February 26, 2016 As per HR Ratings, the credit agency revised Banco Multiva’s long term rating from “HR A-“ to “HR A” with a stable outlook and affirmed its short term rating of “HR2”. In addition, HR Ratings revised Banco Multiva’s Credit Risk Rating from “BBB+” to “A-“, with a stable outlook for the issuance of subordinated debentures. A rating of ‘HR A’ means the issuer or offering given this rating offers reasonable certainty for the prompt payment of debt obligations and they maintain a low credit risk under adverse economic scenarios.

A rating of ‘HR2’ indicates that the issuer or offering given this rating offers a reasonable ability to make prompt payment on short-term obligations and maintains a higher credit risk compared to instruments with a higher credit rating. A rating of ‘A-’ indicates an adequate rating in terms of credit quality for a fund and carries a credit risk similar to that for instruments with low credit risk. The upward revision of Banco Multiva’s ratings is primarily due to a significant improvement in free cash flow, derived from a lower generation of preventive estimates, given the improvement in the credit rating.

Similarly, the Bank showed good levels of liquidity coverage ratio (CCL) during 2015, closing the four quarters at levels above the regulatory minimum of 60. 0% established for that year. Moreover, the loan portfolio maintains a healthy position, reflected in low levels of delinquency. The Bank also showed adequate profitability indicators due to the increase in net income, resulting from lower generation of allowance for loan losses and higher net interest income. The Bank has more flexibility in its funding tools, decreasing its cost of funding.

However, a capitalization ratio down to 3T15, even showing a recovery at the end of 4T15 is appreciated. Finally, during the last year a strong investment was made in branches and staff, an increase in administrative expenses, pushing the index efficiency. Fitch Ratings – May 29, 2015 Fitch Ratings increased the Banco Multiva’s national counterparty risk ratings long and short term from A-’(mex)’ to A(mex)’ and ‘F2(mex)’ to ‘F1(mex)’, respectively. At the same time, it increased the rating of its bond issuance from ‘A-(mex)’ to ‘A(mex)’.

The risk ratings for Banco Multiva in regards to long and short term debt indicates two notches above investment grade. The outlook is stable. The increase in BMultiva ratings reflects the consistency in its positive financial performance, which include indicators of operating profitability on assets above 1%. The increase also includes its ability to absorb losses, as reflected in indicators of robust capital and loan loss reserves large, in light of the high concentrations in its loan portfolio, the portfolio also highlights the rate of healthy nonperforming loans, which consistently fell below 1% in the last 5 years.

Despite obvious improvements in its liquidity position, the bank still continues the challenge of reducing the maturity gap between assets and liabilities on its balance sheet. Multiva’s profitability reflect the consolidation of its business model focused on lending to sub-nationals, which represents a solid base of recurring revenue, besides showing a favorable payment behavior. This results in relatively low provision charges, benefiting Multiva’s profitability. Consistency in the positive financial performance is one of the main strengths of the bank.

In Fitch’s view, Multiva has strong capital indicators, which allow greater absorption loss compared to its closest peers. It becomes more important when considering the high concentration in its loan portfolio. The financial position of the bank has been supported not only by its ability to generate and retain profits on a recurring basis but some dependency injections resources of its shareholders, which allows the bank to sustain its rapid growth within the last 5 years.

One aspect that historically limits the quality of the bank’s assets is its high concentration by borrower, resulting from aggressive growth in loans to sub-nationals, where the expected loss is less compared to other types of financing because the source of payment is guaranteed through insurance resources flowing from the federal government (federal units). The balance of the 20 largest debtors common risk represented 7. 7X the equity at 1Q15 (2013: 7. 2X); Fitch believes this indicator is very high and compares unfavorably with its closest peers.

The company also shows a wide coverage indicators of healthy reserves and capital that mitigate these concentrations. In Fitch’s opinion, Banco Multiva could benefit in the medium term a significant decrease in the concentrations of accredited and mismatches between the maturities of its assets and liabilities. However, this is also a scenario of low probability of occurrence in the short term, since a reduction in the levels of concentration or a marked reduction in the gap liquidity require time to mature.

Therefore, the ratings could benefit from an increase in spraying on the right side of its balance sheet and practices more robust corporate governance. On the contrary, the bank’s ratings could be degraded to a sharp deterioration in its financial performance, specifically to show indicators of operating profitability on average assets consistently below 1% and/or indicators of primary capital under Fitch below 12%.