Fitch Assigns 'BB+' L-T IDR to Credito Real

MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has assigned foreign and local currency long-term Issuer Default Ratings (IDRs) of 'BB+' and short-term IDRs of 'B' to Credito Real S.A.B. de C.V. Sofom, E.R., (Credito Real). Fitch also assigned national long- and short-term ratings at 'A+(mex)' and 'F1(mex)', respectively. The long-term Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

IDRS, NATIONAL RATINGS AND SENIOR DEBT

Credito Real's IDRs, national and senior debt ratings reflect its moderate franchise in Mexico's financial market, its well-proven business model and gradual diversification of its loan portfolio to segments different than payroll loans. The ratings also consider the company's recurring and sustained profitability ratios that underpin its adequate capitalization metrics, amid a high growth strategy, and contained impaired loan ratios that compare favorably against its closest peers. The ratings are limited by the risk of entry into new businesses and countries, by the wholesale nature of its funding base and the important concentrations of its debt maturities, as well as by the political and operational risks which are inherent to the payroll loans segment in Mexico.

Credito Real is the market leader in the payroll loans segment and has an adequate franchise in its other key business lines. Fitch estimates it has more than 30% of market share in the payroll segment, based on publicly available information.

Its business model differentiates from its competitors' in that it centralizes the credit analysis, funding strategies and administrative processes of its different business lines but relies on subsidiaries and strategic partners for loan origination (sales force), while keeping interests aligned through the sharing of both income and risk. This business model has proven to work in its different business lines and throughout the economic cycle. Nevertheless, in Fitch's opinion, other than traditional credit risks, Credito Real is exposed to operational, political, and event risk. Failure to properly implement the agreements with employers or unwillingness from public entities to timely and fully disburse collections, changes in political leadership, and other potential risk factors.

Payroll constitutes the company's core product; however, the participation of other lines in its business mix has increased gradually as a result of aggressive organic and inorganic growth. As of December 2015, payroll loans represented 74% of gross loans, down from 80% in 2012; Credito Real estimates its participation will stabilize at around 50% of the loan portfolio in the long-run, while used car loans, SME loans and other businesses will experience high double digit growth. In Fitch's opinion, Credito Real has effectively started to diversify its income sources, and this compares positively with other participants in the niche.

Although Fitch considers there are some inherent risks from entering new business and countries; the entity has proven to be capable of maintaining economic links with previous owners in order to ensure that their experience and track record continue benefiting the performance of the acquired companies. The recent acquisition of Instacredit with presence in Central American countries (mainly Costa Rica) will represent approximately 14% of the total loan portfolio, which Fitch deems relevant.

Credito Real has grown aggressively, both organically and inorganically over the past few years. Fitch views the company's aggressive growth strategy through acquisitions of local and foreign subsidiaries as indicative of above average risk appetite. Nevertheless, in Fitch's opinion, this is mitigated by its risk-based pricing and the employment of adequate risk controls that have proven to maintain contained asset quality metrics despite significant growth and entry into new businesses.

Credito Real's financial performance is sound and one of its main strengths. Operating ROA and ROE stood at 8% and 29.8%, respectively in 2015 (2012-2014 average: 8.9% and 31.2%). Profitability ratios have been consistent and stable during recent years mainly due to a growing loan portfolio base, ample interest margins and well managed credit and operational costs. Credito Real's efficiency ratio (operating expenses/net revenue) deteriorated moderately in 2015 with an increase to 35.5% from 26.6% in 2014 primarily because of the recent full consolidation of a subsidiary. Nevertheless, Fitch views this level as adequate and favorably comparable to other NBFIs as it benefits from a large business scale.

Credito Real's asset quality metrics compare favourably to its peers as it benefits from its concentration in federal level government entities that centralize payments through the Tesoreria de la Federacion (Tesofe) or that are more operationally efficient than others and from its income/risk sharing agreement with its distributors.

Non-Performing Loans represented 2.4% of gross loans, while the impaired loans ratio adjusted by gross charge-offs stood at an adequate 4.3% in 2015, in line with its 2012-2013 average of 4.5%, and below that of its peers in the payroll segment in Mexico. However, given that Credito Real owns an equity stake in its most relevant distributors, it is exposed to this risk indirectly through a lower contribution of its investment in associates account in the income statement. For this reason, Fitch calculates an impaired loan ratio adjusted for the amounts owed by distributors. This adjusted ratio stood at 4.8% as of December 2015 and at 6.6% if last-12 month charge-offs are considered. In Fitch's opinion, the fact that distributors are jointly liable for the loan portfolio they originate has proven an effective mechanism to contain the deterioration of the loan portfolio. In addition, loan loss reserves remain strong.

The company's capitalization metrics are adequate considering its concentration in low and middle income segments of the population and its above average risk appetite reflected in its aggressive growth strategy. As of December 2015, its tangible common equity ratio stood at 17.3%, down from the 24.1% average registered during 2012-2013. Credito Real targets to maintain a debt to equity ratio below 4x. As of December 2015, it stood at 2.6x, while its debt to tangible equity ratio stood at 4.3x. Leverage will increase when the company consolidates the acquisition of Instacredit but will remain at a level commensurate with its rating.

Credito Real's legal figure does not enable it to take deposits from the public; for this reason, its funding base is concentrated in wholesale sources. Nevertheless, Fitch recognizes that the company's funding profile compares favourably to other rated NBFIs in terms of the number and diversity of funding providers that include local and international commercial banks, local development banks, as well as local and international bond issuances. Asset encumbrance is low as only 10% of its funding mix corresponds to collateralized credit lines.

The concentration of the maturities of its funding lines as of December 2015 was high with 38% maturing in 2016; this, coupled with the syndicated credit line used to acquire Instacredit, concentrates debt maturities in the following two years. In Fitch's opinion, refinancing risk is moderate considering the concentration of Credito Real's maturity schedule in 2016 and 2019 and the current volatility in global markets. However, its positive maturity gaps that benefit from a loan portfolio with an average tenor of 1.7 years financed with debt with average maturity of two years largely mitigates this risk. As of April 2016, the company had refinanced roughly half of the maturities scheduled in 2016.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND SENIOR DEBT

Fitch could upgrade Credito Real's ratings in the medium term if the company is able to diversify its loan portfolio and maintain strong financial performance. This would be reflected in an operating ROA consistently above 8% and an internal capital generation that is sufficient to maintain its tangible common equity ratio above 15% with loan loss reserves covering at least 100% of impaired loans. At the same time, Credito Real must maintain adequate asset and liability management as reflected in positive liquidity gaps.

A deterioration of asset quality metrics that decrease operating ROA and tangible common equity ratio below 4% and 12%, respectively, could adversely affect ratings. A negative rating action could also result from pressure on tangible common equity from goodwill derived of future acquisitions, increased unhedged exposure to foreign currency debt and a deterioration of its liquidity position.

Fitch has assigned the following ratings:

Credito Real S.A.B. de C.V. Sofom, E.R.

--Long-term Foreign Currency IDR 'BB+';

--Short-term Foreign Currency IDR 'B';

--Long-term Local Currency IDR 'BB+';

--Short-term Local Currency IDR 'B';

--National long-term rating 'A+(mex)';

--National short-term rating 'F1(mex)'.

--National long-term rating for senior unsecured local notes 'A+(mex)'.

Summary of Financial Statement Adjustments: Pre-paid expenses were reclassified as other intangibles and deducted from Fitch Core Capital. Results from investments in associates were reclassified as operating. No other relevant adjustments were made.

Date of relevant rating committee: April 22, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Metodología de Calificaciones Nacionales (pub. 13 Dec 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=727099

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003357

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003357

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160426006979/en/

Fitch Ratings
Primary Analyst
Alba Maria Zavala, CFA
Associate Director
+52 81 83 99 9137
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612,
Monterrey, N.L. Mexico
or
Secondary Analyst
Veroonica Chau
Senior Director
+52 81 83 99 9169
or
Committee Chairperson
Alejandro Garcia, CFA
Managing Director
+52 81 83 99 9146
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
[email protected]

Source: Fitch Ratings

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