Fitch Upgrades Banca Mifel's IDRs to 'BB'; Outlook Stable

Fitch Ratings has upgraded Banca Mifel's (Mifel) Viability Rating (VR) to 'bb' from 'bb-', and its long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB' from 'BB-'. The short-term foreign and local currency ratings were affirmed at 'B'. The long- and short-term National scale ratings of Mifel were also upgraded to 'A(mex)' from 'A-(mex)' and to 'F1(mex)' from 'F2(mex)', respectively. The long-term Rating Outlook is Stable.

Mifel's Support Rating was affirmed at '5' and Support Rating Floor at 'NF'. The bank's global subordinated debt was upgraded to 'B+' from 'B'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

VR, IDRs AND NATIONAL SCALE RATINGS

The upgrade of Mifel's ratings reflects the bank's recently improved profitability metrics driven by higher margins (interest margin slightly above 4% of average earning assets in the first quarter of 2015, compared to an average of 2.6% during the 2011-2014 period) and well contained credit costs.

Despite the higher expenses associated with the changes on the business model, Mifel has been able to revert this effect reaching operating efficiency ratios roughly at 50%. Fitch expects that the recently improved profitability metrics to be sustainable, and will continue to enhance the bank's internal capital generation.

The ratings are driven as well by its gradually improved asset quality metrics through lower impairments and a higher reserve coverage ratio (1.37% and 99.4% in the first quarter of 2015 [1Q15}, respectively), but still high concentrations among Mifel's main creditors, together with geographic concentrations. However, these have been gradually easing in recent periods due to the growth in mortgage loans.

Its adequate and relative stable funding base is also considered, it is benefitted from a well-positioned customer deposit base that has proven steady and recurring through the years. Mifel's constrained liquidity and somehow deteriorated loans to deposit ratio are rating factors where the bank still has important room for improvement, according to Fitch.

The bank's stable capital base is also considered, although it compares unfavorably against it closest local peers. Mifel's Fitch core capital stood at 9.43% in 1Q15, proving stability around 9% despite high loan growth in recent years. The bank's capital position has been supported by capital injections and recently by its improved profitability.

Fitch considers that the bank would be able to maintain these capitalization metrics through an enhanced internal capital generation and growth based in lower risk-weighted assets as mortgage loans. Currently, Mifel is expecting a new capital injection but since this has not yet been received, Fitch has not factored in the potential positive benefits.

SUPPORT RATING AND SUPPORT RATING FLOOR

Mifel's Support Rating and Support Rating Floor were affirmed at '5' and 'NF', respectively, in view of the bank's low systemic importance, indicating that, although possible, external support cannot be relied upon.

SUBORDINATED DEBT

The bank's global subordinated securities were also upgraded to 'B+' from 'B', two notches below the applicable anchor rating, Mifel's VR of 'bb'. The ratings are driven by Fitch's approach to factoring certain degrees of subordination. Similar securities would typically be two notches lower for non-performance risk and an additional notch lower for loss severity. However, in the case of Mifel, the overall notching is limited to two notches, due to compression considerations (as per Fitch's existing criteria).

The notching factor in its non-performance risk (-1) since Fitch considers that the triggers for coupon deferrals or cancellations are relatively high, according to applicable local regulations; and an additional (-1) for loss severity that reflects these securities are plain-vanilla subordinated debt (subordinated preferred, under the local terminology).

This issue receives no equity credit under Fitch's approach, since these are dates securities without a loss absorbing feature that triggers before the point of non-viability.

RATING SENSITIVITIES

VR, IDRS AND NATIONAL SCALE RATINGS

Mifel's ratings could be affected negatively if the improving trends in overall profitability and asset quality are not sustained. Fitch considers that these ratings could be downgraded if operating ROA returns to levels below 1% consistently and/or if Fitch's core capital is not sustained at least at 9%. Material deteriorations of its asset quality metrics and additional pressures of its liquidity profile could trigger a downgrade the bank's ratings. In turn, the bank's ratings could be upgraded in the medium term by material and sustained improvements of its funding profile and overall profitability, together with material reductions in its loans concentration.

SUPPORT RATING AND SUPPORT RATING FLOOR

A potential upgrade of Mifel's Support Rating and Support Rating Floor is limited at present, since external support cannot be relied upon, although it is possible.

SUBORDINATED DEBT

The bank's subordinated debt ratings will likely mirror any change in the bank's VR, as this issue rating is expected to maintain the same relativity to Mifel's credit rating, while the bank's VR is at a sub-investment grade level.

The rating actions are as follows:

Banca Mifel, S.A.:

Fitch has upgraded the following ratings:

--Long-term foreign and local currency IDRs to 'BB' from 'BB-'; Outlook Stable;

--Viability rating to 'bb' from 'bb-';

--National-scale long-term rating to 'A(mex)' from 'A-(mex)'; Outlook Stable;

--National-scale short-term rating to 'F1(mex) from 'F2(mex)'.

--Long-term cumulative subordinated preferred notes to 'B+' from 'B'.

Fitch has affirmed the following ratings:

--Short-term foreign and local currency IDRs at 'B';

--Support rating at '5';

--Support rating floor at 'NF'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985561

Endorsement Policy

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

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