MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has affirmed Consupago, S.A. de C.V.'s (Consupago) ratings as follows:
--Long-term foreign currency Issuer Default Rating (IDR) at 'BB-';
--Short-term foreign currency IDR at 'B';
--Long-term local currency IDR at 'BB-';
--Short-term local currency IDR at 'B';
--Senior unsecured debt for up to MX$750 million at 'BB-';
--Long-term national-scale rating at 'A-(mex)';
--Short-term national-scale rating at 'F2(mex)';
--Short-term national-scale rating for local MX$1,000 million senior unsecured debt at 'F2(mex)'.
--Long-term national-scale rating for local MX$500 million senior unsecured debt at 'A-(mex)' from a long-term unsecured debt of MX$2,000 million.
The Rating Outlook is Stable.
Consupago's ratings are driven by its strong capitalization; sound and recurring profitability driven by ample margins, well-contained provisions and strong efficiency levels; and adequate asset quality and loan loss reserve coverage. However, the ratings also factor in the limited flexibility of its funding structure, the challenging operating and competitive environment, and portfolio concentrations by region and employer.
Material improvements on the profile, diversification and flexibility of Consupago's funding mix, coupled with smaller asset liability tenor mismatches, could potentially trigger a revision of Consupago's ratings; nevertheless, Consupago's ratings could be downgraded if core or tangible common capital falls below 20% of total assets, and/or if asset quality weakens to an extent that materially diminishes its loss absorption capacity, and/or if core earnings decline materially (operative ROA below 5%).
Consupago grants loans to public sector employees that explicitly agree to repay those loans through direct payroll debits, largely mitigating credit risk. These jobs are typically stable, but the relatively lower salaries in the public sector mean few financing alternatives for these individuals, which explain the relatively high interest rates. Unlike most peers, Consupago's businesses are primarily direct, avoiding heavy broker-related fees. However, operational, reputational and event risks could be material.
Strong and recurring net interest margin (NIM) of 49.9% and sound efficiency of 31.5% as of June 2012, are major drivers of sound and ample core earnings. Some pressure has arisen from a more challenging environment, increasing competition and higher expenses driven by its soon conversion into a bank. Fitch considers that Consupago will likely maintain robust earnings, comfortably absorbing its high credit costs.
Given the payroll deduction mechanism, overall impairments, provisions and charge-offs are relatively moderate. The negative recent trends are driven by lower charge-offs and a tough economic environment. Loans are diversified by borrower, although certain concentrations by regions and employers remain. A gradually enhanced credit process in recent years and ample loan loss reserves are additional mitigating factors for credit risk. Consupago further strengthened its risk management framework while migrating into a bank.
Given its exceptionally high profitability and the slowdown in loan growth in recent years, the capital base is ample and has continued growing steadily. Even after adjusting for certain non-core assets; Fitch's measurement of core capital remained at a robust 44.3% of total assets as of June 2012. Sound capital is one of Consupago's key strengths.
In Fitch's opinion, improving its funding structure is one of Consupago's major challenges. While liquidity is comfortable and sustained by ample and recurring portfolio cash flows, the funding base is concentrated in a few secured banking facilities, as well as unsecured local and global debt issues that have shorter tenors than its loan portfolio. While Consupago does not plan to materially change its business profile following its conversion into a bank, Fitch expects a gradual improvement on its funding profile.
Despite its conversion into a bank, Consupago will focus on the current business model, as it does not plan in the near future to expand its array of financial products or attend different sectors, neither developing a network of bank branches, while its funding sourced from customer deposits will be moderate. Given the small size of the banking entity into which Consupago's activities will be transferred, Fitch does not expect a material change on the company's financial profile or performance upon its completion.
While credit risk is low, Fitch considers that Consupago's exposure to operational, political and event risk is somewhat higher, like most companies in this market. These are related to the properly execution of the agreements with employers, and potential unwillingness or inability from the latter to timely or fully disburse retained collections.
Consupago was established in 2001 and it was initially conceived as the financial channel for the sales of home appliances at Tiendas Chedraui, one of the largest retailers of furniture, clothes and durable goods in Mexico. In 2003, it entered into a new business line, personal loans exclusively for public-sector employees with cash collections through payroll deduction made by the employer, which rapidly turned into Consupago's core business and the company has consolidated as one of the leading institutions in this market.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
-- 'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
-- 'National Ratings Criteria' (Jan. 19, 2011);
-- 'Finance and Leasing Companies Criteria' (Dec. 12, 2011).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
National Ratings Criteria
Finance and Leasing Companies Criteria
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
Alejandro Pequeno, +52 81 8399 9145
Fitch Mexico SA de CV
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
Alejandro Garcia, CFA, +52 81 8399 9146
Franklin Santarelli, +1-212-908-0739
Source: Fitch Ratings