Fitch Affirms Financiera Independencia's IDRs at 'BB-'; Downgrades National Ratings

MONTERREY, Mexico--(BUSINESS WIRE)--

Fitch Ratings has affirmed Financiera Independencia's (FINDEP) long-term Issuer Default Ratings (IDRs) at 'BB-'. Fitch has also downgraded FINDEP's long- and short-term national scale ratings and local debt issues. A full list of rating actions follows at the end of this release.

The Rating Outlook for all of FINDEP's long-term ratings is Stable.

Fitch believes FINDEP's financial condition remains consistent with a 'BB-' IDR, given its robust franchise in the consumer finance sector, ample liquidity and adequate funding profile. However, rebuilding core capital following the 2011 acquisitions of Apoyo Economico Familiar (AEF) and Apoyo Financiero Incorporated (AFI) has been slower than Fitch expected. This resulted from lower profitability driven by higher average funding cost observed due to issuance of the senior unsecured global notes in 2010, as well as its loan impairment charges. The confluence of these factors underpins the one notch downgrade of the national scale long-term and short-term ratings to 'A-(mex)' from 'A(mex)' and to 'F2(mex)' from 'F1(mex)', respectively.

FINDEP's IDRs and national-scale ratings could be negatively affected if the company fails to stabilize credit costs and asset quality metrics at levels that are closer to historical records and/or if the process of rebuilding core capital levels does not speed up in 2012. Negative rating actions could also occur if FINDEP's currently weak financial condition negatively affects its medium-term funding profile.

Fitch considers that the upside potential for FINDEP's ratings is currently limited, but positive rating actions could arise in the medium term if the company materially improves its core capital position and profitability closer to the levels recorded before the recent acquisitions.

Historically, FINDEP had reported strong capital levels that were consistent with its retail risk profile and rating level. However its adjusted capital ratios (excluding intangible assets, primarily goodwill in this case) declined from roughly 27% at end-2010 to 13.4% as of December 2011. This was exacerbated by the aforementioned acquisitions, given the proposed terms of the transactions (all cash) and the goodwill arising, as well as the lower profitability due to the increasing loan impairment charges and funding cost mentioned before.

Fitch views favorably management's 2H'11 decision to suspend dividends in 2012 related to the 2011 period as a strategy to enhance capital accumulation. However, core capital ratios will only recover gradually and are expected to reach the twenties over the next three years, considering the relatively conservative earnings projections over that period. Fitch believes projected capital ratios remain consistent with FINDEP's risk profile, especially under a scenario of full earnings retention, but enhancing core profitability and stabilizing asset quality metrics are also crucial.

While these factors negatively affected Fitch's expectation of a relatively rapid rebuild of its capital adequacy metrics, Fitch views positively FINDEP's sound liquidity and funding profile. This is a major strength for FINDEP that largely sustains its rating level. FINDEP and its subsidiaries have access to a relatively ample and increasing amount of bank facilities. Moreover, there is a positive maturity gap among assets and liabilities that is key mitigating factor regarding refinancing risk.

In addition, FINDEP has accessed the local debt market, and it placed USD$200 million of five-year senior unsecured global notes in 2010. The company's cushion of liquid assets is reasonable, and the high turnover of its loan portfolio is another major source of liquidity, if needed. Nonetheless, FINDEP is challenged to roll over a significant amount of credit lines over the next 24 months at terms that prove positive for the company's earnings prospects.

Common to other consumer finance entities, wide margins are the key driver of FINDEP's earnings. An ample business scale underpins reasonable efficiency metrics, allowing FINDEP to absorb consistently high credit costs and still delivering strong profitability metrics until 2010. However, a confluence of negative factors constrained earnings in 2011, as increasing credit losses (loan impairment charges to average gross loans from 18.4% in 2010 to 20.5% in 2011) and interest expenses increased 45.6% last year. In addition, certain non-recurring expenses occurred which were associated with technology, personnel and improving internal processes, largely driven by the recent acquisitions. However, Fitch expects a gradual recovery from these various factors during 2012 and 2013.

Historically, the consolidated impairment ratio has been roughly 10%, but it climbed to roughly 12% during the recent economic downturn. Net charge-offs have also been high, roughly 17% of average loans in 2011, while its reserves coverage of impaired loans were still a moderate 76.4% (2010: 65.9%).

Fitch has taken the following ratings actions:

FINDEP:

--Long-term foreign and local currency IDRs affirmed at 'BB-';

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

--US$200 million senior unsecured notes due 2015 affirmed at 'BB-';

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

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

--National-scale long-term rating for local issues of senior unsecured debt downgraded to 'A-(mex)'at from 'A(mex)'.

The Rating Outlook is Stable.

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.

--'Global Financial Institutions Rating Criteria', dated Aug. 16, 2011;

--'National Ratings Criteria', dated Jan. 19, 2011;

--'Finance and Leasing Companies Criteria', dated Dec. 12, 2011.

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659834

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