Fitch Ratings has affirmed Banco del Bajio S.A. Institucion de Banca Multiple's (BanBajio) Viability Rating (VR) at 'bb+' and its Long- and Short-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+' and 'B', respectively.

Fitch has affirmed BanBajio's Government Support Rating (GSR) at 'bb-'.

Fitch has also affirmed BanBajio's and Financiera Bajio, S.A. de C.V. Sofom E.R.'s (FIBA) Long- and Short-Term National scale ratings at 'AA(mex)' and 'F1+(mex)', respectively. The Rating Outlook on the Long-Term ratings is Stable.

Fitch revised its assessment of the trend for the operating environment scored at 'bb+' for Mexican banks to 'Stable' from 'Negative'. Fitch believe banks will face downside risks once again in 2023 due to decelerating economic growth and high inflation; however, we expect bank performance to remain resilient and, most banks' core metrics have sufficient headroom to face these risks.

Key Rating Drivers

Good Credit Profile: BanBajio's IDRs and VR are driven by the bank's well-recognized regional market position and by its business model with specialization in the agribusiness and SME segments, which has consistently generated profitability through economic cycles. BanBajio's national scale ratings are relative rankings of creditworthiness within Mexico's jurisdiction and reflect the bank's good market position in the country's banking industry as well as its good and resilient financial performance.

Solid Regional Market Position: BanBajio's business profile assessment incorporates its strong market position in the Bajio region (35.7% of total loans) and that in recent years it has increasingly diversified its footprint across different Mexican States. The evaluation also considers the bank's well-recognized market position in the agribusiness and SME segments that have generated some pricing power and stability to its income generation through economic cycles. However, BanBajio's diversification continues to lag behind the major domestic banks in terms of credit segments and geography.

Well-Managed Risk Profile: Fitch view's BanBajio's risk profile as moderate, with conservative underwriting standards in its loan and investment portfolio, as well as adequate risk controls that are commensurate with its business profile.

Asset Quality Remains Controlled: Fitch expects BanBajio to maintain a non-performing loans (NPLs) ratio at healthy levels supported by adequate underwriting standards, as well as good reserves, collateral and government guarantees. Even though the bank's loan portfolio is more vulnerable than the major banks because of its higher loans to SMEs and individual borrower concentrations, its delinquency ratios compare better.

Fitch expects any asset-quality deterioration due to the challenging OE to be modest with sufficient headroom to remain consistent with its rating. As of September 2022, the NPLs to total loans ratio was 1.2%, well below the 2.3% average reported in August 2022 by the seven largest Mexican banks, while the reserve coverage of impaired loans remains adequate at 183.5%.

Profitability Sustains Recovery: BanBajio's profitability continues to recover, driven by higher margins, low loan provisions, and operating efficiency. The bank's operating profit to risk-weighted assets (RWA) of 4.6% as of September 2022, is significantly up from 3.1% in YE21. Fitch expects the bank to maintains the improved metrics, but it will depend on credit growth, the maintenance of a net interest margin benefitted by interest rates and better access to lower costs of funding, and provided there are no significant negative pressures on asset quality.

Adequate Capitalization: BanBajio maintains good loss absorption capacity, as reflected by its CET1 to RWA ratio of 14.8%, and loan loss allowances to past-due loans of 183.5%. Although the core metric has tightened due to dividend payments (2018-2021: CET1 ratio average 17.0%), Fitch expects the CET1 ratio to remain consistent with its ratings and national peers, underpinned by improved earnings generation that should offset dividend payments and credit expansion.

Stable Funding and Liquidity: BanBajio's loans-to-customer deposits ratio slightly improved to 104.9% as of September 2022, which is below pre-pandemic levels but still higher than the largest local banks' ratios. The bank has effectively made improvements in its funding base, which has led to lower funding costs and will support profitability as interest rates rise. The bank's liquidity coverage and net stable funding ratios of 138.4% and 115.8%, respectively, as of September 2022 were stable and comfortably above the 100% regulatory requirement.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

BanBajio's IDRs, VR and National Ratings could be downgraded due to a material deterioration of its financial performance that leads to a sustained decline in a CET1 ratio below 13% and operating profit to RWAs ratio below 2%.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

BanBajio's IDRs, VR and National Ratings could be upgraded by the confluence of an improvement of the OE and the credit profile of the bank. Specifically, if the bank significantly enhances its market position while continuing to diversify its business model, maintains a healthy financial profile and improves its capital metrics to 20%.

Government Support Rating (GSR): BanBajio's 'bb-' GSR reflects Fitch's expectation that although the bank is not a domestic systemically important bank (D-SIB) there is moderate probability of sovereign support in case of need, given the bank's mid-size franchise and moderate market share of core customer deposits. As of August 2022, BanBajio's deposits were around 2.6% of the Mexican banking system.

BanBajio's GSR could be downgraded if Fitch believes that the government's propensity to support the bank has declined due to reasons such as a material loss in the market share of retail customer deposits. An upgrade of BanBajio's GSR is limited and could only occur over time with a material gain in the bank's systemic importance.

SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS

Core Subsidiary for BanBajio: The national ratings of FIBA are aligned with BanBajio's national ratings, based on Fitch's institutional support assessment that the subsidiary is core to the bank's strategy due to its relevant role in providing core products such as factoring and leasing, which complement the bank's offering.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

FIBA 's national ratings would mirror any movement on BanBajio's ratings. A modification of the entity's strategic importance to the bank could negative affect FIBA's ratings.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

Summary of Financial Adjustments

Fitch classified pre-paid expenses and other deferred assets as intangibles and deducted them from total equity due to their low loss absorption capacity.

Sources of Information

The principal sources of information used in the analysis are described in the Applicable Criteria.

Financial statements are in accordance with the local banking regulator's (Comision Nacional Bancario de Valores) criteria. 3Q22 statements include recent accounting changes related to the convergence with International Financial Reporting Standards (IFRS). Prior years did not include this change, and Fitch believes they are not directly comparable.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg

(C) 2022 Electronic News Publishing, source ENP Newswire