Fitch Affirms Unifin's IDRs at 'BB'; Outlook Stable

Fitch Ratings has affirmed the Long- and Short-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Unifin Financiera, S.A.B. de C.V. Sofom E.N.R. (Unifin) at 'BB'/'B'. The Long- and Short-Term National Scale ratings were also affirmed at 'A(mex)'/'F1(mex)'. The Rating Outlook on the Long-Term ratings is Stable.

KEY RATING DRIVERS

IDRs, National Scale and Senior Unsecured Debt ratings

Unifin's ratings reflect its moderately sized franchise in the financial sector and its sound national market position in leasing. It also reflects its business know-how and robust legal resources for collection purposes which have allowed it to consistently generate earnings and maintain adequate asset quality under sustained expansion and ambitious targets. Unifin's ratings also consider its enhanced capitalization due to last year IPO, although this is gradually decreasing due to accelerated loan growth. In addition, Unifin's ratings also factor in its aggressive growth and high business concentration, as well as the company's improved but still concentrated securitizations funding profile.

Unifin is the national leader for specialized independent (i.e. not related to a banking-holding company) leasing in Mexico and still holds third place within the total leasing sector. Fitch believes that Unifin's growth targets are aggressive. Its loan portfolio has grown more than 172x over the last 14 years and this trend in growth is expected to continue for the next few years.

Unifin's ample expertise drives its strong ability to consistently generate earnings through economic cycle. Over the past four years, pre-tax income-to-average assets averaged 5.4% and 50% of return on equity (ROE). As of March 2016, pre-tax income-to-average assets and ROE were 4.8% and 29.5%, respectively. The entity's good financial results are driven by controlled operational expenses and its reasonable interest margins due to loan portfolio growth, controlled funding costs and its business focus on SMEs. However, Fitch considers Unifin's profits as somewhat overestimated because of its low reserve coverage relative to other institutions.

Unifin's asset quality is adequate and has had reasonable non-performing loans (NPLs) levels, almost no charge-offs and low levels of foreclosed assets. However, it still exhibits limited reserve coverage. In Fitch's view, Unifin's adherence to its credit policy, adequate collection practices, ownership of the leased assets and the solid legal methods to recover them ensure no material deterioration of its asset quality. Under Fitch's metrics, the NPL ratio (NPLs at 90-days overdue plus the remaining contractual rents) averaged around 3.8% in the past three years (March 2016: 3.6%) with loan loss reserve coverage of less than 25%.

Concentration per client relative to capital has improved as a result of last year's IPO. Recent capital enhancement reduced the relative importance of the top 20 obligors with respect to equity; these obligors represented 0.90x Unifin's total equity as of March 2016 (March 2015: 1.8x). However, concentration by client continues to be exacerbated by the low loan loss reserve cushion, which does not even cover the main debtor.

Unifin's recent IPO strengthened its leverage and capitalization. As of March 2016, the tangible capital-to-tangible assets ratio stood at 10.7%, up from levels around 5% pre-IPO. Unifin's leverage indicators (with recourse to Unifin) measured as debt excluding securitizations-to-tangible equity reached 3.2x at the same date compared to levels of 8x-10x in the years pre-IPO. Total leverage ratio was 5.7x. The recent IPO alleviated some pressures the company had in terms of capitalization; however, we believe that Unifin's challenge is to maintain healthy levels of capitalization because of its aggressive expected growth and limited loan loss reserves.

Unifin has diversified its funding sources over the past years; however, in Fitch's view it still holds important concentrations in market debt issuances. Unifin is heavily reliant on wholesale debt through local debt issuances via securitizations and international bonds (69% of its total interest-bearing liabilities) and the company has proven stability in the debt markets since 2006.

In addition, Unifin has access to national and international development banks and commercial bank facilities. Fitch believes Unfin's business model will continue favoring securitization as the main funding source. As a result of its global debt issuance Unifin increased the average maturity of its financial liabilities and improved its liquidity profile, thereby reducing its tenor mismatches. This partially mitigates refinancing risk arising from the entity's high reliance on market securitizations, its aggressive asset growth plans and the bullet nature of most of its market-driven funding. The latter is also partially offset by the flexibility provided by the current portfolio securitizations.

RATING SENSITIVITIES

IDRs, National Scale and Senior Unsecured Debt ratings

Unifin's ratings could be downgraded in the event of a consistent weakening of its leverage and capitalization. Specifically, under a scenario of a sustained total debt-to-tangible equity ratio above 7x and/or a capital-to-assets ratio adjusted by the unreserved portion of the impaired portfolio (as calculated by Fitch) below 11.5%. Downside potential could also arise from a material deterioration of asset quality metrics or risk concentrations (top 20 concentrations above 2.0x equity).

In turn, controlled growth accompanied by risk diversification and consistent financial performance could benefit Unifin's ratings. Specifically, the ratings could be upgraded if leverage reaches and remains at levels consistently below 5x and/or its tangible equity-to-tangible asset ratios are sustained over 10%. Additional improvements in Unifin's funding profile (i.e. diversification, length and staggering of debt maturities), as well as top 20 concentrations consistently below 1x company's equity could be positive for the ratings.

Fitch has affirmed the following:

--Long-Term Foreign and Local currency IDRs at 'BB';

--Short-Term Foreign and Local currency IDRs at 'B';

--National Scale Long-Term rating at 'A(mex)';

--National Scale Short-Term rating at 'F1(mex)';

--Long-Term senior unsecured notes at 'BB'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Adjustment to Financial Statements: Pre-paid expenses were re-classified as intangibles and deducted from Tangible Equity.

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

National Scale Ratings Criteria (pub. 30 Oct 2013)

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008010

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008010

Endorsement Policy

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

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