Moody's affirms BanRegio's ratings

January 21, 2011

Moody's affirms BanRegio's ratings; assigns (P)P-3 to AF BanRegio's proposed debt program expansion

Moody's Investors Service affirmed Banco Regional de Monterrey, S.A.'s (BanRegio) bank financial strength rating (BFSR) at D+ and local and foreign currency deposit ratings at Baa3/Prime-3, as well as AF BanRegio, S.A. de C.V. SOFOM E.R.'s (AF BanRegio) local currency issuer ratings at Baa3/Prime-3. At the same time, Moody's de México affirmed BanRegio's Mexican national scale deposit ratings at Aa3.mx/MX-1.

Moody's also assigned a (P)Prime-3 local currency debt rating to AF BanRegio's proposed expansion of its five-year short term debt program (programa de certificados bursátiles de corto plazo) to Mx$5 billion, from Mx$3.5 billion. In addition, Moody's de México affirmed its short term Mexican national scale debt rating at MX-1 for the program.

The outlook on all ratings is stable.

Ratings Rationale

In affirming BanRegio's D+ BFSR, Moody's noted the bank's continued ability to generate adequate core earnings, despite the still recovering economy, and its important franchise and market presence in one of the most prosperous regions of Mexico, mainly in the states of Nuevo León, Coahuila and Tamaulipas.

BanRegio's earnings generation benefits from its established franchise as a commercial lender to small and medium-size enterprises, and the stable funding base that is predominantly sourced from retail depositors, thus ensuring healthy net interest margins.

Moody's notes that the bank's past due loans have stabilized at levels that are comparable to those of its regional bank peers, while loan loss reserve coverage remains ample. Nevertheless, Moody's Assistant Vice President Felipe Carvallo mentioned that "further deterioration, especially in light of strong loan growth during 2010 and planned out-of-footprint expansion, will be closely monitored by Moody's, and any significant deterioration could place downward pressure on the ratings."

BanRegio's notable exposures to related-party loans (though within regulatory limits) and large borrower concentrations continue to be of concern for Moody's, and raise question about the robustness of the corporate governance function of the financial group.

The local currency deposit rating of Baa3 is based on the bank's baseline credit assessment of Ba1 and incorporates Moody's assessment of potential systemic support for BanRegio, in a situation of stress, thus translating into a one notch uplift. Moody's assessment of the level of systemic support incorporates BanRegio's important market shares in Mexico's northeastern region, although its national share is small at 1% of the system's deposits.

AF BanRegio is a sister leasing company of BanRegio, both under direct ownership (99.99%) of BanRegio Grupo Financiero, S.A. de C.V. (GF BanRegio). The ratings assigned to AF BanRegio are in line with those of the bank, fully incorporating group support for the leasing company through the group's main subsidiary, BanRegio.

The last rating action regarding BanRegio was on 21 July 2008, when Moody's assigned first time ratings. The last rating action regarding AF BanRegio was on 21 July 2008, when Moody's assigned first time ratings.