Fitch Ratings – Monterrey – 09 Jun 2020: Fitch Ratings has affirmed MMG Bank Corporation’s (MMG) Long-and Short-Term Issuer Default Rating (IDR) at ‘BBB-‘ and ‘F3’, respectively. In addition, MMG’s Viability Rating (VR) has been affirmed at ‘bbb-‘. The Rating Outlook on the Long-Term IDR is Negative. Fitch also affirmed the bank’s Long-Term National Rating with a Stable Outlook.
The IDR’s Negative Outlook is mirroring the Negative Outlook of the sovereign but mainly reflects the deteriorating operating environment in Panama for the banking system, which is expected to drive the bank’s financial profile deterioration over the medium term due to the disruption of economic activity and financial markets from the coronavirus pandemic in Panama.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR UNSECURED DEBT
MMG’s IDRs, national and senior unsecured debt ratings are driven by its intrinsic creditworthiness, reflected in its VR. The bank’s VR is highly influenced by the operating environment, its company profile and a risk appetite. MMG´s VR also considers its asset quality, profitability and capitalization metrics, which are strong and in line with its current rating category.
MMG´s financial profile analysis incorporates the combined approach of the non-bank criteria for Traditional Investment Manager since this business line is one of the main income and risk generators. As of December 2019, the business lines related to asset management, brokerage services and investment banking represented 27% of the bank´s total net revenue.
MMG is a niche bank focusing on asset management and commercial lending, and serving a segment composed of high-net-worth individuals, as well as institutional clients. MMG has a limited franchise within the Panamanian banking system in terms of market share; however, Fitch recognizes that its franchise related to asset management is relevant; although, it has recently faced a more intense competition. As of March 2020, MMG is the sixth largest asset manager in Panama in terms of assets under management (AUM) and the fourth largest participant on the Panama Stock Exchange primary and secondary markets by business volume.
MMG’s asset quality is credit strength and remained consistent with its ratings; however, in Fitch view, it could face pressure over the near to medium term mainly from the securities portfolio invested in Panamanian issuers (18% of total assets). As of December 2019, the bank presented a core metric, impaired loans to gross loans, of nearly 0%, while its investment portfolio, mostly invested in fixed-income securities, is made up of around 61% investment-grade financial instruments.
The bank’s profitability remains strong relative to peers, benefited by the low loan impairment charges and a better operational efficiency than peers. As of December 2019, the Fitch Core Metric, Operating Profit to Risk Weighted Assets (RWA), was at a high 5.7%. While the EBITDA to fee revenue ratio remains high, it stood above 50%. Under the current challenging scenario, Fitch expects MMG to face pressures on its profitability.
The bank’s capitalization levels remain ample compared to peers. The core metric, Common Equity Tier 1 Capital Ratio (CET1), was at a high 23.7% as of December 2019. Fitch expects that CET1 would face pressure under the current crisis due to a lower net income generation as well as potential non-realized losses from the investment portfolio; however, it will continue to be commensurate with the current Fitch capitalization assessment.
Customer deposits have been decreasing and continue to be the main source of funding. As of December 2019, these deposits represented 91% of total funding. Historically, the customer deposits structure has been moderately concentrated. The loans over customer deposits ratio continued its increasing trend. As of December 2019, this metric was 61.1%, and the EBITDA to interest expense ratio was 4.3x.
MMG´s local short-term debt issuances are rated at the same level as the bank’s rating of ‘F1+(pan)’ as the likelihood of default of the debt issuances is the same as the one of the bank.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating (SR) of ‘5’ and the Support Rating Floor (SRF) of ‘NF’ reflect that, however possible, external support for MMG cannot be relied upon given Panama’s longstanding dollarized economy and lack of a lender of last resort.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRs, VR and National Scale Rating
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–MMG’s IDRs are sensitive to changes in the Panama’s operating environment. Negative changes in the bank’s IDRs and VR would mirror any movement in Fitch assessment of the operating environment;
–A prolonged and severe economic disruption from the coronavirus pandemic could lead to a lower operating environment score for Panama’s banks, which would pressure the MMG’s VR and National Ratings;
–Any unfavorable change in the bank’s asset quality, or substantial losses derived from its assets under management that lead to a materialization of the reputational risk such that affect negatively the different business lines, could lead to a downgrade of the ratings. Material and sustained deterioration in earnings generation capacity or capitalization to levels in Fitch core metrics below 3% (Operating Profit to RWA) and 17% (CET1), respectively, could trigger a downgrade of the ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–Given MMG’s current ratings, there is limited upside potential;
–A positive change on Fitch operating environment assessment;
–MMG’s ratings could be upgraded in the medium term if there is a relevant strengthening of its franchise and business model while maintaining its financial profile at solid levels;
–The Negative Rating Outlook on MMG’s rating would be revised to Stable if the operating environment assessment is maintained in the bbb range, and its Outlook changed to Stable, while credit metrics remain at pre-crisis levels or rapidly recover.
SENIOR DEBT
–The bank’s national short-term senior unsecured debt is sensitive to changes in MMG’s National Short-Term rating.
SR and SRF
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–As Panama is a dollarized country with no lender of last resort, an upgrade in Support Rating and Support Rating Floor is unlikely.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–Because these are the lowest levels in the respective scale, there is no downside potential for these ratings.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions 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
Deposits in guarantee were classified as intangibles and deducted from Fitch Core Capital to reflect its low absorption capacity.
Fitch Ratings – Monterrey – 09 Jun 2020: Fitch Ratings has affirmed MMG Bank Corporation’s (MMG) Long-and Short-Term Issuer Default Rating (IDR) at ‘BBB-‘ and ‘F3’, respectively. In addition, MMG’s Viability Rating (VR) has been affirmed at ‘bbb-‘. The Rating Outlook on the Long-Term IDR is Negative. Fitch also affirmed the bank’s Long-Term National Rating with a Stable Outlook.
The IDR’s Negative Outlook is mirroring the Negative Outlook of the sovereign but mainly reflects the deteriorating operating environment in Panama for the banking system, which is expected to drive the bank’s financial profile deterioration over the medium term due to the disruption of economic activity and financial markets from the coronavirus pandemic in Panama.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR UNSECURED DEBT
MMG’s IDRs, national and senior unsecured debt ratings are driven by its intrinsic creditworthiness, reflected in its VR. The bank’s VR is highly influenced by the operating environment, its company profile and a risk appetite. MMG´s VR also considers its asset quality, profitability and capitalization metrics, which are strong and in line with its current rating category.
MMG´s financial profile analysis incorporates the combined approach of the non-bank criteria for Traditional Investment Manager since this business line is one of the main income and risk generators. As of December 2019, the business lines related to asset management, brokerage services and investment banking represented 27% of the bank´s total net revenue.
MMG is a niche bank focusing on asset management and commercial lending, and serving a segment composed of high-net-worth individuals, as well as institutional clients. MMG has a limited franchise within the Panamanian banking system in terms of market share; however, Fitch recognizes that its franchise related to asset management is relevant; although, it has recently faced a more intense competition. As of March 2020, MMG is the sixth largest asset manager in Panama in terms of assets under management (AUM) and the fourth largest participant on the Panama Stock Exchange primary and secondary markets by business volume.
MMG’s asset quality is credit strength and remained consistent with its ratings; however, in Fitch view, it could face pressure over the near to medium term mainly from the securities portfolio invested in Panamanian issuers (18% of total assets). As of December 2019, the bank presented a core metric, impaired loans to gross loans, of nearly 0%, while its investment portfolio, mostly invested in fixed-income securities, is made up of around 61% investment-grade financial instruments.
The bank’s profitability remains strong relative to peers, benefited by the low loan impairment charges and a better operational efficiency than peers. As of December 2019, the Fitch Core Metric, Operating Profit to Risk Weighted Assets (RWA), was at a high 5.7%. While the EBITDA to fee revenue ratio remains high, it stood above 50%. Under the current challenging scenario, Fitch expects MMG to face pressures on its profitability.
The bank’s capitalization levels remain ample compared to peers. The core metric, Common Equity Tier 1 Capital Ratio (CET1), was at a high 23.7% as of December 2019. Fitch expects that CET1 would face pressure under the current crisis due to a lower net income generation as well as potential non-realized losses from the investment portfolio; however, it will continue to be commensurate with the current Fitch capitalization assessment.
Customer deposits have been decreasing and continue to be the main source of funding. As of December 2019, these deposits represented 91% of total funding. Historically, the customer deposits structure has been moderately concentrated. The loans over customer deposits ratio continued its increasing trend. As of December 2019, this metric was 61.1%, and the EBITDA to interest expense ratio was 4.3x.
MMG´s local short-term debt issuances are rated at the same level as the bank’s rating of ‘F1+(pan)’ as the likelihood of default of the debt issuances is the same as the one of the bank.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating (SR) of ‘5’ and the Support Rating Floor (SRF) of ‘NF’ reflect that, however possible, external support for MMG cannot be relied upon given Panama’s longstanding dollarized economy and lack of a lender of last resort.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRs, VR and National Scale Rating
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–MMG’s IDRs are sensitive to changes in the Panama’s operating environment. Negative changes in the bank’s IDRs and VR would mirror any movement in Fitch assessment of the operating environment;
–A prolonged and severe economic disruption from the coronavirus pandemic could lead to a lower operating environment score for Panama’s banks, which would pressure the MMG’s VR and National Ratings;
–Any unfavorable change in the bank’s asset quality, or substantial losses derived from its assets under management that lead to a materialization of the reputational risk such that affect negatively the different business lines, could lead to a downgrade of the ratings. Material and sustained deterioration in earnings generation capacity or capitalization to levels in Fitch core metrics below 3% (Operating Profit to RWA) and 17% (CET1), respectively, could trigger a downgrade of the ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–Given MMG’s current ratings, there is limited upside potential;
–A positive change on Fitch operating environment assessment;
–MMG’s ratings could be upgraded in the medium term if there is a relevant strengthening of its franchise and business model while maintaining its financial profile at solid levels;
–The Negative Rating Outlook on MMG’s rating would be revised to Stable if the operating environment assessment is maintained in the bbb range, and its Outlook changed to Stable, while credit metrics remain at pre-crisis levels or rapidly recover.
SENIOR DEBT
–The bank’s national short-term senior unsecured debt is sensitive to changes in MMG’s National Short-Term rating.
SR and SRF
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–As Panama is a dollarized country with no lender of last resort, an upgrade in Support Rating and Support Rating Floor is unlikely.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–Because these are the lowest levels in the respective scale, there is no downside potential for these ratings.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions 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
Deposits in guarantee were classified as intangibles and deducted from Fitch Core Capital to reflect its low absorption capacity.
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
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
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