nacional financiera, s.n.c. · on wholesale financing. nafin's standalone strength is...

FINANCIAL INSTITUTIONS

CREDIT OPINION21 April 2016

Update

RATINGSNacional Financiera, S.N.C.

Domicile Mexico City, DistritoFederal, Mexico

Long Term Rating A3

Type LT Issuer Rating - FgnCurr

Outlook Negative

Please see the ratings section at the end of this reportfor more information.The ratings and outlook shownreflect information as of the publication date.

Contacts

David OlivaresVillagomez

5255-1253-5705

VP-Sr Credit [email protected]

Felipe Carvallo 5255-1253-5738VP-Senior [email protected]

Lauren Kleiman 5255-1253-5734Associate [email protected]

Aaron Freedman 52-55-1253-5713Associate [email protected]

Nacional Financiera, S.N.C.Negative Outlook Reflecting Government Bond Rating Action

Summary Rating RationaleMoody's assigns long- and short-term local and foreign currency issuer ratings of A3 andPrime-2 to Nacional Financiera, S.N.C., Institución de Banca de Desarrollo (Nafin), as wellas Aaa.mx/MX-1 Mexican National Scale issuer ratings. These ratings take into account astandalone baseline credit assessment (BCA) of ba1. On 4 April 2016, Moody's changed theoutlook to negative, from stable, to Nafin's A3 local and foreign currency issuer ratings andto its foreign currency senior unsecured debt ratings. This rating action followed Moody’sdecision to change the outlook of Mexico’s A3 government bond rating to negative fromstable on 31 March 2016.

Nafin's ratings take into account the very high likelihood that the Mexican government (A3negative) will provide extraordinary financial support to Nafin in case of financial stress,which provides four notches of uplift from the entity's ba1 standalone BCA.

The very high probability of support takes into account statutory support from the Mexicangovernment enshrined in Article 10 of Nafin's Organic Law, which established Nafin andwhich would require Congressional approval to change, that commits the government tofulfilling Nafin's financial obligations at all times. This statutory support reflects Nafin'sstatus as an arm of the government with a public policy role to promote the developmentof Mexico's private sector, with particular emphasis on the financing of micro, small andmedium-sized enterprises (MSMEs), an strategic priority for the government. However,the support statue is not a blanket guarantee, and consequently does not qualify forcredit substitution, because (i) it only benefits Mexican individuals and both Mexican andforeign institutions but not non-Mexican individuals, and (ii) it does not include an explicitcommitment to ensure timely payment. Nafin's rating is also based on a very high level ofdependence between the bank and the government.

That said, given the national oil company's Petróleos Mexicanos (Pemex, Baa3 negative)current grim operating and financial situation and weak liquidity position, Moody's believesthat there will be mounting pressure from the government on Nafin to extend even morecredit to the oil company. Arguably, the government is already using its development banksto support Pemex on its behalf, at a time when these banks are already under significantpressure to significantly raise private-sector lending to boost the economy.

Nafin's standalone BCA takes into account the development bank's relatively low risk profile,underscored by its main focus on second-floor financing with exposures mainly to banks and

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 21 April 2016 Nacional Financiera, S.N.C.: Negative Outlook Reflecting Government Bond Rating Action

other types of financial institutions. Given Nafin's mission to provide financing to MSMEs, one of the riskiest asset classes for banks,this model limits Nafin's credit risk, especially when compared to banks with direct lending exposures. The BCA is also underpinned byNafin's ample level of high quality capital and very strong liquidity profile, which helps to offset risks arising from its total dependenceon wholesale financing.

Nafin's standalone strength is constrained by its high reliance on funds from institutional clients, which compared to traditionalbank deposits are more expensive and subject to greater volatility, increasing Nafin's exposure to refinancing risk. The BCA is alsoconstrained by Nafin's narrow business diversification relative to more diversified banking operations globally.

The ratings on Nafin cover the development bank's outstanding debt issuances of Certificados Bursátiles (CEBURES) and Certificadosde Depósito (CEDES), including those gathered by the London branch, as well as its Pagarés con Rendimiento Liquidable al Vencimiento(PRLVS).

Moody's also assigns an A3 long-term foreign currency senior debt rating to Nafin's senior unsecured debt issuance (Green Bond) for aninitial amount of USD500 million with a maturity of up to ten years.

On 19 April 2016, Moody's assigned A3 and Aaa.mx long term global local currency (GLC) and Mexican National Scale seniorunsecured debt ratings to two issuances of Certificados Bursátiles de Banca de Desarrollo (NAFR 190417 and NAFF 260925) of Nafin.The outlook on the A3 ratings is negative.

Credit Strengths

» Statutory support and very high likelihood of support of Mexican government to Nafin

» Good asset quality is anticipated to continue

» Good capitalization

» Nafin's ratings capture Mexico's Macro Profile of Moderate +

Credit Challenges

» High reliance on market-driven funding

» The bank may be called to provide further support to public entities.

Rating OutlookAll of Nafin's supported ratings have a negative outlook.

Factors that Could Lead to an UpgradeNafin's BCA would face upward pressure if strong capitalization holds up despite the bank's ambitious growth plans, coupled withmaintaining strong profitability levels over time. That said, given the very high level of government support, an uplift in Nafin's BCA isnot likely to have an impact on its issuer and debt ratings and would receive upward pressure only following an upgrade on Mexico'ssovereign ratings. As the government's outlook is negative, we do not anticipate an upgrade on Nafin's ratings at this time.

Factors that Could Lead to a DowngradeNafin's ratings could be downgraded if the Mexican government's bond ratings are downgraded.



Key Indicators

Exhibit 1

Nacional Financiera, S.N.C. (Consolidated Financials) [1]12-152 12-142 12-132 12-122 2011 Avg.

Total Assets (MXN million) 384,828 389,762 352,037 349,074 - 3.33

Total Assets (USD million) 22,281.5 26,442.9 26,878.9 26,880.8 - -6.13

Tangible Common Equity (MXN million) 22,742 22,083 21,150 19,490 - 5.33

Tangible Common Equity (USD million) 1,316.8 1,498.2 1,614.9 1,500.8 - -4.33

Problem Loans / Gross Loans (%) 1.1 1.3 1.4 0.1 - 14

Tangible Common Equity / Risk Weighted Assets (%) 12.6 10.3 10.5 10 - 10.85

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 6.9 7.3 7 0.7 - 5.54

Net Interest Margin (%) 1.2 1.3 0.8 0.9 - 14

PPI / Average RWA (%) 1.6 1.9 1.8 1 - 1.65

Net Income / Tangible Assets (%) 0.3 0.4 0.5 0.4 - 0.44

Cost / Income Ratio (%) 52.7 44.2 44.6 52.8 - 48.64

Market Funds / Tangible Banking Assets (%) 60.5 62.6 62 64.4 - 62.34

Liquid Banking Assets / Tangible Banking Assets (%) 49 56.2 60.1 61.5 - 56.74

Gross loans / Due to customers (%) 136.6 128.9 110.7 113.2 - 122.44

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP [3] Compound Annual Growth Rate based onLOCAL GAAP reporting periods [4] LOCAL GAAP reporting periods have been used for average calculation [5] Basel III - fully-loaded or transitional phase-in & LOCAL GAAP reportingperiods have been used for average calculationSource: Moody's Financial Metrics

Detailed Rating ConsiderationsVERY HIGH LIKELIHOOD OF SUPPORT OF MEXICAN GOVERNMENT TO NAFIN

Nafin's ratings consider that Mexico (A3 negative) would provide it with a very high likelihood an extraordinary financial support toNafin in case of financial stress. The very high support probability takes into account statutory support from the Mexican governmentreflecting Nafin's status as an arm of the government with a public policy role to promote the development of Mexico's private sector.However, statutory support is not a blanket guarantee, and consequently does not qualify for full credit substitution, because (i) itcarves out foreign individuals, and (ii) it does not include an explicit commitment to ensure timely payment.

GOOD ASSET QUALITY IS ANTICIPATED TO CONTINUE

The bank has exhibited low delinquency ratios averaging 1.3% in the last three years and we expect that this level would remain despitethe planned growth of the bank's loan portfolio through 2018. We also consider Nafin's relatively low risk profile, underscored by itsmain focus on second-floor financing with exposures mainly to banks and other types of financial institutions. Given Nafin's mission toprovide financing to MSMEs, one of the riskiest asset classes for banks, this model limits Nafin's credit risk, especially when comparedto banks with direct lending exposures.

GOOD CAPITALIZATION WILL SUPPORT NAFIN'S EXPANSION

Nafin is strongly capitalized with a Tangible Common Equity to Risk Weighted Assets ratio of 12.6%. That said, furthermore, the bank'slarge capital base, however, makes the bank a candidate for capital transfers to other government-owned development banks, toaccommodate the government's more aggressive strategies for these entities, which could pressure Nafin's growth capacity and/orcapitalization going forward.

FUNDING IS IMPROVING DESPITE HIGH RELIANCE ON MARKET-DRIVEN FUNDS

Nafin shows a Market Funds to Tangible Banking Assets of 60.5% reflecting its high reliance on more expensive market-driven fundingand funds from institutional clients. Its funding mix based on (i) certificados bursatiles (CEBURES) sold to institutional clients ("ic"),(ii) certificates of deposit (CDs) from "ic", and (iii) repos. Proven access to capital markets both domestic and international (the latterthrough Nafin London Branch)



Nafin's standalone strength is constrained by its high reliance on funds from institutional clients, which compared to traditional bankdeposits are more expensive and subject to greater volatility, increasing Nafin's exposure to refinancing risk.

NARROW BUSINESS DIVERSIFICATION BY INTERNATIONAL STANDARDS

Nafin was established in 1934 and is owned/controlled by the government of Mexico. It is one of the government's main instrumentsfor financing the economic development of the country. Nafin's specific mandate is to promote the development and modernizationof Mexico's private sector with particular emphasis in the development of MSMEs by enhancing their access to credit (i.e. second floorfinancing through commercial banks). Nafin finances financia institutions which in turn lend to MSMEs, in addition, Nafin holds aprogram of credit guarantees to support continuous financing to that segment. The development bank is also mandated to enhancethe access of large corporations to international capital markets, and to a much lesser extent, Nafin functions as a financial agent forthe Federal Government (i.e. on-lending funds from multilateral organizations).

Nafin is the 2nd largest development bank in Mexico in terms of assets. The bank provides a number of products and servicesto promote the development of Mexico's enterprises, and holds a nationwide scope. However, the bank's standalone strength isconstrained by its narrow business diversification relative to more diversified banking operations globally.

THE BANK MAYBE CALLED TO SUPPORT OTHER PUBLIC ENTITIES

Given Pemex's current grim operating and financial situation and weak liquidity position, Moody's believes that there will be mountingpressure from the government on Nafin to extend even more credit to the oil company. Arguably, the government is already usingNafin to support Pemex on its behalf, at a time when the bank is already under significant pressure to significantly raise private-sectorlending to boost the economy.

NAFIN'S RATING IS SUPPORTED BY ITS MACRO PROFILE OF MODERATE +

The Moderate + Macro Profile reflects Mexico's weaker economic prospects and the increased risks this represents for domestic banks.A combination of the oil price shock and the slower-than-expected GDP growth have undermined Mexico's economic outlook. Thegradual softening of the US growth outlook, an economy to which Mexico is tied, has also had a dampening effect on growth. At thesame time, the structural reforms adopted in 2013-14, though broad, are still in the process of being implemented and the ongoingimplementation has not translated into a boost for domestic economic sentiment. Consequently, there is now a much lower likelihoodthat growth will accelerate; Moody's now forecasts only moderate growth of around 2.5% for 2016 and 2017.

Notching ConsiderationsNafin's A3 GLC issuer and debt rating is based on its ba1 BCA and our assumption of very high probability of support form the Mexicangovernment that provides a four notch uplift.

Global Local Currency (GLC) Debt RatingMoody's assigns A3 long-term GLC debt ratings to Nafin's issuances of certificados bursátiles bancarios (cebures):

» NAFR 190417: 3 year issuance rated on 19 April 2016

» NAFF 260925 (BMV, NAFF 26925): 10.4 year issuance rated on 19 April 2016

Foreign Currency Debt RatingMoody's assigns an A3 long-term foreign currency debt rating to Nafin's senior debt issuance (Green Bond) for an amount of USD500million with a maturity of up to ten years, rated on 21 October 2015. The A3 senior debt rating assigned to Nafin's foreign currencynotes is aligned to the bank's foreign currency issuer rating. The notes represent a senior unsecured obligation of the bank at par withall of its other senior unsecured obligations.

Moody's notes that under the Monetary Law of the United Mexican States (Ley Monetaria de los Estados Unidos Mexicanos), neitherthe bank nor any other Mexican obligor can be obligated to repay any judgment enforced against it in Mexico in foreign currency. Insuch circumstance the foreign currency obligation may be satisfied in Mexican currency at the rate of exchange in effect on the date onwhich payments are determined by the central bank of México.

Nafin's debt ratings benefit from our assumptions of probability of support from the Mexican government, however, the support statueis not a blanket guarantee, and consequently does not qualify for credit substitution, because (i) it only benefits Mexican individuals



and both Mexican and foreign institutions but not non-Mexican individuals, and (ii) it does not include an explicit commitment toensure timely payment. Nafin's rating is also based on a very high level of dependence between the bank and the government.

National Scale RatingMoody's assigns Aaa.mx/MX-1 Mexican National Scale issuer ratings and Aaa.mx Mexican National Scale debt ratings to Nafin.

Ratings

Exhibit 2Category Moody's RatingNACIONAL FINANCIERA, S.N.C.

Outlook NegativeBaseline Credit Assessment ba1Adjusted Baseline Credit Assessment ba1Issuer Rating A3NSR Issuer Rating Aaa.mxSenior Unsecured A3NSR Senior Unsecured Aaa.mxST Issuer Rating P-2NSR ST Issuer Rating MX-1

Source: Moody's Investors Service



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REPORT NUMBER 1024465

nacional financiera, s.n.c. · on wholesale financing. nafin's standalone strength is...

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