The credit risk rating agency Standard and Poor’s Global Ratings (S&P) lowered the rating of the bank of Chihuahuan origin called Bankaool (formerly Unión Progreso), due to liquidity pressures and its low level of capitalization.
In recent days, the agency made public the downgrade of the long-term credit rating, which went from “mxB+” to “mxB-“. In addition, it placed the long and short-term ratings on its Special Review list (CreditWatch) with negative implications.
Amid significant pressures on its capitalization and liquidity levels, Bankaool signed an agreement whereby Grupo OMNI (not rated) will acquire the majority of the bank’s shares. We hope that in the following days a transition to a new management team will take place. This transaction is subject to the approval of the Mexican financial authorities and we expect it to be completed in the short term”, says the evaluation of the rating agency.
“In our opinion, the bank operates with aggressive liquidity policies considering the high concentration in its deposit base and its modest position of liquid assets to face any contingency, as well as more limited financing conditions,” he adds in his arguments to reduce the qualification. “We also see their capitalization levels weaken due to recurring net losses in the absence of capital injections to offset them.”
The “special negative review” status reflects a 50/50 chance of further downgrade, which could be by more than one entity level over the next 90 days.
“The above could happen if it does not solve the strong pressures it faces in its capital and liquidity levels in the second quarter of the year,” warns S&P.
Bankaool accumulates more than a year of operation with losses, according to its own income statements, which are made public by the institution and must report periodically to the National Banking and Securities Commission, a federal regulatory body.
Reasoned rating
In the grounds for the long-term downgrade rating, S&P establishes that the bank operates with aggressive liquidity policies considering the high concentration in its deposit base and its modest position of liquid assets to face a financial contingency or exit resource unexpected.
Despite the fact that Bankaool maintains a funding base made up almost entirely of deposits, of which around 65 percent are retail deposits and 35 percent wholesale, these remain highly concentrated by client.
“Currently, Bankaool’s top five depositors account for approximately 20 percent of its total deposit base, while almost all of its deposits are callable or term with maturities of less than one year. Although the bank has so far succeeded in renewing a large part of its term deposits, we believe that, with the modest level of liquid assets on its balance sheet, it will be in a very vulnerable position if this assumption changes”, he considers.
“At the end of March 2023, Bankaool maintained a low balance of cash and equivalents, of 191 million pesos, which only represents 4 percent of its total deposit base, while for the banking sector this indicator reaches approximately 16 percent.
“In addition, we note industry-wide deposit diversification that is significantly better relative to Bankaool. For all of the above, we have revised our liquidity assessment to moderate, considering that Bankaool’s liquidity management is more aggressive when compared to the standard of the Mexican banking system,” warns the rating agency.
Bankaool capitalization plummeting
“We place Bankaool’s ratings on Negative Special Review to reflect the continued weakening of its capitalization levels due to recurring net losses, and that these have not been fully remedied through capital injections. We estimate that, despite an increase in Bankaool’s business volumes and the incorporation of new business lines, the bank will continue to report limited levels of internal capital generation at least through 2023,” says the S&P press report.
The erosion of the bank’s weakened capital base will be the consequence of the interaction of the above factors, according to the credit risk forecast. Therefore, the document states, “we project that our projected risk-adjusted capital ratio (RAC) at the end of 2023 could fall below 7 percent from 7.5 percent at the end of 2022, which will show a marked downward trend compared to levels of previous years.
This trend is also reflected in the Capitalization Index (Icap) with which the National Banking and Securities Commission evaluates Mexican banks. In the case of Bankaool, at the end of March 2023 it stood at 12 percent, which shows a drop from the 14.8 percent reported in March 2022.
“The bank’s new shareholders are committed to strengthening its financial position by providing it with new financial resources (whether through capital injections or financing) that could be reflected on the balance sheet, even before approval. regulation of the purchase/sale of the institution”, says S&P.
“If that were to happen, we could favorably revise our base case and projected RAC levels could remain consistent with your current capital assessment. On the contrary, if these resources and/or contributions are not received, the bank’s capitalization levels and liquidity position to face unexpected resource outflows could be further weakened, and consequently, the bank’s ratings would drop more than one notch. in the next 90 days or less”, he adds.
Deteriorated indicators
Regarding Bankaool’s non-performing assets (past-due portfolio, foreclosed assets and collection rights), the rating agency indicates that it expects a gradual improvement in them, however, it considers that they will remain high and compare unfavorably with the bank average national.
“We project that our non-performing asset ratio could be below 15 percent by the end of 2023. This, although it would represent an improvement over the 20 percent levels that Bankaool reported during the previous year, will continue to reflect very high levels of non-performing assets in relation to the Mexican banking system”, the report states.
On the other hand, the bank maintains a very low reserve coverage regarding its non-performing assets, of around 25 percent at the end of March 2023, while this figure remains consistently above 130 percent for the national average of the banking.
Although the S&P Global Ratings rating cites figures for the month of March, Bankaool’s financial results are only publicly available up to last February in the official reports of the CNBV.
According to said public information, between February 2022 and February 2023, Bankaool’s fundamental indicators show a significant deterioration, which is consistent with the negative evaluation of the rating agency, which places the bank in its speculative grade rating.
In the period of that year, the capital lost is one thousand 137 million pesos; Return on Assets (ROA) dropped from 1.7 percent to -2.5 percent; Return on Equity (ROE) fell from 12.9 percent to -18.9 percent; and the Coverage Index (Icor) dropped from 126 percent to 119 percent.
Likewise, the Delinquency Index (Imor) grew from 2.1 to 3 percent, the Cost of Deposits rose from 4.7 percent in February of last year to 8.1 percent in the same month of this year; the Capitalization Index in February 2023 fell to 11.5 percent, to a point of returning to the critical condition of two years ago, when it was placed at 10.5 percent, the observable limit of the national regulatory body.
The deterioration in its key indicators coincides with the arguments of the rating agency, which leaves the bank with Chihuahuan origins in a very difficult position.
Without stopping the deterioration of Bankaool
Credit rating downgraded from “MxB +” to “MxB-”
A drop from 4th to 6th place within the rating agency’s speculative grade
Between 15 and 20 percent of its assets are non-performing
It has lost 1,137 million pesos of capital between February 2022 and February 2023
Its Return on Assets (ROA) fell from 1.7 percent to -2.5 percent
Its Return on Equity (ROE) plummeted from 12.9 percent to -18.9 percent
dark outlook
The Delinquency Index (Imor) grew from 2.1 to 3 percent, the Cost of Deposits rose from 4.7 percent in February of last year to 8.1 percent in the same month of this year; the Capitalization Index in February 2023 fell to 11.5 percent, to a point of returning to the critical condition of two years ago, when it was placed at 10.5 percent, the observable limit of the national regulatory body.
