Docuformas S.A.P.I. de C.V. #B+# Global Scale And #mxBBB/mxA-3# National Scale Ratings Outlook Still Stable

Stocks and Financial Services Press Releases Wednesday January 27, 2016 16:24
MEXICO CITY--27 Jan--Standard & Poor's

MEXICO CITY (Standard & Poor's) Jan. 26, 2016--Standard & Poor's Ratings Services said today that it has affirmed its 'B+' global scale and 'mxBBB/mxA-3' national scale ratings on Docuformas S.A.P.I. de C.V. The outlook remains stable. Our ratings on Mexico-based non-bank financial institution (NBFI) Docuformas reflect our "adequate" assessment of its business position due to its improved market share as a result of its acquisition-based, average business mix, and business and geographic concentration.

We also view its capital and earnings as "adequate" based on our forecasted RAC ratio of 8.6% for the next 12-18 months and our assessment of its "weak" risk position due to weaker asset quality than those of its domestic peers. The ratings also incorporate our view of Docuformas' "adequate" funding and "moderate" liquidity.

The stand-alone credit profile (SACP) is 'b+'. We initially set the anchor for NBFIs three notches below the anchor for banks in the same country to reflect the typical lack of access to the central bank's credit lines, lower regulatory oversight, and higher competitive risk for these entities than for banks. We may modify that standard three-notch adjustment for NBFIs in countries or in sectors where these differences don't exist or are less pronounced (i.e., the finance company can access funding from the central bank, is regulated to some degree, or has unique competitive positions, such as monopolistic or oligopolistic businesses).

In Mexico, the NBFI anchor is only two notches below the bank anchor, reflecting the National Banking and Securities Commission's oversight of some of them, and that there is a good track record of government support through guarantees and liquidity during periods of market turmoil. In addition, some NBFIs have funding lines from government-owned banks, which we consider extremely stable. Mexico's economic risk reflects its low per capita GDP, which limits the country's ability to withstand economic downturns and constrains household credit capacity. Although Mexico has maintained macroeconomic stability, its economy still lacks dynamism.

Low-income levels, a large informal workforce, and relatively weak rule of law limit credit growth prospects and banking penetration. These conditions result in high credit risk. On the positive side, the Mexican financial system doesn't have economic imbalances, and housing prices have remained fairly stable for the past five years.

With regards to industry risk, in our view, banks have good profitability thanks to a healthy competitive environment and sound pricing standards. The sector's adequate regulatory framework follows international standards, has fostered healthy capitalization levels, and is strengthening its liquidity oversight. On the other hand, we believe the sector would benefit from more extensive coverage of the financial system and tougher regulation of NFBIs, particularly aimed at fraud prevention. An adequate and stable core customer deposit base supports the sector's systemwide funding. We assess Docuformas' business position as "adequate," supported by a stronger market position (in terms of total leases and loans in the leasing market), increasing business volumes, distribution channels, and penetration of new customers after ARG's (Analistas de Recursos Globales, S.A.P.I) acquisition in 2014.

Docuformas currently serves more than 1,200 clients in the country. Revenue diversification and a significant growth in its loan portfolio were some of the synergies Docuformas gained as a result of integrating ARG. Post-acquisition process is still ongoing and we expect it to be completed by the end of the first half of 2016, when most of the core business areas would be integrated. Docuformas' customer concentration has decreased due to the acquisition of ARG, who had a well-diversified customer base. In this sense, the top 20 customers represent less than 20% of Docuformas' total loans on a consolidated basis.

Compound annual growth rate of Docuformas' operating revenues was about 15% during the past four years, supporting its business stability. Our capital and earnings assessment remains "adequate." Despite recent acquisitions, Docuformas' high dividend payments, and relatively aggressive loan portfolio growth, it has maintained solid internal capital generation.

As of September 2015, its RAC ratio stood at 8.3% and we expect it will remain at a similar level in the next 12-18 months. Our base-case scenario assumptions include: Mexico's expected GDP growth of 2.3% in 2015 and 3.0% in 2016;A 25% average loan portfolio growth for the next two years; Net interest margin (NIM) of about 13% for the next 18 months;Return on assets of about 3% for the next 12-18 months considering loan loans provisions, growth expectations, and noninterest expenses; Nonperforming assets (NPAs) at about 4% for the next 12-18 months that will be fully covered by reserves by year-end 2017; andNo change in dividend policy in the next 12-18 months.

Profitability levels have remained stable for the past two years thanks to NIMs of more than 12% and effective cost control. As of September 2015, return on average assets (ROAA) was 3.21% compared with the three fiscal years average of 4.8%. For the next two years, we expect ROAA to be about 3% as a result of higher loan loss provisions in order to improve asset quality. In our opinion, Docuformas' risk position is "weak," reflecting relaxed underwriting standards compared with those of the Mexican banking industry. Docuformas´ target market is middle market customers who may or may not have access to bank financing and therefore, in our view, potential losses from these clients could increase during economic downturns.

Our risk assessment continues to reflect the weaker asset quality of Docuformas' loan portfolio as a result of the ARG acquisition. However, we expect that the continual review of the current loan portfolio will lead to an improvement in the company's asset quality metrics. As of September 2015, Docuformas' NPAs were about 4.4% with reserve coverage of 88%, and charge-offs were 0.85%. Looking forward, we expect credit losses to represent around 1% of total loans. ARG has higher NPAs than those of other finance companies we rate in Mexico. In addition, its loan loss reserves are insufficient to cover its NPAs, which weaken Docuformas' asset quality. Although Docuformas will work to improve asset quality metrics, we expect them to remain somewhat weaker than those of industry peers for the next 12-18 months. In our view, Docuformas' growth and greater business diversification have strengthened its business position, making it less vulnerable to single-client default or credit quality deterioration in any specific sector.

We assess Docuformas' funding as "adequate." The firm has an adequate funding mix, consisting of market and banking debt, and no significant maturity concentrations. Additionally, under our base-case scenario, Docuformas could access multiple funding sources. The firm's banking debt increased because of the ARG acquisition, but its funding mix didn't change drastically. We expect this debt will account for a greater share of Docuformas' total debt.

As of Sept. 30, 2015, the stable funding ratio was 59.05%, and we expect it will remain at that level for the next 12-18 months. Also, by the end of September 2015, the firm funded its operations with about 44% market debt and the rest mainly from banks, with a ratio of short-to long-term mix of 40%/60%. In our view, this share of short-term debt helps Docuformas to maintain a healthy funding profile, considering that most of its debt maturities are in 2019. Furthermore, we believe that Docuformas balances its market debt with bank debt and short- and long-term maturities. We assess its liquidity as "moderate." As of September 2015, broad liquid assets to short-term wholesale funding were 0.29x, similar to those of other finance companies we rate in Mexico.

Docuformas has sufficient liquidity to cover daily operations, and we predict positive cash flow in our base-case scenario. However, we believe that Docuformas' heavy reliance on short-term debt could damage its financial performance and could pressure its liquidity ratios in a stress scenario. In our opinion, liquidity will remain "moderate" in the next 12 months with enough liquidity to cover its expected growth targets. The stable outlook reflects our expectation that the company will maintain a RAC ratio around 8.6% as a result of its adequate internal capital generation capacity and considering a steady loan portfolio growth.

We expect asset quality metrics to improve in the next 12-18 months as a result of a cleaning process of its loan portfolio, a strategy that will intend to align the company's NPA ratio and reserve coverage with industry benchmarks, while it maintains low charge-offs. We could lower the ratings over the next 12 months if Docuformas' capitalization levels deteriorate, reflecting in a RAC ratio below 7%. In addition, a downgrade could if Docuformas' asset quality deteriorates on a sustained basis, along with poor reserve coverage pressuring profitability and eroding capital base, or if the company's liquidity levels were under pressure in order to cover its short-term obligations. We don't expect an upgrade in the next 12 months.


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