Fitch Ratings has affirmed Banco del Bajio S.A. Institucion de Banca Multiple's (BanBajio) Viability Rating (VR) at 'bb+' and its Long- and Short-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+' and 'B', respectively.

Fitch affirmed BanBajio's Government Support Rating (GSR) at 'bb-'.

Fitch has also affirmed BanBajio's and Financiera Bajio, S.A. de C.V. Sofom E.R.'s (FIBA) Long- and Short-Term National scale ratings at 'AA(mex)' and 'F1+(mex)', respectively. The Rating Outlook on the Long-Term ratings is Stable.

Key Rating Drivers

BanBajio's IDRs and National Ratings are driven by its intrinsic creditworthiness, as reflected in its 'bb+' viability rating (VR). The VR reflects the bank's well recognized market position, in particular in the agribusiness and SME segments, controlled asset quality and resilient earnings generation through economic cycles, as well as good capitalization and funding structure.

Strong Regional Market Position: BanBajio is the largest among midsized Mexican banks with modest market shares of 3.5% and 3.0% of loans and deposits, respectively, as of March 2022 (1Q22). Fitch considers the bank's good regional market position, in the agribusiness and SME segments has allowed some pricing power that supports business volumes and results in a resilient financial performance even under complex economic conditions.

Controlled Asset Quality: Fitch expects BanBajio to sustain controlled impaired loans ratios despite the expected low credit demand in 2022. Asset quality metrics compare better than peers as a result of the bank's knowledge of its core market and good risk controls. BanBajio's impaired loans (NPLs) to total loans was 1.1% at 1Q22 compared to the three-year average of 1.0% (local GAAP), while the adjusted impaired loans ration (NPLs plus charge-offs of the 12 months) was 1.7%. Reserve coverage of impaired loans remains adequate considering the bank segment and individual borrower concentration above 200% of NPLs.

Recovering Profitability; Low LICs: Profitability metrics were impacted during the pandemic due to high loan impairment charges (LICs). As of 1Q22, lower LICs and higher net interest income drove an uplift in the bank's operating profit to RWA ratio to 4.3% in 1Q22 from 3.1% and 2.3% in 2021 and 2020, respectively. In Fitch's view, BanBajio's profitability recovery will continue in 2022 but will still be dependent on credit growth and interest margin performance.

Strong Capitalization: Fitch expects BanBajio's capitalization to remain above 16% and above the rating sensitivity for a rating downgrade of 13%, due to expected low credit growth and sustained earning generation that would offset the resumption of dividend payments. Capitalization maintains good loss absorption capacity, as reflected in the bank's CET1 to RWA ratio, which reached 19.2% in 1Q22, and by the adequate coverage of credit reserves considering the bank's moderate concentrations.

Stable Funding and Liquidity Profile: BanBajio is largely funded by customer deposits, which represented 81.1% of total funding at 1Q22, while the loan to deposit ratio slightly improved to 104.7% (2018-2021 average: 117.9%) supported in recent years by deposit growth above loan expansion; however, the bank's ratio still stands behind largest local banks. Concentration remains moderate, the largest 20 depositors accounted for 13.7% of total deposits. Fitch believes BanBajio's liquidity will remain at comfortable levels due to moderate expected loan expansion, the liquidity coverage ratio has remained above 100% in the last four years.

Government Support Rating (GSR): BanBajio's 'bb-' GSR reflects Fitch's expectation that although the bank is not a domestic systemically important bank (D-SIB) there is moderate probability of sovereign support in case of need, given the bank's mid-size franchise and moderate market share of core customer deposits in the investment-grade Mexican operating environment. As of 1Q22, BanBajio's deposits were around 3.0% of the Mexican banking system.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

BanBajio's IDRs, VR and National Ratings could be downgraded due to a material deterioration of its financial performance that leads to a sustained decline in a CET1 ratio below 13% and operating profit to RWAs ratio below 2%. Increased risks that pressure Fitch's assessment of the OE could also impact the ratings.

BanBajio's GSR could be downgraded if Fitch believes that the government's propensity to support the bank has declined due to reasons such as a material loss in the market share of retail customer deposits.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

BanBajio's IDRs, VR and National Ratings could be upgraded by the confluence of an improvement of the OE and the credit profile of the bank. Specifically, if the bank significantly enhances its franchise while continuing to diversify its business model, maintains a healthy financial profile and improves its capital metrics to 20%.

BanBajio's GSR upgrade is limited and can only occur over time with a material gain in the bank's systemic importance.

SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS

FIBA: The national ratings of FIBA are aligned with BanBajio's national ratings, based on Fitch's institutional support assessment that the subsidiary is core to the bank's strategy due to its relevant role in providing core products such as factoring and leasing, which complement the bank's offering.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

FIBA 's national ratings would mirror any negative action on BanBajio's ratings. A modification of the entity's strategic importance to the bank could also affect FIBA's ratings.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

FIBA's national ratings would mirror any positive action on BanBajio's national ratings.

Financial figures for 2021 and prior years are in accordance with Mexican Financial Reporting Standards (NIF), while 1Q22 figures are under International Financial Reporting Standards (IFRS).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond 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

Fitch classified prepaid expenses and other deferred assets as intangibles and deducted them from equity to reflect 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.

Public Ratings with Credit Linkage to other ratings

Financiera Bajio's ratings are driven by BanBajio's ratings.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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