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Fitch: Acquisition of Ixe Could Negatively Affect GFNorte's IDRs; Upside Potential for Ixe

The parties recently announced a preliminary non-binding agreement and the starting of a due diligence process that could result in IxeGF being absorbed by and integrated into GFNorte. When and if this final agreement is reached, GFNorte's foreign and local currency Issuer Default Ratings or IDRs (long-term 'BBB' and short-term 'F2') will likely be placed on Rating Watch Negative, based on the preliminary conditions that are currently available. The same applies to its major subsidiary, Banco Mercantil del Norte (Banorte), with similar IDRs. The national scale ratings of Banorte and other of GFNorte's subsidiaries (Arrendadora y Factor Banorte, Seguros Banorte Generali, and Casa de Bolsa Banorte) would also be placed on Rating Watch Negative, as these are driven by support considerations relative to Banorte's credit quality. Fitch expects that GFNorte's and Banorte's 'C' Individual ratings would remain unchanged upon completion of a final agreement, but a different outcome could arise if the final conditions were to differ significantly from those currently known.

Fitch considers that this transaction, if finally agreed, would be strategically positive for GFNorte as it should enhance over time its competitive, commercial and financial position amidst an increasingly challenging operating environment. However, in the near term, the deal could potentially have negative effects on GFNorte's and Banorte's financial condition. Depending on the final price and settlement scheme that the parties agree upon, GFNorte's capitalization, which is already being considered relatively moderate by Fitch, could be further pressured in case that the potential acquisition is accompanied by significant cash disbursements, ample goodwill, and/or material reduction on GFNorte's liquidity profile. To a lesser extent, some potential execution risk and the near term effects on overall profitability could also add to the downside potential of GFNorte's ratings, given Ixe's weak performance metrics at present and the non-recurring additional expenses that are usually associated to such integration processes.

Following the potential signature of a final agreement and the likely placement of GFNorte's and Banorte's ratings on Rating Watch Negative, Fitch will continue to monitor the financial implications and the evolution of the integration process before solving the Watch status. Fitch expects to have a resolution of the Rating Watch after the regulatory approvals are obtained, further details on the financing mechanism become available, and after reviewing the post-integration financial profile of the resulting entity. Fitch considers that the negative impact on GFNorte's and Banorte's IDRs, if any, is likely to be contained to no more than a one-notch downgrade. Due to sovereign support considerations, Banorte's IDRs are highly unlikely to be downgraded beyond the 'BBB-' level, its support floor at present. In turn, GFNorte's ratings could remain unchanged only if the additional equity raised to finance the acquisition is of such large amount and high relative contribution, that it prevents material weakening of the bank's liquidity position and the more stringent metrics of core capitalization, which take into account the absorbed assets and deduct any goodwill that could arise from the transaction. This potential scenario would also imply that Fitch is comfortable with execution risk being properly addressed, in addition to ensuring that asset quality and risk concentrations are not materially worsened following the acquisition.

In turn, upon completion of the transaction, the ratings of IxeGF and its subsidiaries are likely to be upgraded and aligned to the resulting ratings of GFNorte. This would also stand for the national scale ratings of IxeGF, Ixe Banco, and the rest of IxeGF's rated subsidiaries (Ixe Casa de Bolsa, Fincasa Hipotecaria, and Ixe Automotriz).

Alternatively, should the parties fail to reach a final agreement and the integration process is dropped, all the ratings of GFNorte, IxeGF and their subsidiaries are likely to be affirmed at their current levels with a Stable Outlook.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria', dated Aug. 16, 2010;
--'Insurance Rating Methodology', dated Aug. 16, 2010;
--'Equity Credit for Hybrids and Other Capital Securities', dated Dec. 29, 2009;
--'Rating Hybrid Securities', dated Dec. 29, 2009;
--'Rating Criteria for Securities Firms', dated Dec. 30, 2009;
--'Finance and Leasing Companies Criteria', dated Dec. 30, 2009;
--'National Ratings - Methodology Update', dated Dec. 18, 2006.

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766
Equity Credit for Hybrids & Other Capital Securities - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112
Rating Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086
Rating Criteria For Securities Firms - Financial Institutions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493276
Finance and Leasing Companies Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493344
National Ratings - Methodology Update
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=305544

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Primary Analyst:
Alejandro Garcia, CFA, +52 81 8399 9146
Senior Director
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial C.P. 64920
Monterrey, Mexico
or
Secondary Analyst:
Oliver Venegas, +52 81 8399 9149
Analyst
or
Committee Chairperson:
Franklin Santarelli, +1-212-908-0739
Senior Director
or
Media Relations, New York:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com