Fitch Affirms Tanner's IDR at 'BBB-'; Outlook Stable
KEY RATING DRIVERS - IDRs, SENIOR UNSECURED DEBT AND NATIONAL RATINGS
Tanner's IDRs and national ratings reflect its consistent performance throughout the economic cycles, characterized by an adequate profitability relative to its business niche, adequate albeit deteriorating portfolio quality and a sound management of its wholesale funding, with good matching in terms of maturities, currency and costs. Tanner's ratings also reflect its solid capital levels which, together with its intention to operate with lower leverage ratios in the medium term, provide the company with additional cushion to continue to expand its business and also to cover unexpected losses.
Tanner's ratings also factor in the challenges associated with its relative smaller size and its higher business concentration when compared to other financial institutions of a universal nature, which exposes the company to changes in the economic cycle more than those more diversified institutions. At the same time, the company still faces the challenge of managing the quality of its loan portfolio, which has deteriorated faster than that of some of its local peers given some riskier segments that the entity approached in the past years (i.e. used cars), also as a result of the portfolio seasoning as it has grown considerably in the past few years, in an economy that is undergoing a prolonged slowdown.
Tanner has shown robust profitability metrics throughout the cycles (average ROA of 3.95% in 2011-2014), which are consistent with the risk profile of its target segment. However, profitability has declined gradually due to slower growth and margin pressure due to the change in the loan portfolio mix, with higher weight of lower yielding lines (mainly traditional loans to companies) to compensate for the slow growth of factoring and auto loans.
Adequate credit risk management, business know-how and client diversification, as well as accelerated credit growth, have historically favored the entity's asset quality ratios. However, in line with the economic slowdown in Chile and given the progressive diversification toward some more sensitive segments and products, and due to the seasoning of the portfolio, past due loans have steadily risen since 2012, mainly driven by auto loans and a single large borrower that was impaired due to a fraud (excluding the latter, past due loans would be a better 4.71%). Tanner has recently strengthened its admission, collection and loan monitoring areas aiming to prevent further deterioration of its loan book.
Capitalization levels have strengthened since November 2013 when the company raised \\$200 million in equity. Similarly, Tanner's leverage levels are low (2.70x as of March 2015). Fitch expects capitalization and leverage levels to deteriorate gradually over the next few years as a result of the entity's expansion strategy.
Strong liquidity should continue to be favored by sound asset liability management, elevated monthly cash flow due to high factoring turnover and diversification of funding sources (bank debt, short- and long-term issuances in both local and international markets), as well as the greater proportion of long-term debt within total liabilities.
Tanner's senior unsecured bonds are rated at the same level as its IDR and national rating, considering the absence of credit enhancement or a subordination feature.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The Rating Outlook for the long-term IDRs and national rating is Stable. Downward ratings pressure would stem from a stronger than expected deterioration in asset quality ratios (delinquency rising and remaining consistently over 5%), which would pressure its profitability (ROAA falling and remaining consistently below 2%), as well as from a considerably decrease in the company's financial flexibility and liquidity.
Considering the current business model of the company, upgrades are not likely in the short term. However, higher diversification of its revenues, assets and funding sources could contribute to improve its ratings in the longer term.
Fitch has affirmed Tanner's ratings as follows:
--Foreign and local currency long-term IDR at ' BBB-'; Outlook Stable;
--Foreign and local currency short-term IDR at 'F3';
--Senior unsecured notes due 2018 at 'BBB-';
--Long-Term National Rating at 'A+ (cl)'; Outlook Stable';
--Short-term National Rating at 'N1(cl)';
--Long-term National Rating of bond program at 'A+(cl)';
--Long-term National Rating of commercial paper program at 'A+(cl)';
--Short-term National Rating of commercial paper program at 'N1(cl)'.
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