Fitch Affirms Ixe Banco's Ratings; Outlook to Negative.

MONTERREY, Mexico -- Fitch Ratings has affirmed the ratings of Mexico's Ixe Banco, S.A. (Ixe), and revised the Outlook to Negative. The Outlook was revised from Stable given the continued pressures on the bank's profitability and its gradually declining loss absorption capacity.

Fitch affirms the following, with a Negative Outlook:

--Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB';

--Short-term foreign and local currency ratings at 'B';

--Individual rating at 'C/D';

--Support rating at '5';

--Support rating floor at 'NF';

--USD120 million junior subordinated perpetual securities at 'B+';

--Long-term national-scale rating at 'A(mex)';

--Short-term national-scale rating at 'F1(mex)'.

Ixe's ratings reflect its weak operating performance amidst an aggressive branch expansion strategy, gradually declining loss absorption capacity, and significant concentrations and event risk in its predominantly corporate loan portfolio. The ratings also consider strong loan growth, although they factor in as well its sound liquidity, low delinquency, adequate capitalization and gradually strengthening franchise.

Since 2007, the bank's operating performance has been negative, underpinned by a relatively aggressive expansion in its branch network related to the projected increased contribution from retail products to the group's overall business mix. Higher non-interest costs, coupled with low margins and modest revenue diversification, pose significant challenges to Ixe's profitability over the short- to medium-term. Strong loan growth and the gradually increasing credit costs also weigh on the bank's prospects going forward, although some non-recurring revenues that are likely to materialize in the upcoming months could provide certain relief in the near future. Internal capital generation has been negative since 2007. New capital and hybrid securities, however, have prevented deterioration of capital ratios, which remain adequate and provide some comfort against the adverse earnings forecast for 2008-2010.

Continued declines on the bank's loss absorption capacity, asset quality deterioration and tighter financial flexibility at the bank and/or the holding company level, are all factors that could put downward pressure on its individual and issuer ratings. In turn, the ability to rebuild profitability and to prevent asset quality problems amidst a rapidly growing loan portfolio while maintaining sound liquidity could eventually trigger a revision of the Rating Outlook to Stable.

Ixe is part of Ixe Grupo Financiero (IxeGF), a medium-sized financial conglomerate with rapidly growing subsidiaries in the most relevant financial segments. Ixe is mostly concentrated on loans to the commercial, corporate and financial sectors, while the group is targeting a larger share of retail loans. In June 2007, IxeGF and the private equity fund Brysam reached an agreement under which the latter subscribed capital in September 2007 to acquire a 28% stake in the former following a capital injection of MXN2.67 billion. Ixe's core business is commercial and corporate lending and, to a lesser extent, loans to financial intermediaries (together accounting for 87% of total loans at end-2007). Though rapidly growing, the contribution from retail loans is still a low 13%. Therefore, a key strategy has been the rapid expansion of Ixe's branch network, which has grown to 92 points at end-2007 from 38 at end-2005. The bank expects to continue growing its network until reaching around 300 agencies by 2011.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.