Rating Action: Moody's downgrades eight Mexican banks and the IPAB; outlook negative 22 Apr 2020 Mexico, April 22, 2020 -- Moody's de México ("Moody's") has today downgraded to Baa1, from A3, the long- term global local and foreign currency deposit, issuer and debt ratings, where applicable of BBVA Bancomer, S.A. (BBVA), Banco Mercantil del Norte, S.A. (Banorte), Banco Santander México, S.A. (Santander México), Banco Nacional de México, S.A. (Citibanamex), HSBC México, S.A. (HSBC México), Banco Nacional de Obras y Servicios Públicos, S.N.C. (Banobras), Nacional Financiera, S.N.C. (Nafin), Banco Nacional de Comercio Exterior, S.N.C. (Bancomext), and the deposit insurer, Instituto para la Protección al Ahorro Bancario (IPAB). Moody's also affirmed MUFG Bank México, S.A.'s (MUFG) Baa1 deposit ratings. In the same rating action, Moody's affirmed the Aaa.mx/MX-1 long- and short-term Mexican National Scale ratings of BBVA, Banorte, Santander México, Citibanamex, HSBC México, Banobras, Nafin, Bancomext, and the IPAB. Moody's also affirmed long- and short-term Mexican National Scale ratings of Banco del Bajío, S.A. (BanBajío) at Aa2.mx/MX-1 and of MUFG at Aa1.mx/MX-1. The rating outlook on BBVA, Banorte, Santander México, Banobras, Nafin, Bancomext, and the IPAB remains negative. The rating outlook for Citibanamex and HSBC México was changed to stable, from negative. The rating outlook on BanBajío was changed to negative, from stable of its global local and foreign currency ratings. The rating outlook on MUFG remained stable. Moody's also affirmed the baseline credit assessments (BCAs) and adjusted BCAs of BBVA, Banorte, Santander México, Citibanamex, HSBC México, BanBajío, MUFG, Banobras, Nafin and Bancomext. The Counterparty Risk Assessments (CR Assessments) of BBVA, Santander México, Citibanamex, HSBC México, and MUFG were affirmed at A3(cr), while the CR Assessments of Banorte and BanBajío were downgraded by one notch Baa1(cr) and Baa2(cr), respectively. The rating actions follow the announcement by Moody's Investors Service, published on 17 April 2020, of the downgrade of the Government of Mexico's debt rating to Baa1, from A3. The outlook remained negative. For additional information, please refer to the related press release: "Moody's downgrades Mexico's ratings to Baa1, maintains negative outlook" (https://www.moodys.com/research/Moodys-downgrades-Mexicos-ratings- to-Baa1-maintains-negative-outlook--PR_422013). Moody's has also withdrawn the outlooks on the issuer ratings of Casa de Bolsa BBVA Bancomer, S.A. de C.V., Arrendadora y Factor Banorte, S.A. de C.V., Casa de Bolsa Santander, S.A. de C.V., Citibanamex Casa de Bolsa, S.A. de C.V. and the IPAB for its own business reasons. Please refer to the Moody's de México Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.mx. A complete list of affected ratings can be found at the end of the press release. RATINGS RATIONALE DOWNGRADE OF GLOBAL LOCAL AND FOREIGN CURRENCY RATINGS The downgrade to Baa1, from A3, of the global local and foreign currency deposit, issuer and debt ratings, where applicable, of BBVA, Banorte, Santander México, Citibanamex, HSBC México, Banobras, Nafin, Bancomext, and the issuer rating of the IPAB is in line with the downgrade of Mexico's sovereign debt rating to Baa1, from A3, because (1) Mexico's medium term economic growth prospects have materially weakened, (2) the continued deterioration in Petróleos Mexicanos (Pemex, Ba2 negative) financial and operational standing is eroding the sovereign's fiscal strength, and (3) weakened policy making and institutional capacity. The rating actions reflect the high inter-linkages between Mexican banks' ratings and those of the sovereign via holdings of government bonds for liquidity purposes or lending to entities such as state-owned enterprises or regional and local governments that benefit from cash flows from the Federal government. Moreover, the global spread of the coronavirus is resulting in simultaneous supply and demand shocks. Moody's expects these shocks to materially slow global economic activity, particularly in the first half of this year. In Mexico, the coronavirus outbreak will mire an already weak economy into a recession, and as such Moody's forecasts a significant GDP contraction this year followed by a weak recovery. The full extent of the economic costs will be unclear for some time. Fear of contagion will dampen consumer and business activity. The longer it takes for households and businesses to resume normal activity, the greater the economic impact. Fiscal and monetary policy measures will likely help limit the damage in individual economies. The coronavirus outbreak will have a direct negative impact on the asset quality and profitability of banks, in some cases in a pronounced manner, for example for undiversified banks with material exposure to high-risk sectors and small and medium-sized enterprises. Moody's also views risks to be elevated for business models reliant on spread income, equity indices and sustained low rates. The exposure of the issuers affected by today's rating action to environmental and social risks is low and moderate, respectively, consistent with our general assessment for the global banking sector. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Moody's does not have any particular concerns with the governance of the eleven Mexican issuers and their affiliated entities affected by this rating action. They show an appropriate risk management framework commensurate with its risk appetite. DOWNGRADE OF THE IPAB'S RATINGS The IPAB, in its role as the deposit insurance corporation, is an integral part of the Mexican government. The IPAB is largely funded by bonds that benefit from an implicit sovereign backing, whereas deposit insurance corporations elsewhere fund themselves privately. Therefore, IPAB's ratings and outlook are aligned with those of the Mexican government. LOWERING OF ASSESSMENT ON PROBABILITY OF GOVERNMENT SUPPORT FOR BANKS Moody's also lowered the government support assumptions it incorporates in the credit ratings of Mexican commercial banks to high, from very high, to reflect the Mexican government's stance towards fiscal austerity, which may evidence less willingness to provide support to privately-owned entities. As a result, deposit and debt ratings for BBVA, Santander México, and Citibanamex no longer benefit from government support despite their importance to the Mexican payment system. This change however, does not influence the three banks' ratings because of their relatively high adjusted BCAs, which are now at the same level as the rating of the government. Moody's views are also supported by the rating agency's expectation that support from the Mexican federal government would be provided, if needed, first and foremost to development banks, which benefit from statutory support and that have relevant public policy mandates (Banobras, Nafin, and Bancomext), and to state-owned enterprises, such as Pemex. VERY HIGH SUPPORT FOR DEVELOPMENT BANKS REMAINS UNCHANGED Moody's incorporates three notches of uplift for Banobras and Nafin, and four notches of uplift for Bancomext, based on the rating agency's assumption of very high government support for the three development banks based on the banks' laws. Moody's assumes the government will support the development banks' obligations with creditors and ensure timely payment of the banks' obligations. Consequently, the Baa1 ratings and negative outlooks of Banobras, Nafin and Bancomext are in line with Mexico's Baa1 sovereign rating and negative outlook. AFFIRMATION OF BBVA'S baa1 BCA AND AFFIRMATION OF CASA DE BOLSA BBVA'S RATINGS; NEGATIVE OUTLOOK FOR BOTH Moody's affirmed BBVA's baa1 BCA and adjusted BCA to reflect the bank's strong earnings generation that derives from a diversified loan portfolio and leading market shares in many asset classes and banking products that have cemented its position as the most profitable large bank in Mexico. BBVA's baa1 BCA also incorporates its higher capitalization, despite consistently high dividend payouts, and the improvements in asset quality that will mitigate the effects from Mexico's economic contraction. The strength of the bank's risk management over time is evidenced by a well-diversified loan portfolio and industry exposures, which have and should continue to limit the volatility of its asset quality indicators. Nevertheless, Moody's maintains a negative outlook on BBVA's ratings to incorporate its assessment of downward pressure on the bank's standalone credit strength derived from the more difficult economic scenario in Mexico. Moody's affirmed Casa de Bolsa BBVA Bancomer, S.A. de C.V.'s (Casa de Bolsa BBVA) long-term global local currency issuer rating in line with the affirmation of BBVA's baa1 adjusted BCA. Moody's also changed Casa de Bolsa BBVA's outlook to negative, from stable, in line with the negative outlook for BBVA. NEGATIVE OUTLOOK ON BANORTE AND AFFIRMATION OF ITS baa2 BCA; AFFIRMATION OF AYF BANORTE'S ISSUER RATINGS WITH STABLE OUTLOOK Moody's affirmation of Banorte's baa2 BCA reflects its improved earnings generation capacity, which will continue to support its ample capitalization. Banorte has expanded its loans into higher-yielding asset classes, though with disciplined underwriting, limiting potential deterioration under an increasingly more difficult operating environment. The baa2 BCA also benefits from the bank's core deposit funding, even if Banorte's deposit franchise is weaker relative to that of its large bank peers, as reflected in relatively higher funding costs. Banorte's Baa1 deposit ratings benefit from one notch of uplift from the bank's baa2 BCA despite Moody's having lowered its assessment of government support to high, from very high, for the large Mexican commercial banks. The outlook remains negative in line with the negative outlook on the sovereign debt rating.