Fitch Affirms Mercantil Banco's IDR at 'CCC'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Venezuela-based Mercantil, C.A. Banco Universal's (MB) long-term Issuer Default Rating (IDR) at 'CCC' and Viability Rating (VR) at 'ccc', following Fitch's peer review of Venezuelan Private Sector Banks. No Rating Outlook is assigned at this rating level. See the full list of rating actions at the end of this release.

KEY RATING DRIVERS

IDRs, VR AND NATIONAL RATINGS

In Fitch's view, the operating environment is the key factor constraining MB's VR, which drives its IDR and does not take into account state support. Like all Venezuelan banks, MB's VR is strongly linked to the creditworthiness of the sovereign, given its exposure to public sector bonds and its vulnerability to the government's policy choices and the country's economic performance. MB's international ratings also remain constrained by the sovereign.

MB's ample market share and strong franchise have allowed the bank to maintain a relatively stable deposit base despite deposit volatility among domestic banks in past crises. Fitch notes that MB's exposure to liquidity risk is heightened by a significant reliance on short-term funding, as is the rest of the market. In Fitch's opinion, MB's liquidity buffers are sufficient as long as the domestic monetary market remains liquid and foreign exchange controls hold.

MB registers good loan quality metrics; however, Fitch notes that these are not comparable to other markets given the high level of inflation. In spite of economic volatility and the natural seasoning process, MB's low non-performing loan (NPL) ratio of 0.21% at end-June 2015 is in line with other local commercial banks, as inflation induced loan growth has greatly outpaced impaired loan growth. MB's reserve coverage of gross loans declined to 3.22% at end-June 2015 from its peak of 4.14% at YE2011. Though this level is higher than many of MB's local peers, Fitch believes a stronger level is warranted given past impaired loan deterioration during other economic crises.

The bank's Return on Average Assets (ROAA) declined to 3.7% at end-june 2015 from its peak in the last four years of 4.6% at YE2013. A deceleration in loan growth, inflation-driven increases in operating costs and the impact of new income tax regulation have pressured the bank's profitability despite improvements in its net interest margin (NIM) and lower impairment costs. In Fitch's opinion, further government intervention in the banking sector or a sharper than anticipated economic adjustment could pressure MB's performance. Although the bank will remain profitable in nominal terms, based on Fitch's forecast for year-end inflation in Venezuela (2015: 183% and 2016: 165%) it is not likely to remain profitable in real terms.

Like other Venezuelan banks, MB's capital ratios have been under pressure due to high nominal asset growth and weaker profitability (end-june 2015 equity-to-assets: 7.4%), though they remain in line with the industry average. Fitch expects equity levels to increase in 2016 given a potential capital injection and devaluation, though inflation-induced growth will continue to pressure capitalization ratios.

RATING SENSITIVITIES

IDRS, VR AND NATIONAL RATINGS

[A downgrade of the sovereign's IDRs would result in a similar action on the IDR and VR of MB, which is capped at the sovereign. Additional government intervention that pressures financial performance could negatively affect the bank's IDRs, VR and National ratings. While this is not Fitch's base case, due to capital controls and high domestic market liquidity, a persistent decline in deposits would pressure ratings.

Upside potential to any of the banks' ratings in the near term is limited in light of the current economic crisis.]

SUPPORT RATING AND SUPPORT RATING FLOOR

[The bank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF' reflect Fitch's expectation of no support. Despite MB's systemic importance, support cannot be relied upon given Venezuela's highly speculative rating and lack of a consistent policy on bank support.

Venezuela's propensity or ability to provide timely support to MB is not likely to change given the sovereign's very low speculative-grade ratings. As such, the SR and SRF have no upgrade potential.

Fitch has affirmed MB's ratings as follows:

--Long-term foreign and local currency Issuer Default Ratings (IDR) at 'CCC';

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

--Viability rating at 'ccc';

--Support at '5';

--Support floor 'NF';

--Long-term national-scale rating at 'AA-(ven)';

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

Additional information is available on www.fitchratings.com

Related Research:

Venezuela

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Related Research

Venezuelahttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868264

Additional Disclosures

Dodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996780

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996780

Endorsement Policyhttps://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151215006835/en/

Fitch Ratings
Primary Analyst:
Mark Narron, +1-212-612-7898
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Francesca Cedrola, +503 2516-6611
Analyst
or
Committee Chairperson:
Rene Medrano, +503 2516-6610
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
[email protected]

Source: Fitch Ratings

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