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Rating Action:

Moody's assigns first-time B1 ratings to Bangladesh-based Mercantile Bank Ltd.

11 May 2018

Singapore, May 11, 2018 -- Moody's Investors Service has today assigned B1 long-term foreign- and local-currency deposit and issuer ratings to Mercantile Bank Ltd. (MBL), a bank based in Bangladesh (Ba3 stable). Moody's has also assigned short-term ratings of Not Prime (NP), baseline credit assessment (BCA) of b2, adjusted BCA of b2, and counterparty risk (CR) assessment of B1(cr)/NP(cr). The outlook is stable.

RATINGS RATIONALE

The B1 ratings are one notch higher than MBL's b2 BCA, incorporating one notch of uplift due to Moody's assumption of a moderate probability of public support from the Government of Bangladesh.

The b2 BCA reflects MBL's modest solvency profile, good funding profile, and modest liquidity position.

The bank's asset quality is modest, with a problem loans ratio of 3.7% and rescheduled loans ratio of 7.0% at the end of 2017. These ratios are largely in line with those reported by private sector banks in the country.

Moody's notes that MBL's asset quality ratios could be understated because of the bank's rapid 32% loan growth in 2017, a fast expansion rate relative to domestic peers. The credit risk introduced by rapid credit growth is balanced somewhat by the short-term nature of most loans originated in 2017, as those are mainly related to trade finance.

Similar to domestic peers, MBL has a corporate banking focus in loans, and is exposed to industries such as the ready garments sectors. This industry in Bangladesh has been undergoing restructuring and facility upgrades, and is of poor credit quality according to Bangladesh Bank, the country's central bank.

MBL has a low loss absorbing buffer, with a tangible common equity/adjusted risk weighted assets ratio (TCE/RWA) of 6.2% at year-end 2017 on a pro-forma basis, including the proposed cash dividends for 2017. This ratio is weak in Moody's opinion. The bank's capital ratio declined in 2017 due to rapid RWA growth as well as high cash dividends.

Moody's expects MBL's TCE ratio will increase moderately in 2018-2019 due to a reduction in cash dividends and slower RWA growth, as the bank is facing rising minimum capital ratios set by Bangladesh Bank.

The central bank's Basel III roadmap requires that banks in Bangladesh maintain a minimum Tier 1 ratio of 8.5% on 1 January 2020, inclusive of the capital conservation buffer, which is higher than the 7.25% required for 2017. MBL's Tier 1 ratio stood at 7.9% for 2017, a ratio that is lower than the fully-loaded 2019 capital requirement of 8.5%.

The bank is funded by deposits, but its loan to deposit ratio (LDR) stood at a high 97% at the end of 2017. Somewhat mitigating the risk from this high LDR, Moody's notes that the bank had a very well matched maturity profile of assets and liabilities as of the same date.

The bank's liquid assets at 18% of tangible banking assets are modest, but of good quality in the Bangladesh context, with the vast majority of liquid assets composed of cash, placements with Bangladesh Bank, and investments in government securities.

Moody's assumes that there is a moderate probability of support to MBL from the Government of Bangladesh. This assumption results in a one-notch uplift of the bank's B1 ratings, from its b2 BCA.

COUNTERPARTY RISK ASSESSMENT

MBL's CR Assessment is positioned at B1(cr)/NP(cr). CR assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and relates to a bank's contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities. Senior obligations represented by the CR Assessments will be more likely preserved to limit contagion, minimize losses and avoid disruption of critical functions.

What Could Change the Rating Up/Down

Moody's will consider upgrading the BCA if the bank materially improves its TCE ratio and decreases the level of problem and rescheduled loans. The BCA could also be upgraded if Moody's raises the Macro Profile for Bangladesh, which currently stands at a "Weak" level.

If the BCA of MBL is upgraded by one notch, Moody's may consider upgrading the bank's deposits ratings.

Conversely, the BCA and ratings could be lowered if solvency and liquidity metrics significantly deteriorate and/or if the Macro Profile is lowered.

A summary of MBL's first-time ratings as assigned by Moody's is as follows:

- B1 local and foreign currency long-term deposit ratings; outlook stable

- B1 local and foreign currency long-term issuer ratings; outlook stable

- b2 BCA and b2 adjusted BCA

- B1(cr)/NP(cr) long-term and short term counterparty risk assessments

- NP local currency and foreign currency short-term deposit ratings

- NP local currency and foreign currency short-term issuer ratings

The principal methodology used in these ratings was Banks published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Dhaka, Bangladesh, Mercantile Bank Ltd.'s consolidated assets totaled BDT261 billion (approximately $3.2 billion) at 31 December 2017.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eugene Tarzimanov
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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