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Rating Action:

Moody's changes outlook on Mauritius Commercial Bank's Baa1 ratings to negative from stable; ratings affirmed

25 Feb 2014

Limassol, February 25, 2014 -- Moody's Investors Service has today affirmed Mauritius Commercial Bank Limited's Baa1 deposit and issuer ratings and changed the corresponding outlook to negative from stable.

The negative outlook on the ratings is driven by: (1) the risk of a material decline in Mauritius Commercial Bank's Tier 1 ratio following the group's announced restructuring, which will be completed in the coming months, and (2) weakening asset quality, with related metrics comparing unfavorably to similarly rated peers globally.

A full list of affected ratings is provided at the end of this press release.

RATINGS RATIONALE

-- AFFIRMATION OF STANDALONE RATING

Moody's rating affirmation for Mauritius Commercial Bank reflects the bank's high earning generation capacity (pre-provision income to average assets of 3% in FYE2013), its sound funding profile and healthy liquidity buffers (liquid assets comprised 24% of total assets in June 2013) and its dominant franchise in Mauritius, with a market share of around 40% in domestic deposits.

The primary driver of the negative outlook, however, is the risk of a material decline in the bank's Tier 1 capital ratio following the expected implementation of a group restructuring, which aims to ring fence the bank's domestic operations. Moody's recognises that the restructuring, which involves the transfer of non-banking and foreign banking subsidiaries to a new holding company, will limit contagion risks stemming from the non-banking operations and partially reduce risks from operations outside Mauritius (through subsidiaries). However, the expected restructuring will also reduce the rated entity's core capital buffers, and hence weaken its ability to absorb unexpected losses. Moody's expects Mauritius Commercial Bank's consolidated Tier 1 ratio of 13% as at June 2013 to decline to a pro-forma of around 10%, with the final post-restructuring level dependent on which operations are ultimately transferred out of the rated entity. The bank has recently raised Tier 2 capital, which Moody's expects will partially mitigate the impact of the restructuring on the bank's total capital levels.

Moody's notes that the second driver underpinning the negative outlook is the deterioration in Mauritius Commercial Bank's asset quality, with metrics currently comparing unfavorably to those of similarly rated peers. The rating agency notes that between June 2011 and June 2013 the volume of the bank's non-performing loans (NPLs) increased by 76%, and accounted for 5% of gross loans as of June 2013 (compared to 3.5% at end-June 2011). The risk of further weakening in asset quality stems primarily from Mauritius Commercial Bank's off-shore business (i.e. cross-border business carried out by the bank from Mauritius), which will remain under the rated entity post-restructuring. NPLs in this sector went up in 2013, exerting negative pressure on the bank's asset quality metrics. The risk of pressure on asset quality also stems from the bank's large single borrower concentrations, with top 20 exposures estimated to account for over 350% of Tier 1 capital. Although these exposures are diversified across economic sectors, they render the bank vulnerable to downside risks in the event of default of one of the large corporates.

Moody's also notes that as a result of the increase in NPLs, higher provisioning requirements (with loan-loss provisions increasing by 108% year-on-year during the fiscal year ending June 2013 (FYE2013)) are also pressuring Mauritius Commercial Bank's profitability metrics, with return on average assets declining to 2.2% in FYE2013 from 2.7% in 2011. In addition, the coverage of NPLs by loan-loss reserves declined to 55% at end-June 2013, from 75% at end-June 2011.

-- AFFIRMATION OF DEPOSIT RATINGS

The affirmation of Mauritius Commercial Bank's Baa1 deposit ratings, with a negative outlook, reflects Moody's view that a potential weakening of the bank's standalone profile would likely lead to a lowering of the bank's deposit ratings. Moody's considers the likelihood of government support to be very high for Mauritius Commercial Bank, given its systemic importance and dominance in the domestic system. These support assumptions currently lead to two notches of uplift from the bank's standalone rating. While the ring-fencing of the bank's domestic operations will reinforce Mauritius Commercial Bank's systemic importance, Moody's does not anticipate increasing its support assumptions beyond two notches to offset any downward pressure on the standalone rating.

WHAT COULD MOVE THE RATINGS UP/DOWN

The negative outlook on the deposit and issuer ratings indicates there is a risk that Mauritius Commercial Bank's ratings could be downgraded if, following the implementation of the restructuring, the bank's capitalisation -- and specifically its Tier 1 ratio -- declines significantly below current levels. Further asset quality deterioration, or weakening in profitability levels, could also exert downward pressure on the ratings.

The negative outlook indicates that there is limited upward pressure on Mauritius Commercial Bank's ratings in the near term. The outlook could be changed back to stable if the bank maintains its core capital metrics close to current levels and improves its asset-quality metrics, including the provisioning coverage.

LIST OF RATINGS

- Baa1 long-term local and foreign-currency deposit ratings, affirmed; outlook changed to negative

- Baa1 foreign-currency issuer rating, affirmed; outlook changed to negative

- Standalone D+ bank financial strength rating (BFSR) -- equivalent to a baa3 baseline credit assessment -- affirmed; outlook stable

- Aa3.za and A3.za (South Africa) national scale ratings (NSR) senior unsecured and subordinated rating, affirmed

- Prime-2 short-term local and foreign-currency deposit ratings were not affected by today's rating actions

No outlook is assigned on the bank's Prime-2 short-term deposit ratings, and the Aa3.za and A3.za (South Africa) national scale ratings (NSR) assigned to its senior unsecured and subordinated medium-term notes (MTNs).

METHODOLOGIES USED

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Credit Ratings to Global Scale Credit Ratings.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Elena Panayiotou
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on Mauritius Commercial Bank's Baa1 ratings to negative from stable; ratings affirmed
No Related Data.
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