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Rating Action:

Moody's downgrades Banco Mercantil's ratings; negative outlook

05 Feb 2016

New York, February 05, 2016 -- Moody's Investors Service has today downgraded the long-term local- and foreign-currency deposit ratings of Banco Mercantil do Brasil S.A. (BMB) to B3 from B2. Moody's also downgraded BMB's long-term Brazilian national scale deposit rating to B1.br from Ba2.br, the long-term foreign currency senior unsecured medium term note program to (P)B3 from (P)B2, and the long-term foreign currency subordinated debt rating to Caa1 from B3. At the same time, Moody's downgraded BMB's baseline credit assessment (BCA) and adjusted BCA to b3 from b2, and its long-term Counterparty Risk Assessment (CRA) to B2(cr) from B1(cr). Moody's affirmed all short-term ratings and assessments assigned to BMB. The outlook on all ratings remains negative.

The following ratings and assessments of BMB were downgraded:

Long-term global local-currency deposit rating: to B3 from B2, with negative outlook;

Long-term global foreign-currency deposit rating: to B3 from B2, with negative outlook;

Long Term foreign-currency Senior Unsecured Medium-Term Note Program , to (P)B3 from (P)B2

Long-term foreign currency subordinated debt rating: to Caa1 from B3;

Long-term Brazilian national scale deposit rating: to B1.br from Ba2.br;

Baseline credit assessment: to b3 from b2;

Adjusted baseline credit assessment: to b3 from b2;

Long-term counterparty risk assessment: to B2(cr) from B1(cr);

The following ratings and assessments of BMB were affirmed:

Short-term global local-currency deposit rating of Not Prime;

Short-term global foreign-currency deposit rating of Not Prime;

Short-term Brazilian national scale deposit rating of BR-4;

Short-term counterparty risk assessment of Not Prime(cr).

RATINGS RATIONALE

The downgrades reflect Banco Mercantil do Brasil S.A. (BMB)'s persistent weak adjusted levels of capitalization, high asset risk, and declining liquidity. BMB continues to report high delinquency ratios, which reflect the poor quality of a loan book centered on small and medium-sized companies (SMEs) that has been highly vulnerable to the slow economic activity of the past years. In 2015, BMB's delinquency ratios remained above 8% mostly because of the poor performance of SME loans, which accounted for 40% of total loans, despite efforts to improve the quality of that portfolio. Moody's anticipates further deterioration in BMB's loan book in 2016 as a result of additional strain on borrowers' repayment capacity caused by Brazil's prolonged recession period. The bank's still unseasoned consumer lending product could increase asset risk further.

BMB's capitalization -- measured by Moody's ratio of tangible common equity (TCE) to risk weighted-assets (RWA) -- barely exceeded a 4.0% as of 3Q15, despite modest recovery in the preceding nine months. While the bank's regulatory common equity tier 1 ratio is considerably higher at 8.3%, it incorporates a high volume of deferred tax assets (DTAs) associated with loan loss provisions, which Moody's discounts because of the high degree of uncertainty that the bank will be able to utilize them.

Although BMB achieved positive results in the first three quarters of 2015 after reporting net losses in five of the six preceding quarters, Moody's does not believe this recovery is sustainable. The improvement was mainly associated with revenues from a new, high yield but high risk product offered to individuals. Together with the poor performance of SMEs in this environment, however, this new product is likely to result in an increase in credit costs in the coming quarters. In turn, these increased provisioning requirements, coupled with weak loan demand, are expected to drive a decline in profitability.

Lastly, the downgrade also considered the steady decline in liquid resources, which dropped to 17% of tangible banking assets as of September 2015 from 23% a year earlier. These credit challenges notwithstanding, however, BMB continues to benefit from a relatively strong funding profile that compares favorably to other B-rated banks in Brazil. Supported by its retail footprint, demand, savings and time deposits from individuals accounted for a significant 34% of total funding in September 2015. Time deposits from institutions and mid-size companies contributed another 40%.

BMB's ratings remain on negative outlook to reflect the pressures of challenging market conditions and slow business activity, which can increase non-performing loans in the SME portfolio or in the bank's unseasoned retail lending product.

BMB's ratings do not benefit from any uplift from either affiliate or government support. Moody's assesses a low likelihood of government support for the bank, reflecting its small deposit market share.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The ratings could move down if the bank reports increased provision expenses and a further decline of already thin capital levels. While positive pressure on the bank's ratings is highly unlikely because of the negative outlook on ratings, the outlook could stabilize if the bank is able to maintain positive operating results and delinquencies start to decline.

LAST RATING ACTION

Moody's took its last rating action on BMB on 12 June 2015, when the rating agency downgraded the bank's long-term global local and foreign currency deposit ratings to B2, from B1, the senior unsecured debt rating to (P)B2, from (P)B1, the subordinated debt rating to B3, from B2, and the Brazilian national scale deposit ratings to Ba2.br and BR-4, from Baa3.br and BR-3, in the long- and short-term, respectively. The short-term local and foreign currency deposit ratings were affirmed. Moody's also downgraded BMB's baseline credit assessment to b2, from b1, and assigned Counterparty Risk Assessments (CR Assessments) of B1(cr) and Not Prime(cr), long- and short-term, respectively, to BMB.

METHODOLOGY USED

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies 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 ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

Banco Mercantil do Brasil S.A. is headquartered in Belo Horizonte, Brazil, and had total assets of BRL12.4 billion ($3.11 billion) and total equity of BRL715 million ($179.6 million) as of 30 September 2015.

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.

Alexandre Albuquerque
Asst Vice President - Analyst
Financial Institutions Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

M. Celina Vansetti
MD - Banking
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Banco Mercantil's ratings; negative outlook
No Related Data.
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