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Rating Action:

Moody's downgrades Mauritius Commercial Bank's deposit ratings to Baa3 from Baa1; ratings placed on review for further downgrade

31 Oct 2014

Limassol, October 31, 2014 -- Moody's Investors Service has today downgraded Mauritius Commercial Bank Ltd's long-term and short-term deposit ratings to Baa3/Prime-3 from Baa1/Prime-2. Concurrently, Moody's lowered the bank's baseline credit assessment (BCA) to ba1 from baa3 within the D+ standalone bank financial strength rating (BFSR) category. All ratings placed on review for further downgrade.

The downgrade of Mauritius Commercial Bank's ratings is driven by: (1) the decline in its core capitalisation, following a group restructuring, which has reduced the bank's loss absorption capacity and raised single-borrower concentrations; (2) the recent weakening in asset quality, which is also pressuring the bank's profitability through higher provisioning expenses; and (3) a moderation of Moody's government support assumptions incorporating the insights gained from the global financial crisis and a recognition of the still large size of the bank relative to the balance sheet of the government, despite recent regulatory measures to ring fence the bank's non-bank and international subsidiaries.

The review will focus on a forward-looking assessment of further downward pressure on asset quality, profitability, and capital, including an assessment of risks relating to large-single borrower concentrations and cross-border operations.

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

RATINGS RATIONALE

--REDUCED CAPITAL BUFFERS AND INCREASED CONCENTRATION LEVELS

The primary driver of the downgrade is the weakening of Mauritius Commercial Bank's core capital buffers available to protect against losses. Following the group's restructuring, which involves the transfer of non-banking and foreign banking subsidiaries to a new holding company, Mauritius Commercial Bank's consolidated Tier 1 ratio declined to 11% as at June 2014 from 13% reported as at June 2013. Furthermore, and despite the bank recently raising Tier 2 capital, Moody's expects some additional downward pressure on capital as the bank continues to complete its restructuring, with the final post-restructuring capital level dependent on the timing of the transfer of remaining operations.

Single-borrower concentrations have also increased significantly both in absolute terms and relative to Tier 1 capital. Moody's estimates that post-restructuring top 15 exposures (funded and unfunded) have grown to around 3.4x Tier 1 capital as of June 2014, from around 2.3x as at June 2013. Although these exposures remain diversified across economic sectors, Moody's expects they will continue to render the bank vulnerable to downside risks in the event of default of one of the large corporates.

--WEAKENING ASSET QUALITY LEADING TO HIGHER PROVISIONING REQUIREMENTS

The second driver of the downgrade is the deterioration in Mauritius Commercial Bank's asset quality in the fiscal year ended June 2014 (FYE2014), with the volume of non-performing loans (NPLs) (excluding bank exposures) increasing to 7.3% of loans as at end-June 2014, compared to 5.1% in June 2013 and 3.5% in June 2011. The weakening in asset quality is primarily driven by the default of a few large Indian corporate exposures in Mauritius Commercial Bank's off-shore lending business, which remains within the restructured entity (i.e. cross-border business carried out by the bank from Mauritius).

As a result of the increase in the volume of NPLs, Mauritius Commercial Bank's provisioning requirements rose significantly and are also pressuring the bank's profitability metrics, with return on average assets declining to 1.8% in FYE2014 from 2.1% reported in FYE2013. Moody's considers that the bank will need to continue to build its provisioning coverage, with loan loss reserves estimated at a low 55% of problem loans as at end-June 2014, which will exert further pressure on net profitability. Despite the collateral held against the problem loans, Moody's considers that raising the provisioning coverage is particularly important as the bank's cross-border operations are to jurisdictions characterised by weak institutional frameworks and slow recovery procedures.

--MODERATION OF SYSTEMIC SUPPORT CONSIDERATIONS

The third driver of the downgrade reflects a moderation of Moody's government support assumptions. Although Moody's continues to view the probability of government support for Mauritius Commercial Bank to be high -- based on the bank's systemic importance and dominance in the domestic system -- the rating agency has moderated its assumptions, resulting in one notch of uplift from the standalone rating, compared to two notches previously.

The moderation reflects the insights gained from the global financial crisis, which have illustrated how governments -- in line with global regulatory trends -- are increasingly employing market solutions in the provision of support to troubled banks, particularly when systemic banking crises coincide with periods of challenging macro-economic conditions. This is particularly relevant for the Mauritian banks, given the large size of the domestic banks in relation to the balance sheet of the government and the strong correlation between the government's finances and performance of these banks. Although Moody's recognises that the amendments to the Banking Act in 2013, leading to the restructuring and the ring-fencing of the large domestic banks, will limit contagion risks from non-bank operations and partially reduce risks from overseas (through subsidiaries), they also highlight the challenges authorities would face in supporting large domestic banks in a stress scenario.

-- FACTORS TO BE CONSIDERED IN THE RATING REVIEW

The review will focus on a forward-looking assessment of (1) further downward pressure on asset quality and profitability, (2) risks relating to the cross-border operations and the large-single borrower concentrations and (3) and the risk of further weakening of capitalisation.

WHAT COULD MOVE THE RATINGS UP/DOWN

Mauritius Commercial Bank's ratings could be downgraded if Moody's considers that the bank's asset quality and profitability will remain pressured due to risks from cross-border operations and from the large single-borrower concentrations. Heightened risk of further erosion of the bank's core Tier 1 ratio could also exert downward pressure on the ratings. As indicated by the rating review for downgrade, there is limited likelihood of any upwards rating momentum over the near-term.

LIST OF RATINGS

- Long-term and short-term local- and foreign-currency deposit ratings downgraded to Baa3/Prime-3 from Baa1/Prime-2; ratings placed on review for further downgrade

- Foreign-currency issuer rating downgraded to Baa3 from Baa1; rating placed on review for further downgrade

- Standalone D+ bank financial strength rating (BFSR) maintained -- baseline credit assessment lowered to ba1 from baa3; BFSR placed on review for downgrade

- National scale ratings (NSR) senior and subordinated medium-term notes (MTNs) downgraded to A3.za and Baa2.za (South Africa) from Aa3.za and A3.za, respectively; ratings placed on review for further downgrade

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Banks published in July 2014. 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 ".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".

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 J 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 downgrades Mauritius Commercial Bank's deposit ratings to Baa3 from Baa1; ratings placed on review for further downgrade
No Related Data.
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