New York, December 02, 2019 -- Moody's Investors Service ("Moody's") has today
upgraded to B3.br, from Caa1.br, the long term
national scale deposit rating assigned to Banco Mercantil do Brasil S.A.
("Banco Mercantil" or "Mercantil"). Moody's also upgraded
to B1.br, from B2.br, Mercantil's long-term
National Scale Counterparty Risk rating. At the same time,
Moody's affirmed Banco Mercantil's long-term local
and foreign currency deposits ratings at Caa1, its baseline credit
assessment at caa1 and its long-term counterparty risk rating at
B3. A full list of the affected ratings and assessments is provided
at the end of this press release. The outlook was changed to stable,
from negative to reflect the bank's better results that have allowed
it to improve capital ratios.
The upgrade of Banco Mercantil's long-term national scale
ratings and the change in the outlook to stable, from negative,
incorporate the steady improvement in the bank's profitability over
the past 12 months driven by lower funding and credit costs, and
in capital, following the modestly better earnings, lower
dividend payout and less capital consuming assets. The affirmation
of Mercantil's global scale ratings reflects Moody's expectation
that the bank's financial performance will remain under pressure
by persistently weak asset risk, by heightened competition and by
a still heavy cost structure that will continue to limit the bank's
ability to generate sustainable and recurring results.
Banco Mercantil's loan portfolio contracted 12% in 3Q 2019
when compared to one year prior mostly reflecting the runoff of problematic
corporate loans, as well as true sales of payroll loans, which
Mercantil resumed in mid 2019. At the same time, Mercantil
expanded into riskier unsecured consumer lending , and this asset
class accounted for more than one fourth of the bank's loan portfolio
in 3Q2019. While consumer loans yield high margins, the delinquencies
have been high at 9.2%, and above the system's
personal lending average nonperforming loan (NPL) ratio of 7.4%,
thus, putting further pressure on the bank's weak asset risk.
Therefore, the buildup of this riskier portfolio and the continuous
contraction of corporate loans have resulted in a 9.4% problem
loan ratio in September 2019, about 3 times higher than the banking
system's average, and worse than the 8.9% reported
one year prior. High asset risk, even if partially offset
by adequate loan loss reserves, also stems from the fact that high
net charge off ratios, averaging 8.1% of loans from
2014 June 2019, have not been enough to curtail the volume of problem
Mercantil delivered stronger bottom-line results in 3Q 2019 as
evidenced by the ratio of net income to tangible banking assets at 1.1%,
up from the 0.5% average reported in the past three years.
The reduction in funding costs, aided by the decline in policy rate
and a higher-yielding loan mix supported net interest margins,
despite the contraction in the loan book. However, Mercantil
still reports high and volatile provisions as a percentage of its pre-provision
income, at above 60%, while operating costs remain
high, with the cost to income ratio at levels of 63%,
and above the 50.3% average reported by the Brazil banking
system in 3Q2019. The key drivers of Mercantil's improved
profitability were therefore the gains on sales of payroll loans in the
period. Excluding the gains on credit sales, Mercantil's
adjusted net income to tangible banking assets would have declined to
less than 1%, a level that is more in line with its historical
performance. With credit costs expected to remain high, the
sustainability of Mercantil's profitability will depend on further
credit sales or continuing cost cutting measures.
Moody's upgrade of Mercantil's NSR acknowledges the bank's
improved capital position over the past quarters, following the
regulatory approval of a BRL 60 million capital injection in mid 2018
and higher earnings generation. Mercantil's capital ratio,
measured by Moody's as tangible common equity as a percentage of
adjusted risk weighted assets (TCE/RWA) increased to 10.4%
in September 2019, from 7.8% in September 2018 and
5.6% in September 2017. Mercantil's stronger
capital position also resulted from a reduced loan portfolio as well as
lower capital requirements for credit risk as the bank increased the share
of consumer loan in its loan mix, which tends to consumes less capital.
Banco Mercantil's ratings are also supported by its predominantly deposit
based funding structure, which has been stable in recent quarters.
While more than one third of the bank's funding is sourced from
institutional investors and beneficiaries of Social Security, this
is somewhat offset by the bank's historical sizeable holdings of liquid
assets, which accounted for 36% of tangible banking assets
in September 2019 and has been higher than 25% since 2016.
Liquid assets cover more than 100% of the bank's deposits
with daily withdrawal clauses. Also, the bank presents a
positive tenor gap of 5.9 months in June 2019.
Moody's believes Banco Mercantil's exposure to environmental risks is
low, consistent with its general assessment for the global banking
sector. Banco Mercantil's exposure to social risks is moderate,
consistent with Moody's general assessment for the global banking sector.
Moody's does not apply any corporate behavior adjustment to the
bank, considering recent and improved measures to enhance transparency
and to strengthen corporate governance, including a recently renewed
management team. We incorporated concerns about risk and corporate
governance in our assessment of asset risk and profitability, especially
concerning weak credit concession parameters of corporate lending in the
WHAT COULD CHANGE THE RATING -- DOWN/UP
The ratings could be downgraded if Mercantil's earnings decline
as a result of its inability to generate sustainable results and of a
further deterioration on its already weak asset quality position,
which could put downward pressure on capital. The ratings could
be upgraded if the bank demonstrates ability to generate consistent and
sustainable earnings within the next 12-18 months with controlled
credit costs and manageable cost structure under heightened competitive
conditions. Upward pressure on the ratings will also derive from
declining asset risk and maintenance of adequate capital ratios.
The principal methodology used in these ratings was Banks Methodology
published in November 2019. Please see the Rating 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 May 2016 entitled "Mapping National Scale Ratings
from Global Scale Ratings". While NSRs have no inherent absolute
meaning in terms of default risk or expected loss, a historical
probability of default consistent with a given NSR can be inferred from
the GSR to which it maps back at that particular point in time.
For information on the historical default rates associated with different
global scale rating categories over different investment horizons,
please see http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.
Banco Mercantil is headquartered in Belo Horizonte Brazil, and reported
BRL 9.9 billion (USD 2.5billion) in assets and BRL 878 million
(USD 220 million) in shareholders' equity as of 30 September 2019.
LIST OF AFFECTED RATINGS AND ASSESSMENTS
The following ratings of Banco Mercantil do Brasil S.A were upgraded:
- Long-term Brazilian national scale counterparty risk rating
to B1.br from B2.br
- Long-term Brazilian national scale deposit rating to B3.br
from Caa1.br, outlook revised to stable from negative
The following ratings and assessments of Banco Mercantil do Brasil S.A.
- Long-term global local and foreign-currency deposit
ratings of Caa1, outlook revised to stable from negative
- Short-term global local and foreign-currency deposit
ratings of Not Prime
- Long-term global local and foreign-currency counterparty
risk ratings of B3
- Short-term global local and foreign-currency counterparty
risk ratings of Not Prime
- Long term foreign-currency senior unsecured medium-term
note program of (P)Caa1
- Long-term foreign currency subordinated debt rating of
- Long-term counterparty risk assessment of B3(cr)
- Short-term counterparty risk assessment of Not Prime (cr)
- Short-term Brazilian national scale deposit rating of
- Short-term Brazilian Counterparty Risk Rating of BR-4
- Baseline credit assessment of caa1
- Adjusted baseline credit assessment of caa1
Outlook changed to stable from negative
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vice President - Senior Analyst
Financial Institutions Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653
M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653