Fitch Ratings has affirmed MCB Long-Term Issuer Default Rating (IDR) at ‘BBB-‘ with a negative outlook. MCB’s capacity for respecting financial commitments is considered adequate but adverse business or economic conditions are more likely to affect this capacity.
The negative outlook on MCB’s long-term IDR reflects the negative impact of the pandemic on MCB’s operating environment and the resulting downside risks to the bank’s financial profile, in particular asset quality and profitability.
Fitch’s ‘Long-Term Issuer Default Rating’ scales range from AAA to D. With AAA, the highest credit quality and D, the worst.
The ‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
“MCB has a strong franchise as the largest bank in Mauritius, with market shares of local currency deposits and domestic credit of 47% and 39%, respectively, at June 2020. MCB is increasingly active outside of Mauritius, particularly in Africa, through its energy and commodities (E&C) and international structured finance business lines, which accounted for a combined 33% of gross loans at September 2020. Strong regional growth in recent years has mitigated weak domestic performance in FY20 (financial year ending June 2020), with foreign-sourced profit-before-tax increasing to 67% and helping maintain healthy, albeit reduced profitability”, says Fitch Ratings.
The firm argues MCB is taking increasing country risks through its growing exposure to Africa but it considers that the underlying credit risks, particularly in E&C financing, are mitigated by transaction structures and prudent underwriting standards and risk controls.
MCB’s impaired loans (Stage 3 loans under IFRS 9) ratio (4.8% at September 2020) has remained relatively stable despite prevailing economic conditions, supported by repayment moratoria granted to domestic customers affected by the pandemic and Mauritius government’s monetary and fiscal response, says Fitch.
MCB’s profitability is said to be healthy, supported by a low cost of funding and strong control of non-interest expenses. But with the significant increase in loan impairment charges, Fitch therefore forecasts profitability metrics to remain depressed.
MCB’s large customer deposit base is considered as a rating strength, with a high proportion of its retail, demand and savings deposits supporting funding stability and low funding costs. “Single-depositor concentration is considered low, with the largest 20 deposits accounting for just 8% of customer deposits at September 2020. MCB’s cross-border financing is largely funded by hard currency (mainly US dollars) deposits and to a lesser extent, borrowing from banks. Deposits from global business companies (GBCs; the offshore sector), which represent a material source of foreign currency funding (23% at June 2020), are considered a less stable source of funding. GBC deposit outflows represent a downside risk, despite remaining stable during the pandemic. Liquidity coverage is considered comfortable, particularly in Mauritian rupees ».
MCB has a bank support rating (SR) of 3 on a scale of 1 (best) to 5 (worst), with a Support Rating Floor (SRF) of ‘BB’. “This reflects Fitch’s view of a moderate probability of support from the Mauritian authorities, if required. We consider the Mauritian authorities to have a high propensity to provide support to MCB given its exceptionally high systemic importance as the country’s largest bank and largest taker of domestic deposits. However, Fitch believes that authorities’ ability to provide timely extraordinary support is limited by MCB’s large size relative to sovereign resources”, says Fitch.
Fitch has also informed that it has simultaneously withdrawn MCB’s ratings for commercial reasons and will no longer provide ratings and analytical coverage for MCB.
Why does Fitch withdraw ratings?
‘Withdrawn’: A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient.