Moody’s downgrades Mauritian banking majors MCB & SBM deposit rating to Baa3
Following group restructuring exercises, both banks’ capital structures have come under the scanner of financial analysis and research major Moody’s, which has also warned that the rating of these two banks could decrease further if no improvement is brought about in response to its comments. (Image: Cruising Excursions)
Mauritius’ top two banking institutions, Mauritius Commercial Bank (MCB) and State Bank of Mauritius (SBM), saw their long-term and short-term deposit ratings pulled down to Baa3/Prime-3 from Baa1/Prime-2, according to Moody’s Investors Service.
Concurrently, Moody’s also lowered MCB’s baseline credit assessment (BCA) to ba1 from baa3 within the D+ standalone bank financial strength rating (BFSR) category while SBM as standalone bank has received a financial strength rating (BFSR) of D+, equivalent to a baseline credit assessment (BCA) of ba1, from C-/baa2.
Moody’s enumerated several factors which impacted MCB’s rating. First and foremost, following a group restructuring, the bank faced a loss absorption capacity and an increased in single-borrower concentrations caused by a decline in its core capitalisation.
Secondly, there was a recent weakening in asset quality, which is also pressuring the bank’s profitability through higher provisioning expenses. It may be noted that the weakening in asset quality is primarily driven by the default of a few large Indian corporate exposures in MCB’s off-shore lending business, which remains within the restructured entity.
MCB’s assets in the fiscal year ended June 2014 deteriorated, as the volume of non-performing loans (NPLs), excluding bank exposures, increased to 7.3% of loans as at end-June 2014, compared to 5.1% in June 2013 and 3.5% in June 2011.
The third driver of the downgrade reflects a moderation of Moody’s government support assumptions.
However, 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. Also, 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 formation of subsidiaries.
Similarly, SBM’s rating was downgraded due to a decline in the bank’s capital buffers available to protect against losses.
Recently, SBM raised Tier 2 capital as the completion of a group restructuring on October 2, 2014, which included both the upstreaming of capital and the transfer of non-banking and foreign banking operations to a newly-established holding company.
Consequently, this has resulted to the decline in SBM’s Tier 1 ratio to an estimated 8% from a consolidated 18.7% reported as at December 2013.
Finally, Moody’s highlighted that the rating of these two banks could decrease further if no improvement is brought about in response to its comments.
Moody’s went on to note that MCB’s ratings could be downgraded if the bank’s asset quality and probability is observed to remain pressured due to risks from cross-border operations and from the large single-borrower concentrations.
In addition, MCB’s ratings can also nosedive if the heightened risk of further erosion of the bank’s core Tier 1 ratio is perceived.
While, for SBM, Moody’s noted that the bank must be cautious of the group’s expansionary plans which could further reduce the capital cushion available to support the bank in the event of need.
Finally, a downgrade for SBM could also be on the cards if Moody’s considers that the bank’s asset quality and profitability could come under pressure due to risks stemming from the increased single-borrower concentrations.