Rating Action: Moody's affirms Baa3 ratings of two Mauritian Banks, maintains

stable outlook
Global Credit Research - 31 Oct 2017
Limassol, October 31, 2017 -- Moody's Investors Service (Moody's) has today affirmed Mauritius Commercial
Bank Limited's (MCB) and SBM Bank (Mauritius) Ltd.'s (SBM) local and foreign-currency deposit ratings at
Baa3/P-3 and their baseline credit assessments (BCA) of ba1. Moody's maintained the stable outlook on the
long-term deposit ratings assigned to both banks.
MCB's and SBM's Baa3 long-term deposit ratings reflect their Baseline Credit Assessment (BCA) of ba1 and
Moody's assessment of a `high' probability of Government of Mauritius (Baa1, stable) support in case of need.
The banks' ba1 BCAs reflect: (1) their very high liquidity buffers, (2) comfortable capital levels and (3) good
earnings generating capacity. These positive credit drivers are moderated by banks' (1) elevated credit risks
owing to sizeable borrower concentrations and problem loans, although on a declining trend and (2) reliance
on relatively high portion of foreign-sourced deposits, which are confidence sensitive to any disruption in
Mauritius' off-shore business sector, although part of these deposits relate to corporates and high net-worth
individuals that are more sticky. The high government support assumption is driven by the banks' importance
to the domestic financial system given MCB's approximate 45% market share of domestic customer deposits,
and SBM's around 23% market share combined with its indirect government ownership of around 28% through
state-owned entities.
The full list of affected ratings is provided at the end of this press release.
RATINGS RATIONALE
MAURITIUS COMMERCIAL BANK LIMITED
- STANDALONE BCA
MCB's baseline credit assessment affirmation takes into consideration the bank's progress in reducing its
nonperforming loans, as well as its satisfactory full-year performance as of June 2017 with net profits
increasing by around 11%. The bank' main rating drivers include:
-- ELEVATED CREDIT RISKS, ALTHOUGH ASSET QUALITY IS IMPROVING
As of end-June 2017, MCB's problem loans (defined as impaired loans and all loans that are more than 90
days past due but not impaired) improved significantly to 5.9% as of June 2017 from around 9% as of June
2016 and June 2015, reflecting the curing of certain renegotiation loans that are now being serviced.
Moody's expects MCB's asset quality to benefit from the high economic growth in Mauritius (the rating agency
expects GDP to expand by 3.6% in 2017 and 3.7% in 2018), as well as the budgeted infrastructure spending
that is likely to revive credit growth. Accordingly, the rating agency expects further asset quality improvements
at MCB, which could trigger upward rating pressure.
However, high single-borrower concentration levels will continue to expose MCB to downside risks and
constrain its ratings. The bank's top-20 group loan exposures comprised a significant proportion of its Tier-1
capital as of June 2017, although Moody's recognises the bank's entrenched franchise with some of the
country's conglomerates that are well diversified across different sectors of the economy.
-- COMFORTABLE CAPITAL BUFFERS PROVIDE STRONG LOSS-ABSORPTION CAPACITY
As of June 2017, the bank reported a tangible common equity to risk-weighted assets of 13.9% which
compares well to the 12.4% global ba1 peers median ratio. Although Moody's expects part of the capital to be
absorbed to fund credit growth, the bank will manage the capital allocation within the MCB Group structure in a
manner that will ensure that the rated entity's core capital base remains at comfortable levels above its
regulatory requirement. The bank's common equity Tier 1 ratio (CET1) on a consolidated basis was a high
16.3% as of June 2017.
16.3% as of June 2017.
-- GOOD EARNINGS GENERATING CAPACITY SUPPORTED BY HEALTHY NET INTEREST MARGINS
AND LOW CREDIT COSTS
During the financial year ended June 2017, net income to tangible banking assets was at 2.1% (FYE 2016:
1.8%), supported by good growth in non-interest income and low provisioning costs (0.6% of loan loss
provisions to gross loans), which compares well to the 0.8% global ba1 peers median ratio.
Moody's expects MCB's profitability to continue to be supported by (1) healthy net interest margins (FYE 2017:
3%), although it has come under modest pressure in recent years, (2) a gradual pick up in lending activity,
which will be supported by the increase in public and private sector investment in the country, particularly
towards the infrastructure, energy sectors and tourism.
-- HIGH LIQUIDITY SUPPORTED BY A GRANULAR DEPOSIT-BASED FUNDING STRUCTURE,
ALTHOUGH A SIZEABLE PORTION IS FOREIGN-SOURCED
As of June 2017, the bank's liquid banking assets to tangible banking assets ratio stood at 45% (43% at June-
2016) and its market funds to tangible banking assets ratio stood at a low 3.5% (3.4% at June-2016). Moody's
expects MCB to maintain its high liquidity buffers, supported by its deposit-funded profile and a strong growth in
customer deposits.
Although the bank benefits from a stable low cost deposit-funded structure reflecting its high market share in
the domestic customer deposits (around 45%), Moody's considers MCB's foreign-sourced deposits (or
segment B deposits) at around 29% of total deposits as of June 2017 to be confidence sensitive to any
disruption in Mauritius' off-shore business sector and can expose the bank to refinancing risks. Nonetheless,
the rating agency understands that a good part of MCB's segment B deposits relate to corporates and high
net-worth individuals that are more sticky.
- LONG-TERM DEPOSIT RATINGS
-- GOVERNMENT SUPPORT
MCB's Baa3 deposit rating incorporates a high probability of government support in case of need that
translates into one notch uplift from its ba1 BCA, based on the bank's importance to the domestic financial
system given its 45% market share of domestic customer deposits.
WHAT COULD MOVE THE RATING -- UP/DOWN
Upwards pressure on MCB's ratings could develop through sustainable improvements in MCB's asset quality
combined with a sustained record of limiting risks in cross-border business lines, easing borrower
concentration and reducing volatility in provisioning requirements.
Downwards pressure on MCB's ratings could develop in case: (1) the bank's asset quality, profitability and
capitalisation come under pressure as a result of excessive risks stemming from cross-border operations; or
(2) if there is a considerable increase in its large single-borrower and group concentrations. In addition, if the
sovereign's willingness to support the bank or its capacity to do so is reduced, this could also negatively impact
the bank's ratings.
RATINGS OUTLOOK
The stable outlook reflects Moody's view that MCB's solid liquidity and capitalisation, and good profitability
balance the challenges arising from elevated credit risks and refinancing risks stemming from confidence-
sensitive foreign-sourced deposits.
SBM BANK (MAURITIUS) LTD.
- STANDALONE BCA
The affirmation of SBM's baseline credit assessment considers the bank's rapid net loans and deposits growth
at 23.3% and 24.5% in the first six months of the year as of June 2017 that will support its revenues going
forward, but also its reduced net interest margin and elevated loan portfolio provisions that caused net profit to
reduce by around 16% year-on-year. The bank's main rating drivers include:
-- HIGH BORROWER CONCENTRATION AND CROSS BORDER OPERATIONS RAISE THE BANK'S
CREDIT RISK PROFILE
As of end-June 2017, SBM's problem loans (defined as impaired loans and loans that are more than 90 days
past due but not impaired) approximated 5.6% (YE2016: 6.5%). The rapid growth in lending (up by 23% in the
6 month period) masked the increase in absolute problem loans (up by 5% during the same period) which was
due to concentrated Indian-related exposures that went bad.
Moody's expects that the bank's high credit concentrations will persist and continue to expose SBM's asset
quality to event risk. As of June 2017, top-20 exposures comprised a significant proportion of its Tier-1 capital
as of June 2017. The bank, however, maintains a high cash coverage of NPLs by loan loss reserves of around
85% as of June 2017, which provides a strong buffer against credit losses and drives the bank's standalone
credit profile of ba1.
Moody's expects SBM's asset quality to benefit in the next 12-18 months from the still resilient economic
growth in Mauritius. In addition, the bank claims that its increased focus on its foreign-related business
(Segment B loans) in recent quarters is unlikely to further compromise its asset quality, given that such lending
is usually done on a secured syndicated basis for low to medium risk assets. Nonetheless, the rating agency
expects downside risks on the bank's asset quality to gradually increase over the longer-term, from the group's
recent strategic venture into Kenya and appetite to further expand its operations into Africa.
-- COMFORTABLE CAPITAL BUFFERS LIKELY TO BE PRESSURED
The bank maintains comfortable, yet declining, capitalisation, which underpins its ratings. As of June 2017,
SBM's reported common equity Tier 1 (CET1) ratio declined to 12.2% from 12.9% as of end December 2016
due to a significant increase in the bank's risk-weighted assets. These capital levels are above regulatory
requirements, and provide the bank with some loss absorption capacity against unexpected losses in the
context of elevated credit risks.
Moody's considers that the high capital level maintained at the holding company SBM Holdings Ltd (CET1 of
17.2% in June 2017) will continue to provide an additional cushion to SBM if needed, although part of it is
being utilised to fund the expansion strategy into Africa. In addition, the rating agency notes that the imminent
conversion of the bank's branches in India into a wholly-owned banking subsidiary, is likely to pressure the
SBM's capital levels, although the bank is expected to replenish the gap.
-- GOOD PROFITABILITY DESPITE DECLINE IN THE FIRST SIX MONTHS 2017
During the six months ended June 2017, net income to tangible banking assets approximated to 1.6% (2016:
1.7%), which compares well to the 0.8% global ba1 peers median ratio. This is despite the almost 16% year-
on-year decline in net profit for the first six months in 2017, mainly driven by an increase in operating costs
resulting from the new IT platform and higher portfolio provisions due to an expanding loan book.
Moody's expects SBM's profitability to continue to be supported by (1) high net interest margins (H1 2017:
3.1%), despite intense competition, as SBM is focused to grow its higher yielding Segment B loan portfolio, (2)
a gradual pick up in lending activity, which will be propelled by the increase in public and private sector
investment in the country, particularly towards the infrastructure, energy sectors and tourism.
-- ABUNDANT LIQUIDITY ON THE BACK OF A DEPOSIT-FUNDED PROFILE, ALTHOUGH A SIZEABLE
PORTION IS FOREIGN-SOURCED
As of June 2017, the bank's liquid banking assets to tangible banking assets ratio stood at 42% (41.5% at Dec-
2016) and its market funds to tangible banking assets ratio stood at 4.5% (5.7% at Dec-2016), which compare
well to global ba1 peers. Moody's expects SBM to maintain its high liquidity buffers, supported by its deposit-
funded profile and a strong growth in customer deposits.
Although the bank benefits from a stable low cost deposit-funded structure reflecting its high market share in
the domestic market (around 23%), Moody's considers SBM's foreign-sourced deposits (or segment B
deposits) at around 25% of total deposits as of December 2016 to be confidence sensitive to any disruption in
Mauritius' off-shore business sector and can expose the bank to refinancing risks.
- LONG-TERM DEPOSIT RATINGS
-- GOVERNMENT SUPPORT
SBM's Baa3 deposit rating incorporates a high probability of government support in case of need that
SBM's Baa3 deposit rating incorporates a high probability of government support in case of need that
translates into one notch uplift from its ba1 BCA, based on (1) the bank's indirect government ownership of
around 28% through state-owned entities and (2) the bank's importance to the domestic financial system given
its 23% market share of domestic deposits.
WHAT COULD MOVE THE RATING -- UP/DOWN
Upwards pressure on SBM's ratings could develop following a material reduction in single borrower
concentrations and a successful enhancement of business diversification, while achieving strong earnings
growth, improved asset quality and strong capitalisation.
Downwards pressure on SBM's ratings could develop if the rating agency considers that its underlying
fundamentals could come under pressure as a result of risks stemming from its large single-borrower
concentrations, or from any excessive risks arising from its ambitious expansion plans in India and Africa. In
addition, if the sovereign's willingness to support the bank or its capacity to do so (as implied by its Baa1 rating)
is reduced, this could also negatively impact the bank's ratings.
RATINGS OUTLOOK
The stable outlook reflects Moody's view that SBM's solid liquidity, comfortable capitalisation and adequate
profitability balance the challenges arising from elevated credit risks and refinancing risks stemming from
confidence-sensitive foreign-sourced deposits.
LIST OF AFFECTED RATINGS
Issuer: Mauritius Commercial Bank Limited
Affirmations:
....LT Issuer Rating, Affirmed Baa3, Outlook Remains Stable
....LT Bank Deposits, Affirmed Baa3, Outlook Remains Stable
....ST Bank Deposits, Affirmed P-3
....Adjusted Baseline Credit Assessment, Affirmed ba1
....Baseline Credit Assessment, Affirmed ba1
....LT Counterparty Risk Assessment, Affirmed Baa2(cr)
....ST Counterparty Risk Assessment, Affirmed P-2(cr)
Outlook Actions:
....Outlook, Remains Stable
Issuer: SBM Bank (Mauritius) Ltd.
Affirmations:
....LT Issuer Rating, Affirmed Baa3, Outlook Remains Stable
....LT Bank Deposits, Affirmed Baa3, Outlook Remains Stable
....ST Bank Deposits, Affirmed P-3
....Adjusted Baseline Credit Assessment, Affirmed ba1
....Baseline Credit Assessment, Affirmed ba1
....LT Counterparty Risk Assessment, Affirmed Baa2(cr)
....ST Counterparty Risk Assessment, Affirmed P-2(cr)
Outlook Actions:
....Outlook, Remains Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in September 2017. Please see the
Rating Methodologies page on www.moodys.com for a copy of this methodology.
At the end-June 2017, Mauritius Commercial Bank Limited, headquartered in Port Louis, Mauritius, had total
assets of MUR314.2 billion ($9.1 billion).
At the end-June 2017, SBM Bank (Mauritius) Ltd., headquartered in Port Louis, Mauritius, had total assets of
MUR161.8 billion ($4.7 billion).
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.
Nondas Nicolaides
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
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Limassol CY 3301
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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