OREANDA-NEWS. March 12, 2015. Fitch Ratings has assigned The Mauritius Commercial Bank Limited (MCB) a Long-term Issuer Default Rating (IDR) of 'BBB-' and Viability Rating (VR) of 'bbb-'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary.

MCB is Mauritius' oldest and largest bank and the main operating bank of MCB Group Limited (MCB Group), Mauritius' largest listed holding company. MCB itself has deposit and lending domestic market shares of around 40% each.

KEY RATING DRIVERS - VR AND IDRs
MCB's Long- and Short-term IDRs are driven by the bank's intrinsic strength as captured in its VR.

The VR reflects the bank's leading franchise in the small but relatively stable domestic market, adequate underlying profitability, solid funding and liquidity profile as well as MCB's simplified organisational structure following a restructuring exercise in 2014. It also reflects MCB's only acceptable capitalisation, some pressure on asset quality, its fairly concentrated corporate loan book and execution risks in its international expansion plans.

Predominately a domestic universal bank, MCB provides retail, commercial, card and payment services. The bank is also increasingly active in trade finance in the Sub-Saharan region and to a lesser extent international private banking, although to date this remains a small proportion of its overall business. While we believe that MCB's diversification strategy could ultimately improve the bank's earnings and risk diversification, in the short to medium term it exposes the bank to comparatively higher execution and strategic risks.

In 2013, an amendment to the 2004 banking act gave the central bank the authority to require the separation of banking and non-banking activities at domestic systemically important banks (D-SIB), including at MCB Group. This resulted in the effective ring-fencing of domestic banking activities within MCB. As a result, contagion risk from international expansion and non-banking activities at MCB Group level for MCB has fallen and operational complexities have been reduced. In our view, both of these factors are credit positive for MCB's counterparties and depositors.

MCB's profitability is robust benefiting from a good product mix and strong pricing power resulting in adequate margins. In 2014, high loan impairment charges and persistent excess liquidity hampered results. In 2015, we expect MCB's profitability to moderately improve as loan impairment charges should gradually fall and central bank measures should tackle excess liquidity in the domestic banking system.

We consider MCB's funding and liquidity as a strength based on its strong local and foreign currency deposit franchise, its sound loans-to-deposits ratio, and adequate management of both local and foreign currency liquidity.

Asset quality is a moderate weakness for MCB's VR. Both the bank's impaired loans ratio (6.1% at end-2014; based on 60 days past due loans) and loan book concentration have worsened in the past two years and are weaker than the average for the Mauritian banking sector. In addition, volumes of renegotiated or restructured loans are high relative to international peers. However, this is to some extent mitigated by adequate loan loss and collateral coverage and the low migration volumes from renegotiated to impaired loans.

While capitalisation at MCB Group is adequate (end-2014 core Tier 1 ratio of 13.5%), we view the bank's capitalisation as only acceptable (just below 11% at end-December 2014). However, our assessment of MCB's capitalisation is based on our expectation that in the short term, a combination of internal capital generation and capital strengthening measures will bring it more in line with domestic and international peers.

The Stable Outlook on MCB's Long-term IDR reflects our expectation that the bank will report adequate profitability in the medium term and improve its capitalisation in the short term.

RATING SENSITIVITIES - VR AND IDRs
Upside potential for MCB's VR and IDRs is currently limited but could arise from improved asset quality and lower loan book concentration.

Given the small size of the Mauritian economy, its concentrated nature and Fitch's assessment of Mauritian sovereign risk, any upside potential would likely be limited to one notch.

Further worsening of MCB's asset quality, fast international expansion without corresponding improvements in risk controls or a more aggressive approach to managing foreign currency exposures could be negative for MCB's VR and IDRs. A material deterioration in the domestic macroeconomic environment would also put pressure on MCB's VR and IDRs.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
MCB's Support Rating of '3' and Support Rating Floor of 'BB+' reflect our view that there is a moderate probability of sovereign support for MCB, if ever necessary. This is based on MCB's dominant position in and systemic importance for the Mauritian financial sector.

Fitch understands that the Mauritian authorities are supportive of the country's banking system and that the recent legislative changes requiring large banks to separate banking and non-banking activities are a way of improving the government's ability to support D-SIBs and to limit contagion risks from non-banking activities.

However, the sovereign's ability to support the banking system is constrained by both Mauritius' relatively high gross general government debt to GDP ratio and the size of the country's banking sector relative to GDP. Even if only domestically-owned D-SIBs are considered, contingent risks from the banking sector remain sizeable. The sovereign's comparatively large stock of FX reserves somewhat mitigates these limitations.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
Should the Mauritian government start implementing resolution legislation, envisaging senior debt bail-in before state support can be extended, then MCB's Support Rating and SRF would be reviewed.

The Support Rating and SRF are also sensitive to any deterioration in sovereign financial flexibility or changing macroeconomic conditions.

The rating actions are as follows:

Long-term IDR: assigned at 'BBB-'; Outlook Stable
Short-term IDR: assigned at 'F3'
Viability Rating: assigned at 'bbb-'
Support Rating; assigned at '3'
Support Rating Floor: assigned at 'BB+'

Fitch will shortly publish a Ratings Navigator for MCB.