Fitch Affirms Mercantil Commercebank's Long- & Short-Term IDRs; Outlook Stable
KEY RATING DRIVERS
IDRS AND VRs
MCFB's IDRs reflect its geographic concentration, mainly in South Florida, a risk profile that includes exposure to economic conditions in Latin America, a limited franchise, and modest earnings metrics. Offsetting this, the company's ratings are supported by its solid capital levels and good liquidity profile. Fitch believes the improved financial performance over the last few years is sustainable.
In Fitch's view, MCFB's and MCH's ratings are not immediately affected by the deteriorating economic conditions in Venezuela and their impact on MSF. Although MCFB and MCH are part of the organizational structure of MSF, and the franchise could be affected by the financial performance of its parent company/and or affiliated companies in Venezuela and other countries, Fitch believes any impact on the Florida-based franchise, at this time, is limited.
In Fitch's opinion, contagion risk to MCFB from the parent is limited at this time. MCFB's holding company structure isolates its assets and the strong local regulator can restrict transfers of capital and liquidity from the subsidiary to the parent. Further, to date, there is no evidence that MSF has withdrawn liquidity or capital. In general, subsidiary banks can be vulnerable to a sharp deterioration in the parent's credit profile. However, Fitch believes this is a rare case, where the subsidiary's Viability Rating (VR), and Long-Term IDR, can be higher than its parent's Long-Term IDR.
The funding structure is largely core-deposit driven and benefits from a high volume of international deposits. The majority of international funding is sourced from Venezuelan depositors who have turned to U.S. banks as a safe haven. These deposits historically have a very low attrition rate, limited rate sensitivity and provide a stable source of low-cost funding. Overall, MCFB has exhibited a relatively stable deposit base, despite volatility in Venezuela over the last 10 years that has pressured MSF in its home market. To cushion potential volatility and improve diversification, the company is implementing a strategy to increase U.S. deposits through a branch-led expansion, primarily in the Houston area, which Fitch views favorably.
Furthermore, Fitch also believes MCH's consolidated balance sheet has good liquidity with a combination of cash, cash equivalents and liquid investment securities representing about 28% of total assets as of Sept. 30, 2015 and a loan-to-deposit ratio of 87%.
In Fitch's view, the lack of access to external capital is considered a rating constraint. That said, MCH's capital position is adequate and supports the risks inherent in the bank's business mix. MCH's TCE/TA ratio stood at 8.33% and tier 1 capital ratio stood at 11.94% at Sept. 30, 2015. Given projected loan growth, capital is expected to decline slightly, but should remain within our expectations for the rating level. The decline should also be manageable given the expectation of sustainable profitability.
Credit trends have significantly improved from the peak of the crisis, as net charge-offs (NCOs), nonperforming assets (NPAs), and the inflows of criticized/classified assets have all returned to normalized levels. Overall, Fitch views the company's asset quality performance over time favorably. Fitch expects future credit costs to be manageable given the reduction in overall balances in riskier segments of the CRE market, including construction and development loans as well as tempered growth in commercial and industrial (C&I) loans. For third quarter 2015 (3Q15), NPAs, calculated by Fitch to include accruing troubled debt restructuring, were 1.31% compared to 1.08% the same period a year ago. NCOs declined to nil for 3Q15 compared to 3.9% at the peak of the crisis year-end 2009.
MCH's earnings measures tend to be modest when compared to other community banks and are considered a rating constraint. Fitch attributes this to the company's asset mix, which is lower-yielding, as cash and investment securities averaged 29% of total assets over the past four quarters. Additionally, MCH's large correspondent banking business and short-term trade finance business are lower-yielding than other types of loans, which also constrains spread revenue and the margin. Other factors affecting recent performance include the extended period of low interest rates as well as increased expenses related to on-going growth efforts.
The company has improved diversification in its loan mix by reducing real estate lending and growing its C&I portfolio. Although Fitch views the diversification in the loan mix as a positive, the industry in general has also been growing C&I loans and competition is fierce. As such, Fitch views the company's recent pullback in 2015 favorably. In general, Fitch is concerned with the potential for credit quality deterioration.
Given MCFB's targeted, niche client base, which gives the company an opportunity to leverage its expertise in Latin America as well as in oil-related industries, there is some concern that asset quality could deviate from recent trends given the prolonged decline in energy and commodities prices. Additionally, the bank also engages in syndicated lending through participations in large lending arrangements to corporate borrowers. Although performance to date has been stable, Fitch believes a reversion in credit performance to normalized levels from historical lows may lead to credit deterioration in the syndicated loan book.
SUPPORT RATING AND SUPPORT RATING FLOOR
MCH and MCFB have a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, MCH and MCFB are not systemically important and, therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
LONG- AND SHORT-TERM DEPOSIT RATINGS
Mercantil Commercebank, N.A.'s uninsured deposit ratings are rated one notch higher than its IDR and senior unsecured debt rating because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
HOLDING COMPANY
MCH has a bank holding company (BHC) structure with the bank as the main subsidiary. The subsidiary is considered core to the parent holding company, supporting equalized ratings between the bank subsidiary and the BHC. IDRs and VRs are equalized with those of MCH's operating company and bank reflecting its role as the BHC, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.
RATING SENSITIVITIES
IDRS AND VR
Given MCFB's geographic concentration in South Florida, its IDRs are sensitive to market conditions within its regional footprint. Additionally, MCFB has a large component of international exposure (roughly 34% of its total loan book), which is also affected by economic conditions in Latin America.
MCFB's ratings are on the high end of its near term rating potential. Although Fitch recognizes the company's improvements in asset quality and its strategy to diversify its deposit base, the company's ties to its parent company, MSF, and affiliated bank, Mercantil CA Banco Universal, are considered a rating constraint.
Fitch notes that there may be risks to MCFB's Venezuelan deposit base as depositors may seek to withdraw their funds to make routine operational purchases. Factors that could trigger negative rating action would be a change in depositor behavior as evidenced by a declining trend in deposits. Although not anticipated, reputational risk is also a concern given that MCFB's ultimate parent is domiciled in Venezuela.
Other factors that would be viewed negatively are a decline in capital or a material deterioration in credit performance. Fitch notes that MCH has, historically, experienced above-average C&I loan growth that is, as yet, unseasoned.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of long- and short-term deposits issued by Mercantil Commercebank, N.A. are primarily sensitive to any change in the company's IDRs. This means that should a Long-term IDR be downgraded, deposit ratings could be similarly affected.
HOLDING COMPANY
If MCH or MCFB became undercapitalized or increased their double leverage significantly, there is potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.
PROFILE
Established in 1979, Mercantil Commercebank, N.A. (MCB), based in Coral Gables, FL, is a privately held, FDIC insured, nationally chartered bank, regulated by the Office of the Comptroller of the Currency (OCC). The bank has 12 branches throughout Miami-Dade County, four in Broward County, one in Palm Beach County, one in New York, NY, and five in the Houston, TX area. The bank is ultimately beneficially owned by Mercantil Servicios Financerios (MSF), one of the largest financial groups based in Venezuela.
Fitch has affirmed the following ratings:
Mercantil Commercebank Florida BanCorp.
--Long-term IDR at 'BB'; Outlook Stable;
--Short-term IDR at 'B';
--VR at 'bb';
--Support at '5';
--Support floor at 'NF'.
Mercantil Commercebank, N.A.
--Long-term IDR at 'BB'; Outlook Stable;
--Long-term deposits t 'BB+';
--Short-term IDR at 'B';
--Short-term deposits at 'B';
--VR at 'bb';
--Support at '5';
--Support Floor at 'NF'.
Fitch has assigned the following ratings:
Mercantil Commercebank Holding Corp.
--Long-term IDR of 'BB'; Outlook Stable;
--Short-term IDR of 'B';
--VR of 'bb';
--Support of '5';
--Support floor of 'NF'.
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