Fitch Ratings has affirmed the ratings and revised the Outlook of the Venezuela-based Mercantil Banco (MB) to Stable from Negative, as follows:
--Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+';
--Short-term foreign and local currency rating at 'B';
--Individual at 'D';
--Support at 5.
--Long-term National rating at 'AA(ven)';
--Short-term National rating at 'F-1(ven)';
--Support Floor at NF.
The Outlook for the long-term IDR is Stable. Government intervention is a major risk for Venezuelan banks; nevertheless, MB's conservative business plan, adequate risk control techniques, long history of expertise and current capital base provide some room for maneuvering in case of further interventions.
MB's ratings reflect its strong franchise, stable retail deposit base, and adequate performance sustained by an above-average risk control culture. The ratings are constrained by the negative effects of government intervention into the banking sector and overall private-sector activities.
MB is a leader in terms of loan origination, based on its ample market share, conservative lending policies, and state of the art risk control tools. Strong economic activity observed in the country since mid-2004 has resulted in a sustained increase in the loan portfolio, while asset quality metrics remain healthy. At end-June 2008, the past due loan portfolio was below 1% of total loans, but slightly increasing. Loan loss reserves have averaged 2.5% since year 2005, a level that might be tight considering the volatility of the operating environment.
A larger business base and greater exposure to consumer lending have been able to mitigate the negative effects of interest rates controls, the absence of foreign exchange gains and still-high overheads. As such, the return-on-average-assets (ROAA) ratio has averaged 3.5% since 2005, although it has been decreasing. Future profitability expectations could remain limited given a possible deepening of market competition, higher loan loss provisions or more government intervention.
Despite vigorous growth and lower profitability, MB has been proactive in protecting its capital base, not only moderating its cash dividends, but also completing one of the few fresh capital injections to a Venezuelan bank in 2007. At end-June 2008, the equity-to-assets ratio stood at 10%, while the Fitch free-capital ratio, which excludes the burden of fixed and foreclosed assets, increased to almost 8.9%, a level considered adequate given the risk profile of the bank, but not easy to sustain in times of growing competition and lower expected profits.
MB was the third largest universal bank in Venezuela at June 2008 in terms of invested funds (assets plus investment funds) with a 10.5% asset market share, and was a leader in many market segments. MB is 99.8% owned by Mercantil Servicios Financieros (MSF), a holding company with major investments in Venezuela and the United States.
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