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Fitch Affirms Mercantil Commercebank's Long- & Short-Term IDRs; Outlook Stable
December 20, 2016 / 8:32 PM / in a year

Fitch Affirms Mercantil Commercebank's Long- & Short-Term IDRs; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 20 (Fitch) Fitch Ratings has affirmed the Long- and Short-term Issuer Default Ratings (IDRs) of Mercantil Commercebank Holding Corp. (MCH) and its main bank subsidiary, Mercantil Commercebank, N.A. (MCB) at 'BB/B' with a Stable Outlook. Through MCH, the bank is beneficially owned by Mercantil Servicios Financieros (MSF), one of the largest financial institutions based in Venezuela. A complete list of ratings follows at the end of this release. KEY RATING DRIVERS IDRS AND VIABILITY RATINGS MCH'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 MCH's improved earnings performance over 2016 is sustainable. In Fitch's view, MCH's ratings are not immediately affected by the deteriorating economic conditions in Venezuela and their impact on MSF. Although MCH and MCB 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 that, at this time, any impact on the Florida-based franchise, is manageable. In Fitch's opinion, contagion risk to MCH from the parent is limited at this time. MCH'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. Furthermore, to date, there is no evidence that MSF has withdrawn liquidity or capital.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, we believe 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. Historically, these deposits have a very low attrition rate, limited rate sensitivity and provide a stable source of low-cost funding. Overall, MCH 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 29% of total assets as of Sept. 30, 2016 and a loan-to-deposit ratio of 88%. In Fitch's view, the lack of access to external capital is considered a rating constraint. Even so, MCH's capital position is adequate, supports the risks inherent in the bank's business mix, and is in line with our expectations for the current rating level. MCH's TCE/TA ratio stood at 8.48% and common equity tier 1 capital ratio stood at 10.24% at Sept. 30, 2016. Although Fitch considers the capital base sufficient to support risks within the business mix, higher than expected growth coupled with limited profitability could impact capital ratios. 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. Future credit costs are expected 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. While asset quality has improved, we note that that the bank's growing CRE concentration could drive some volatility in NPA measures, but credit losses should remain at manageable levels. Given MCH'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. MCH's earnings are on the lower end of community bank peers and are considered a rating constraint. Although profitability measures have normalized over the last several periods as credit costs have declined, core profitability remains low due to the company's relatively low-yielding loan portfolio and considerable operating cost structure. Though improving, the efficiency ratio has been in the 79%-85% range over the last five quarters. Community bank peers generally operate in the 60%-70% range. We believe MCH's current level of earnings is sustainable as management continues to reposition the loan portfolio in 2017 towards relatively higher yielding CRE loans and away from lower yielding trade finance and correspondent banking loans and as management continues to focus on cost containment initiatives. 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 Viability Ratings (VRs) do not incorporate any support. LONG- AND SHORT-TERM DEPOSIT RATINGS MCB'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 VRS Given MCH'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 17% of its total loan book), which is also affected by economic conditions in Latin America. MCH's ratings are on the high end of its near-term rating potential. Although Fitch recognizes MCH's modest improvements in earnings and stable asset quality as well as its strategy to diversify its loan portfolio and 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 MCH'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 an unexpected change in depositor behavior as evidenced by a declining trend in deposits. To date, the company has been able to manage through the change in its international deposit mix by growing its domestic deposits. Although not anticipated, reputational risk is also a concern given that MCH'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 experienced above-average CRE 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 as to 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 MCB 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., 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 10 branches throughout Miami-Dade County, four in Broward County, one in Palm Beach County, and seven in the Houston area. The bank also has a loan production office in New York City. The bank is ultimately beneficially owned by Mercantil Servicios Financieros, one of the largest financial groups based in Venezuela. Fitch has affirmed the following ratings: Mercantil Commercebank Holding Corp. --Long-Term IDR at 'BB'; Outlook Stable; --Short-Term IDR at 'B'; --VR at 'bb'; --SR at '5'; --SRF at 'NF'. Mercantil Commercebank Florida BanCorp. --Long-Term IDR at 'BB'; Outlook Stable; --Short-Term IDR at 'B'; --VR at 'bb'; --SR at '5'; --SRF 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'; --SR at '5'; --SRF at 'NF'. Contact: Primary Analyst Stefan Kahandaliyanage Associate Director +1-646-582-4918 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Doriana Gamboa Senior Director +1-212-908-0865 Committee Chairperson Justin Fuller Senior Director +1-312-368-2057 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016817 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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