NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the long- and short-term Issuer Default Ratings (IDRs) of Mercantil Commercebank Florida Bancorp (MCFB) and its main subsidiary, Mercantil Commercebank, N.A. at 'BB/B', with a Stable Outlook. A complete list of ratings follows this release. Through its ultimate domestic holding company, Mercantil Commercebank Holding Corp. (MCH), the bank is beneficially owned by Mercantil Servicios Financerios (MSF), one of the largest financial institutions based in Venezuela. Although the ratings assigned are for MCFB, Fitch also reviews the financials for MCH, which is the domestic holding company for MCFB in the U.S.
KEY RATING DRIVERS - IDRs, VR and Senior Debt
MCFB's IDRs and Stable Outlook reflect its geographic concentration mainly in South Florida, risk profile that includes exposure to economic conditions in Latin America, limited franchise, and modest earnings measures. The company's ratings are supported by its solid capital levels and good liquidity profile. Fitch believes the company's improvement in credit and financial performance over the last two years is sustainable.
During 2013, MCH's financial performance improved with net income of $28.6 million compared to $26.4 million for 2012 and reported net losses for 2008-2010. Results are supported by significant improvement in asset quality which ultimately has reduced credit costs.
In 2014, the company should see some benefits from increased volumes in loan originations with higher yields from the growing commercial and industrial loans (C&I) lending segment than its trade finance book, whose loan yields are much lower reflecting their short duration. Additionally, the company has increased the purchase of syndicated loans, which should also offset the impact to margin pressures from the investment securities portfolio. Offsetting, provisioning may need to increase to keep up with loan growth.
Although profitability has improved, 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 30% of total assets over the past four quarter-period ends. Additionally, MCH's large correspondent banking business and short-term trade finance 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.
MCH reported return on assets (ROA) at 0.42% for 2013. Fitch also analyzes the company's earning measures on a risk-adjusted basis. Return on risk weighted assets (RORWA) stood at 0.91x for 4Q'13 and was in-line with expectations.
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 all continue to decline and return to normalized levels. Fitch expects future credit costs to be manageable given the continued reduction in overall balances in the riskier segments of CRE and construction portfolios. At year-end 2013, NPAs, calculated by Fitch to include accruing troubled debt restructuring, was 1.00% compared to 2.58% the previous year. NCOs also declined to 0.16% for 2013 compared to 0.57% for 2012.
MCH's capital position is solid and supports the risks inherent in the bank's business mix. MCH's Fitch Core Capital/Risk Weighted Assets ratio stood at 13.6% and Tier 1 Common stood at 13.56%. Given projected loan growth, capital is expected to decline slightly but should remain above peer averages. The decline should also be manageable given the expectation of sustainable profitability.
MCH's balance sheet represents good liquidity with the combination of cash, cash equivalents and investment securities representing about 27.2% of total assets on Dec. 31, 2013, and the loan-to-deposit ratio was 85%. The investment portfolio is highly rated, short in duration at 2.2 years. Nonetheless, Fitch notes that certain securities holdings could be affected by economic conditions in certain countries in Latin America, although these positions are modest in size.
The company has continued to shift its loan mix by reducing real estate lending and growing its C&I portfolio. For 2013, MCH's C&I portfolio grew by 9% compared to the previous year. 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. In general, Fitch is concerned with the potential for credit quality deterioration, since performance for these loans is better than historical averages.
Offsetting this, MCFB's targeted client base is more niche, which gives the company an opportunity to leverage its expertise in Latin America as well as in oil-related industries. Additionally, the bank also engages in syndicated lending through participations in large lending arrangements to domestic corporate borrowers. Participations are entered into with the initial lending group or purchased in the secondary market. Although performance to date has been stable, Fitch will monitor the growth in this segment.
KEY RATING SENSITIVITIES - IDRs, Senior Debt and Viability Rating (VR)
Given MCFB's geographic concentration in South Florida, its IDRs are sensitive to market conditions within its footprint. Additionally, MCFB has a large component of international exposures (roughly 40% of its lending activity), which is also affected by economic conditions in Latin America.
MCFB ratings are on the high-end of its rating potential. Although Fitch recognizes the company's recent improvements in asset quality and earnings, Fitch considers ties to its parent company, MSF, and affiliated bank, Mercantil CA Banco Universal. Although MCFB operates in the Florida market, its franchise could be affected by the health of its parent company and/or affiliated bank, currently rated at 'B', Negative Outlook.
Factors that could trigger negative rating action would be a declining trend in earnings and/or a reversal of recent improvements to credit performance. Fitch notes that MCH has experienced above-average C&I loan growth that is unseasoned. Although not anticipated, reputational risk is also a concern given MCFB's ultimate parent is domiciled in Venezuela. To date, MCFB has actually benefited from its Mercantil brand, despite volatility in Venezuela, as demonstrated by its stable deposit base.
In Fitch's review of MCH, the criteria report 'Rating FI Subsidiaries and Holding Companies', August 2012, was applied. In general, subsidiary banks can be vulnerable to a sharp deterioration in the parent's credit profile. As a result, subsidiary VRs are not usually much higher than parent Long-Term IDRs.
KEY RATING DRIVERS and SENSITIVITIES - Support and Support Rating Floors
MCFB has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, MCFB is not systemically important and therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any support.
KEY RATING DRIVERS - 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 bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.
KEY RATING SENSITIVITIES - Holding Company
On a stand-alone basis at the holding company, MCFB's liquidity is considered ample. The holding company maintained its own source of liquidity with cash and investment securities totaling $42 million at Dec. 31, 2013. Annual MCFB (parent-company only) interest expense totals approximately $7 million, providing about 6x coverage. The only debt outstanding at MCH or MCFB consists of $114 million of trust preferred securities (unrated), issued privately and through pools, as of Dec. 31, 2013. Double leverage is modest at 112%.
KEY RATING DRIVERS and SENSITIVITIES - Institutional Support
Over the years, capital ratios have been augmented by capital contributions from MSF (about $267 million for 2008-2012). Although MSF has demonstrated its willingness to provide capital support to MCFB and ultimately to MCB, Fitch assumes that additional contributions from MSF are unlikely over the near term and cannot be relied upon.
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 11 branches throughout Miami-Dade County, two in Broward County, two in Palm Beach County, one in New York, NY, and three in Houston, TX. The bank is ultimately beneficially owned by Mercantil Servicios Financerios (MSF), the largest financial group based in Venezuela.
Fitch has affirmed the following ratings, with a Stable Outlook:
Mercantil Commercebank Florida BanCorp.
--Long-term IDR at 'BB';
--Short-term IDR at 'B';
--Viability rating at 'bb';
--Support at '5';
--Support floor at 'NF'.
Mercantil Commercebank, N.A.
--Long-term IDR at 'BB';
--Long-term deposits at 'BB+';
--Short-term IDR at 'B';
--Short-term deposits at 'B';
--Viability at 'bb';
--Support at '5';
--Support Floor at 'NF'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).
Applicable Criteria and Related Research:
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827431
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