Fitch Affirms Mercantil Commercebank's IDRs on Downgrade of Mercantil Servicios Financieros

NEW YORK--()--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 at the end of this release. Through its ultimate domestic holding company, Mercantil Commercebank Holding Corp. (MCH), the bank is beneficially owned by Mercantil Servicios Financieros (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.

Fitch's rating action follows the downgrade of MSF and its affiliated bank, Mercantil C.A. Banco Universal (Mercantil). For details regarding the MSF and Mercantil downgrade, please see 'Fitch Takes Rating Actions on Private-Sector Venezuelan Banks' dated Dec. 19, 2014.

KEY RATING DRIVERS - IDRs, Viability Rating (VR) and Senior Debt

In Fitch's view, MCFB's ratings are not immediately affected by the downgrade of MSF and/or Mercantil. Although MCFB is part of the organizational structure of MSF and the franchise could be affected by the health of its parent company/and or affiliated bank, Fitch believes the recent downgrade of its ultimate parent reflected conditions in Venezuela and believe the 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 and ring-fences its assets given the strong local regulator which 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 Further, to date, there is no evidence that MSF has withdrawn liquidity or capital. Fitch believes that this supports the independence of the subsidiary's credit profile from that of its parent. 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. In Fitch's review of MCH, the criteria report 'Rating FI Subsidiaries and Holding Companies', August 2012, was applied.

Fitch notes that there may be risks to MCFB's Venezuelan deposit base, such as depositors seeking other U.S.-based banking institutions in which to deposit their monies given concerns with MSF and/or Mercantil. However, to date, MCFB has actually demonstrated a stable, steady deposit base, despite volatility in Venezuela. Furthermore, MCFB has experienced a number of tumultuous events over the last 10 years that have pressured MSF in its home market, yet none have materially impacted MCFB's financial condition (either through loan losses and/or a meaningful decline in its deposit base). Nonetheless, should a change in depositor behavior become prevalent or exposure to Venezuela lead to credit deterioration, MCFB's ratings may come under review.

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 typically have a very low attrition rate, limited rate sensitivity and provide a stable source of low-cost funding. Furthermore, Fitch also believes MCH's balance sheet has good liquidity with a combination of cash, cash equivalents and investment securities representing about 33% of total assets on Sept. 30, 2014, with a loan-to-deposit ratio of 82%.

MCFB's IDRs reflect its geographic concentration, mainly in South Florida, risk profile that includes exposure to economic conditions in Latin America, limited franchise, and modest earnings metrics. The company's ratings are supported by its solid capital levels and good liquidity profile, and Fitch believes the improvement in credit and financial performance over the last two years is sustainable.

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 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.

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. For 3Q'14, NPAs, calculated by Fitch to include accruing troubled debt restructuring, was 0.70% compared to 0.97% the same period a year ago. NCOs also declined to 0.09% for 3Q'14 compared to 3.9% at the peak of the crisis year-end 2009.

MCH's capital position is solid and supports the risks inherent in the bank's business mix. MCH's TCE/TA ratio stood at 8.64% and Tier 1 Common stood at 13.65%. 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.

The company has continued to shift its loan mix by reducing real estate lending and growing its commercial and industrial (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. 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 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's ratings are on the high end of its rating potential. Although Fitch recognizes the company's recent improvements in asset quality and earnings, the company's ties to its parent company, MSF, and affiliated bank, Mercantil CA Banco Universal are considered as a rating constraint.

Factors that could trigger negative rating action would be a change in depositor behavior represented 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 earnings and/or a reversal of recent improvements in credit performance. Fitch notes that MCH has experienced above-average C&I loan growth that is as yet unseasoned.

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, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

KEY RATING DRIVERS and SENSITIVITIES - Institutional Support

Over the years, capital ratios have been augmented by capital contributions from MSF. 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 and cannot be relied upon.

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 Sept. 30, 2014. 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. Double leverage is modest at 111%.

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, three in Broward County, one in Palm Beach County, one in New York, NY, and four 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';

--VR at 'bb';

--Support at '5';

--Support floor at 'NF'.

Mercantil Commercebank, N.A.

--Long-term IDR at 'BB';

--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'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Fitch Downgrades Venezuela's IDRs to 'CCC' (Dec. 18, 2014);

--'Fitch Takes Rating Actions on Private-Sector Venezuelan Bank' (Dec. 19, 2014)

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=961915

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Contacts

Fitch Ratings
Doriana Gamboa
Director
+1-212-908-0865
Fitch Ratings,
33 Whitehall St.
New York, NY 10004
or
Julie Solar
Senior Director
+1-312-368-5457
or
Jawad Sozer, CFA
Associate Director
+1-312-368-2315
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-1560
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Doriana Gamboa
Director
+1-212-908-0865
Fitch Ratings,
33 Whitehall St.
New York, NY 10004
or
Julie Solar
Senior Director
+1-312-368-5457
or
Jawad Sozer, CFA
Associate Director
+1-312-368-2315
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-1560
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com