OREANDA-NEWS. Fitch Ratings has affirmed The Mauritius Commercial Bank Limited's (MCB) Long-term Issuer Default Rating (IDR) at 'BBB-' with Stable Outlook. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS
IDRs and VR
MCB's IDRs are driven by the bank's intrinsic strength, as expressed in its Viability Rating (VR). The VR reflects MCB's consistently strong profitability and company profile. MCB's healthy performance is driven by a good product mix and strong pricing power, resulting in firm margins. The bank reported a net profit of MUR2.6bn for the six months to end-2015, with an operating return on average equity in excess of 20%.

Strong profitability and a stable funding base of low-cost retail deposits are both driven by the bank's dominant domestic franchise, with a deposit and lending market share of approximately 40%. The bank also has a large portfolio of liquid government securities, which mitigates its short-term funding profile of (mostly retail) deposits.

The VR also considers pressure on MCB's asset quality, characterised by its high NPL ratio (of 6.4% at end-December 2015) compared with similarly rated peers. Additionally, MCB has a large book of restructured loans, which together with NPLs, comprises over 15% of gross loans, although Fitch understands from management that some restructured loans are technical in nature and do not reflect heightened credit risk.

MCB's asset quality metrics are weaker than similarly rated peers'. More specifically for the bank, it reflects problem loans in construction and tourism, legacy exposure in India, as well as slower growth in Mauritius. The bank's balance sheet is reflective of a small island economy, with high concentrations by sector and single obligor.

Regulatory capital ratios have improved as a result of the transfer of subordinated debt to MCB's holding company, MCB Group Limited in 2015, which in return, injected equity into MCB. However, capital ratios should be seen in the context of the bank's asset quality.

The Stable Outlook on the Long-term IDR reflects Fitch's view of the domestic economy, which is resilient and diverse, despite slower GDP growth. Mauritius is well-positioned as an offshore financial and business centre and entry point for investment in both Africa and the Indian sub-continent.

SUPPORT RATING AND SUPPORT RATING FLOOR
MCB's Support Rating (SR) of '3' and Support Rating Floor (SRF) of 'BB+' reflect a moderate probability of support from the Mauritian authorities, in the event of need. The ratings also consider the large size of the banking sector, which constrains the ability of the authorities to provide support.

However, Fitch believes the authorities have a high propensity to support MCB, reflecting its systemic importance as the largest bank in Mauritius and the largest taker of domestic retail deposits.

RATING SENSITIVITIES
IDRs and VR
MCB's IDRs and VR are sensitive to a persistent deterioration in asset quality, particularly from a higher volume of restructured loans becoming impaired. MCB is highly exposed to the slowing growth in the domestic economy, while currency risk could arise, should the bank develop a large asset/liability mismatch in its large US dollar balance sheet.

Any upside to the VR and IDR is likely to be limited to one notch given the small size of the Mauritian economy and Fitch's assessment of sovereign risk. Upside to the VR is most likely to be driven by a significant improvement in asset quality metrics, including further reductions in concentrations in the loan book, particularly by single obligor.

SUPPORT RATING AND SUPPORT RATING FLOOR
MCB's SR and SRF are sensitive to either a weakening ability or propensity from the authorities to support the bank. The former would mostly likely result from a decline in the creditworthiness of the sovereign in Fitch's view. The latter would most likely be triggered by the implementation of a framework for orderly bank resolution, entailing the bail-in of senior obligations and deposit insurance.

An upward revision of the SR and SRF could only be driven by an improvement in Fitch's view of sovereign creditworthiness. We already view the propensity of the authorities to support MCB as high, given the highly systemic nature of MCB.

The rating actions are as follows:

The Mauritius Commercial Bank Ltd
Long-term IDR affirmed at 'BBB-'; Outlook Stable
Short-term IDR affirmed at 'F3'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '3'
Support Rating Floor affirmed at 'BB+'.