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Fitch Affirms Mercantil Bank Holding Corp.'s Long- & Short-Term IDRs at 'BB/B'; Outlook Stable
September 15, 2017 / 5:07 PM / 2 months ago

Fitch Affirms Mercantil Bank Holding Corp.'s Long- & Short-Term IDRs at 'BB/B'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, September 15 (Fitch) Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) of Mercantil Bank Holding Corp. (MBH) and its main bank subsidiary, Mercantil Bank, N.A. (MB) at 'BB/B' with a Stable Outlook. Through MBH, 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 MBH's IDRs reflect its geographic concentration, mainly in 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 MBH's improved earnings performance over 2017 is sustainable. In Fitch's view, MBH's ratings are not immediately affected by deteriorating economic conditions in Venezuela and their impact on MSF. Although MBH and MB 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 addition, we believe that contagion risk to MBH from the parent is limited at this time. MBH's holding company structure isolates its assets, and management at both MBH and MSF have committed to maintaining capital and liquidity at MBH. In the event that MSF should need additional capital, a contingency capital plan is in place. The plan focuses on Venezuela-based capital strategies, including equity capital raises. To date, there is no evidence that MSF has withdrawn liquidity or capital.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. MBH's 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, MBH has exhibited a relatively stable deposit base, despite volatility in Venezuela over the last 10 years. To cushion volatility and improve diversification, the bank continues to execute on its strategy to gather U.S. deposits through a branch-led expansion, primarily in the Houston area, which Fitch views favorably. Fitch believes the company has good liquidity with a combination of cash, cash equivalents and investment securities representing about 24% of total assets as of June 30, 2017 and with a loan-to-deposit ratio of 92%. In Fitch's view, the lack of access to external capital is considered a rating constraint. Even so, MBH'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. MBH's TCE/TA ratio stood at 8.28% and its common equity tier 1 capital ratio stood at 9.98% at June 30, 2017. Although Fitch considers the capital base sufficient to support risks within the business mix, higher than expected growth coupled with limited profitability could reduce capital ratios. Net charge-offs (NCOs), nonperforming assets (NPAs), and the inflows of criticized/classified assets are all at relatively low levels. Fitch expects future credit costs to remain manageable although asset quality ratios may worsen driven by continued portfolio seasoning. Additionally, loan losses in general have been well below historical averages; therefore Fitch expects mean reversion to take hold especially in a higher interest rate environment where marginal borrowers may be unable to support debt servicing. Given MBH's strategy to de-emphasize C&I and grow CRE loans in Florida, New York, and Houston, there is some concern that asset quality in this asset class, including construction loans, could deviate from recent trends. 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. MBH's earnings are on the lower end of community bank peers and are considered a rating constraint. Although profitability measures have improved over the last several periods as credit costs have declined, core profitability remains low due to the company's relatively large low-yielding liquid asset mix, operating cost structure, and, more generally, balance sheet growth during an extended period of low interest rates. Fitch expects management to continue to focus on cost containment initiatives while repositioning the loan portfolio towards relatively higher yielding CRE loans and away from lower yielding trade finance and correspondent banking loans. These actions should have a positive impact on the bank's earnings profile. SUPPORT RATING AND SUPPORT RATING FLOOR MBH and Mercantil Florida Bancorp Inc (MFB) have a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, MBH and MFB 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 MB'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 MBH 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 MBH'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 MBH's geographic concentration in Florida, its IDRs are sensitive to market conditions within its regional footprint. Additionally, MFB has a meaningful international exposure (roughly 14% of its total loan book), which is also affected by economic conditions in Latin America. MBH's ratings are on the high end of its near-term rating potential. Although Fitch recognizes MBH's 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 (VR 'cc'), are considered a rating constraint. If there are unexpected declines in MBH's Venezuelan deposits due to customers withdrawing funds to make routine operational purchases, particularly as a result of a Venezuelan sovereign default, negative rating action could occur. To date, Fitch notes that the bank 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 MBH'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 MBH 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 MB 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 MBH or MFB 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 Bank, 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 branches throughout Miami-Dade County, Broward County, Palm Beach County, and 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 Bank Holding Corp. --Long-Term IDR at 'BB'; Outlook Stable; --Short-Term IDR at 'B'; --VR at 'bb'; --SR at '5'; --SRF at 'NF'. Mercantil Florida BanCorp Inc. --Long-Term IDR at 'BB'; Outlook Stable; --Short-Term IDR at 'B'; --VR at 'bb'; --SR at '5'; --SRF at 'NF'. Mercantil Bank, N.A. --Long-Term IDR at 'BB'; Outlook Stable; --Long-term deposits '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, CFA 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 Sean Pattap, CFA Senior Director +1-212-908-0642 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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