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Credit Rating
RATING AGENCY : Moody's Investor Services GLOBAL CREDIT RESEARCH - 10 September 2009
Ratings
| Category | Moody's Rating |
| Outlook | Stable |
| NSR Issuer Rating - Dom Curr | A2.za |
| NSR ST Issuer Rating - Dom Curr | P-1.za |
OPINION Rating Rationale
Mercantile Bank Limited (“Mercantile Bank”) is the main operating company of Mercantile Bank Holding Limited, which is 91.75% - owned by the Portuguese state-owned bank, Caixa Geral de Depositos (CGD).
The A2.za/P-1.za national scale issuer ratings for Mercantile Bank reflect it small and narrow franchise, but also its improved financial profile and Moody’s assessment of a high probability of parental support in the case of need. Mercantile Bank started out primarily as a “community’ bank serving the financial needs of the Portuguese community, where it still retains an important niche. Although it is now a broader-based South African bank, its franchise and financial performance has historically been undermined by its poor underwriting/credit procedures and its lack of a clearly defined strategy. Following its recapitalization in the early part of the decade, when CGD gradually raised its stake to 92% (from 26%) and a new senior management team was recruited, the bank has been in a steadily recovering trend: risk management processes have been strengthened, its strategic focus has been reassessed and its financials have improved. Mercantile Bank is now well-capitalised, with substantially better asset quality and a recovery I its earnings generation. It still enjoys a relatively stable funding base, with high levels of deposits from the Portuguese community.
Mercantile Bank’s ratings also incorporate mismatches in the maturity profile of its assets and liabilities, and high credit concentrations. A further challenge for the bank will be to expand its franchise in a highly competitive market and under the current tough market/macro conditions, which are likely to place pressure on its financial fundamentals, specifically its earnings power and asset-quality indicators.
Mercantile Bank’s national scale issuer ratings also incorporate uplift according to Moody’s assessment of a high probability of parental support. Our assessment is based on: (i) CGD’s 92% controlling stake in Mercantile Bank; (ii) Mercantile Bank’s increasing association with the CGD brand; and (iii) the perceived low risk of CGD disposing of Mercantile Bank. As a 100% state-owned bank, CGD has an additional incentive to support Mercantile Bank in the case of need, as doing so means it would be indirectly supporting South Africa's Portuguese community.
