Moody’s Investors Service (“Moody’s”) has today downgraded by one notch the long-term ratings and assessments of Mauritius Commercial Bank Limited (“MCB”) and Absa Bank (Mauritius) Limited (“Absa Mauritius”). As part of the same rating action, Moody’s has affirmed the ratings of SBM Bank (Mauritius) Ltd. (“SBM”). The outlooks on MCB’s and SBM’s deposit ratings are negative and the outlook on Absa Mauritius’ deposit rating is stable. The downgrade of MCB’s and Absa Mauritius’ ratings reflects the lowering of Mauritius’ Macro Profile by one notch to “Weak+” from “Moderate-“. Moody’s reassessment of the operating environment has in turn lead to a one notch lower Baseline Credit Assessment (BCA) for the two banks. The lower Macro Profile captures Moody’s view that Mauritius’ economic strength and the overall operating environment for banks is weaker, following the large loss of economic activity and income, in addition to the likely durable, long lasting effects on the tourism industry.
Although the government expects tourism flows to resume in the second half of 2021, this is dependent on achieving a collective immunity for the population with more than 60% of the population vaccinated, while longer-term risks include a change in consumer behaviour that reduces demand for long-haul travel. The slow tourism recovery will weigh not only on employment and income levels for workers and corporates in the tourism sector but has also large spillovers to the rest of the economy. Tourism’s direct contribution to GDP is estimated at 8% of GDP in 2019 and, when including the indirect contribution from other industries such as transport and accommodation and food service, accounts for a sizeable 23% of GDP.
These, combined with a sizeable social support program and the support of the Mauritius Investment Corporation (MIC) to large enterprises, have helped contain borrower default. The Bank of Mauritius established MIC has US$2 billion of international reserves available to make long-term quasi-equity investments in systemically important domestic companies in the hardest hit sectors such as tourism, in order to mitigate the contagion to the banking system for the next few years. The stable outlook on Absa Mauritius’ ratings reflects Moody’s view that the bank’s ratings already capture current risks to the bank’s financials from the weakening operating conditions and the potential weakening of sovereign capacity to support the bank.
The downgrade of MCB’s long-term bank deposit and issuer ratings to Baa3, was driven by a one-notch downgrade of its standalone BCA to ba1, following Moody’s reassessment of Mauritius’ operating environment due to the factors discussed above. Specifically, Moody’s has lowered Mauritius’ Macro Profile by one notch to “Weak+”, from “Moderate-“, that lead to a one notch change in MCB’s own Macro Profile to “Weak+”. MCB’s Macro Profile is derived using the weighting of MCB’s loans according to their domicile, balancing Mauritius’ “Weak+” Macro Profile (56% of loans as of the end of June 2020) the stronger Macro Profiles of various European Union countries’ and the weaker Macro Profiles of various sub-Saharan African countries.The negative outlook is driven primarily by potential further pressure on the bank’s standalone credit profile in case of a further weakening of the operating environment or in case of a more pronounced deterioration in the bank’s financial metrics. To date, MCB’s profitability has weakened with net income to tangible assets dropping to 1.5% during the second half of 2020 from over 2% prior to the pandemic, primarily due to higher expected credit losses that reached MUR 7 billion as at December 2020. Nonetheless, MCB maintains strong capital levels with shareholder’s equity to assets of 10.8%, high liquid assets at 48% of tangible banking assets and a stable funding profile as of December 2020. The extent to which asset quality weakens as some of the support measures are lifted, and the impact this will have on the bank’s profitability and capital will determine any potential further downwards rating movements.The negative outlook also reflects a potential weakening of the Mauritian government’s own credit profile, and by extension a weakening sovereign capacity to support MCB, that will trigger Moody’s to re-assess its support assumptions. MCB’s Baa3 long-term deposit and issuer ratings currently capture its ba1 BCA and one notch of rating uplift from our assumption of a high level of support from the Government of Mauritius, in the event of need, driven by MCB’s importance to Mauritius’ domestic financial system where it has 47% of Rupee-denominated customer deposits.
Moody’s reassessment of the operating environment has not had an impact on SBM’s standalone BCA of ba2, despite a lower Macro Profile. Moody’s has lowered Mauritius’ Macro Profile by one notch to “Weak+”, from “Moderate-“, following a reassessment of Mauritius’ economic strength and the overall operating environment for banks. SBM’s own Macro Profile has also been lowered to “Weak+”, which is derived using the weighting of SBM’s loans according to their domicile, balancing Mauritius’ “Weak+” Macro Profile (73% of loans as of the end of June 2020) and the Macro Profiles of the other markets in which the bank has cross-border operations