Rationale
The starting point for our unsolicited public information (“pi”) rating on Banque Marocaine du Commerce Exterieur (BMCE) is its ‘bb’ anchor, which is based on our view of the Moroccan banking system. The rating also reflects our view that the bank’s business position, funding, and liquidity are neutral rating factors, while its capital and earnings, and risk position are negative. BMCE’s stand-alone credit profile (SACP) is in the ‘b’ category.
Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank’s anchor, the starting point in assigning an issuer credit rating. The anchor for a commercial bank operating only in Morocco is ‘bb’. The BICRA score is informed by our evaluation of economic risk. We view Morocco’s economy as skewed toward a few cyclical sectors, especially agriculture and tourism, which leaves the country’s economic performance vulnerable to external factors and exposed to real estate trends. With regard to industry risk, the Moroccan banking industry is underpinned by large and concentrated banking assets and strong access to retail deposits, largely unremunerated, including those from Moroccan expatriates. Nevertheless, the deposit-to-loan ratio of the banking system is steadily declining because the pool of available deposits can no longer accommodate the growing size and pace of lending activities, which may present liquidity challenges over the medium term.
BMCE’s business position is neutral for the rating. With total assets of Moroccan dirham (MAD) 208 billion on Dec. 31, 2011, BMCE is the third-largest bank in the Kingdom of Morocco (foreign currency BBB-/Stable/A-3; local currency, BBB/Stable/A-2), and operates as a universal bank. It has a 15% market share in customer deposits, but its larger peers tend to have more sizable domestic operations. While BMCE is focused on developing its domestic business, it also wants to become involved in commercial and investment banking in Africa in cooperation with Bank of Africa group (BoA: not rated) and its own U.K.-based investment banking subsidiary. To that end, BMCE increased its stake in BoA to 59.4% in July 2011. BoA accounted for 29% of BMCE’s consolidated earnings in 2011. Our concern over management’s international expansion plans not being backed by sufficient capital has been only partly alleviated by a MAD6.5 billion increase in shareholder’s equity in 2010.
Capital and earnings is a negative rating factor. This reflects our expectation that our projected risk-adjusted capital (RAC) ratio before adjustments should remain in the 3%-5% range over the next 12-18 months. This is despite our consideration of the MAD6.5 billion shareholder’s equity increase in 2010. Additionally, because of BMCE’s high dividend payout ratio, we do not expect significant internal capital generation during the same period. We expect BMCE to maintain its modest earnings capacity in the medium term, in light of its expansion in Africa and major restructuring projects to strengthen commercial and operating efficiency. Earnings are supported by relatively stable net interest margins mainly due to the high level of unremunerated deposits. However, a shift towards remunerated deposits and potentially greater competition on liabilities could slightly hamper BMCE’s earnings profile in the longer term. The success of the ongoing restructuring exercise could push earnings higher.
Risk position is a negative rating factor. The ratio of nonperforming loans to total loans increased marginally to 6.1% on Dec 31, 2011, from 5.7% at the end of 2010, mainly led by the weakening in the African portfolio. We do not expect a dramatic deterioration in asset quality in the foreseeable future, but remain cautious about Morocco’s real estate sector and the bank’s rapid expansion overseas, both of which are risky factors for the loan portfolio. That said, the portfolio’s real estate exposure is largely contained to the government-backed social housing segment, which mitigates the risk to some extent.
Almost 12% of the loan portfolio was exposed to real estate development companies in 2011, but the bank has only limited exposure to the most risky luxury segment.
Funding and liquidity are neutral rating factors. We believe the bank’s funding profile benefits from good access to the cheap retail and corporate deposits that fully cover its loan portfolio. Over 50% of these deposits are unremunerated. At the end of December 2011, the bank’s ratio of loan to deposit was 89.5%.
We expect this ratio to deteriorate in the medium term with growth in deposits lagging that of loans. BMCE’s liquidity benefits from cash and repo-able Moroccan treasury bonds. Liquid assets accounted for 14% of adjusted assets as of June 30, 2011.
The ‘pi’ rating is higher than the bank’s SACP, reflecting our view of BMCE’s “high” systemic importance as the third-largest commercial bank in Morocco (Kingdom of Morocco; BBB-/Stable/A-3), which we classify as “supportive” toward its banking sector under our criteria. As a result, we believe there is a “moderately high” likelihood that BMCE would receive extraordinary support from the Moroccan government in case of need.
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