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Moody's downgrades Banco Mercantil do Brasil ratings; outlook now stable

Moody's on Jan. 30 downgraded its ratings on Banco Mercantil do Brasil SA, citing the company's ongoing asset quality issues and weak capitalization levels.

The rating agency said that it lowered the Brazilian bank's long-term local- and foreign-currency deposit ratings to Caa1 from B3, as well as its long-term national scale deposit rating to B3.br from B2.br. The company's baseline credit assessment and adjusted BCA dropped to caa1 from b3, while its long-term counterparty risk assessments fell to B3(cr) from B2(cr).

In conjunction with the move, Moody's changed its outlook on Banco Mercantil's ratings to stable.

In lowering the ratings, the rating agency highlighted the bank's continued asset quality deterioration and its "persistently weak capitalization levels and the challenges it faces in generating sustainable profitability." The rating agency pointed to the bank's rising delinquency ratios, mostly in the small- and medium-sized segment, as well as its low loan provision levels as of September 2016.

"Moody's anticipates further deterioration in Banco Mercantil's loan book in 2017 as a result of the additional strain on borrowers' repayment capacity caused by Brazil's prolonged recession period and seasoning in its consumer lending product could increase asset risk further," the rating agency said.

And while the bank has reduced its exposure to SMEs, it has been focused on unsecured lending to its "heavily indebted" pensioner customer base, which Moody's also considers to be "heavily high risk" market segment.

"It remains unclear if the bank's new focus of lending to pensioners will enable it to generate profits on a sustainable basis, particularly given Brazil's challenging economic environment," Moody's noted.

Moody's predicted that the bank will face challenges to improve its profitability amid a weak loan demand forecast and reduced investment income due to lower benchmark Selic rate.