Fitch Ratings has affirmed Credit Immobilier Et Hotelier's (CIH) Long-Term (LT) Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB' with Stable Outlook.

Fitch has also affirmed CIH's Viability Rating (VR) at 'b+' and National LT Rating at 'AA-(mar)' with a Stable Outlook.

Key Rating Drivers

CIH's IDRs are driven by potential support from the Moroccan authorities, as reflected by its Government Support Rating (GSR) of 'bb'. The Stable Outlook on CIH's IDRs reflects that on the sovereign.

CIH's Viability Rating (VR) reflects the bank's weak capital position and asset quality pressures. It also considers CIH's leading position as a real estate lender with a focus on mortgage lending, evolving business model, acceptable profitability, sufficient liquidity and stable funding structure.

CIH's National Ratings are in line with its direct local peers. They are below those assigned to the market leader Attijariwafa Bank and below those assigned to the subsidiaries of large French banking groups as the latter benefit from potential support from their foreign shareholders.

Government Support Rating of 'bb': Fitch does not view CIH as a domestic systemically important bank given its 5%-6% market share. CIH's 'bb' GSR considers the bank's 67.9% ownership by Caisse de Depot et de Gestion (CDG), a leading state-owned financial institution that manages savings in Morocco.

Operating Environment Outlook Stable: Morocco's real GDP is forecast to grow 3.2% in 2024 and 3.3% in 2025. However, growth remains vulnerable to a slowdown in the eurozone, Morocco's main trading partner, and to adverse weather conditions and high inflation.

Evolving Business Model: CIH increased its share of non-real-estate loans to 55% of total loans at end-3Q23 (end-2016: 31%; target: 60%). However, fast loan growth has been putting pressure on overheads and capitalisation.

Fast Growth Undermines Risk Profile: The bank's risk profile is driven by its focus on mortgage financing (33% of total loans at end-1H23). Risks associated with rapid loan growth and the diversification process are mitigated by continued investments in risk-control tools and a prudent approach to new corporate lending.

Pressured Asset Quality: CIH's Stage 3 loans ratio was a high 8.97% at end-1H23, albeit below the sector average, and coverage of Stage 3 loans by total loan loss reserves was only 47% given the availability of hard collateral (namely in the mortgage segment). We expect the Stage 3 loans ratio to remain around 9% in 2024.

Acceptable Profitability: Operating profitability has recovered since its 2020 low and is now in line with most peers. In 1H23, the annualised operating profit/risk-weighted assets ratio was 2.2% (2022: 1.6%) despite loan impairment charges consuming 38% of pre-impairment operating profit. We expect profitability to increase slightly in 2024 as CIH's profits in consumer finance and participative banking pick-up.

Weak Capitalisation: The bank's common equity Tier 1 (CET1) ratio (end-1H23: 8.1%) is well below domestic peers' and just in line with the minimum regulatory requirement of 8%. High capital encumbrance by unreserved Stage 3 loans (71% of CET1 capital at end-1H23) highlights the vulnerability of the bank's core capital to asset quality deterioration and limits assets growth. We expect CIH's CET1 buffers to increase to 70bp-100bp in 2024 following a capital raising exercise and some risk-weighted assets optimisation.

Good Funding and Liquidity: Customer deposits accounted for 65% of total funding at end-1H23. With 83% of deposits sourced from the inexpensive retail segment, CIH's deposit base is granular. The bank had a good liquidity coverage ratio of 122% at end-1H23.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

CIH's IDRs would be downgraded if the state's ability or propensity to support the bank diminished. A downgrade of the Moroccan sovereign rating would trigger a downgrade of the GSR and IDR.

CIH's VR could be downgraded if the CET1 buffers over the minimum regulatory requirement are sustainably below 50bp or if capital encumbrance through unreserved Stage 3 loans increases materially. A significant deterioration of the operating environment, leading to asset quality and profitability metrics weakening, could also be negative.

The National Rating could be downgraded if Fitch believes CIH's creditworthiness has weakened relative to other Moroccan issuers.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade of CIH's IDRs would be driven by an upgrade of the GSR, which itself would require an upgrade of the sovereign rating.

An upgrade of the VR is unlikely in the near term, given current asset quality pressures and CIH's tight core capital position.

The National Rating could be upgraded if Fitch believes CIH's creditworthiness has improved relative to other Moroccan issuers.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

CIH's LT Foreign-Currency IDR (xgs) is at the level of the VR. The LT Local-Currency IDR (xgs) is in line with the LT Foreign-Currency IDR (xgs).

The Short-Term (ST) Foreign-Currency IDR (xgs) is in accordance with the LT Foreign-Currency IDR (xgs) and Fitch's ST rating mapping. The ST Local-Currency IDR (xgs) is in accordance with the LT Local-Currency IDR (xgs) and Fitch's ST rating mapping.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

CIH's LT IDRs (xgs) could be downgraded if the VR was downgraded. The ST Foreign-Currency IDR (xgs) is primarily sensitive to changes in the LT Foreign-Currency IDR (xgs) and could be downgraded if the latter is downgraded and the new LT rating maps to a lower ST rating in accordance with Fitch's criteria. The ST Local-Currency IDR (xgs) is primarily sensitive to changes in the LT Local-Currency IDR (xgs) and could be downgraded if the latter is downgraded and the new LT rating maps to a lower ST rating in accordance with Fitch's criteria.

An upgrade of CIH's LT IDRs (xgs) would require a VR upgrade. The ST Foreign-Currency IDR (xgs) is primarily sensitive to changes in the LT Foreign-Currency IDR (xgs) and could be upgraded if the latter is upgraded and the new LT rating maps to a higher ST rating in accordance with Fitch's criteria. The ST Local-Currency IDR (xgs) is primarily sensitive to changes in the LT Local-Currency IDR (xgs) and could be upgraded if the latter is upgraded and the new LT rating maps to a higher ST rating in accordance with Fitch's criteria.

VR ADJUSTMENTS

The operating environment score of 'bb' has been assigned above the 'b' category implied score, due the following adjustment reasons: macroeconomic stability (positive) and sovereign rating (positive).

The business profile score of 'bb-' has been assigned above the 'b' category implied score, due the following adjustment reason: market position (positive).

The earnings and profitability score of 'bb-' has been assigned above the 'b' category implied score, due the following adjustment reason: historical and future metrics (positive).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

CIH's IDRs are linked to the Moroccan sovereign rating.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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