Fitch rates NDB’s Basel III Sub Debt A- (Exp)

Friday, 31 July 2020 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has assigned National Development Bank PLC’s (NDB, A+(lka)/Stable) proposed Basel III-compliant subordinated unsecured debentures an expected National Long-Term Rating of ‘A-(lka)(EXP)’.

The proposed debentures will total up to Rs. 6.5 billion with maturities of five years and will be listed on the Colombo Stock Exchange. The bank expects the proposed debentures to qualify as Basel III-compliant regulatory Tier 2 capital.

The proposed debentures include a non-viability clause whereby they will convert to ordinary voting shares if so determined by the Monetary Board of the Central Bank. The bank plans to use the proceeds from the proposed debentures to strengthen its Tier 2 capital base and support loan-book expansion. The final rating is subject to the receipt of final documentation conforming to information already received.

NDB’s proposed and outstanding rupee-denominated subordinated debt is rated two notches below the National Long-Term Rating anchor. This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries. There is no additional notching for non-performance risks.

NDB’s National Long-Term Rating reflects its modest franchise and more balanced business model but thinner capitalisation relative to similar rated peers, as the notes do not incorporate going-concern loss-absorption features.

Factors that could, individually or collectively, lead to positive rating action/upgrade: NDB’s subordinated debt would be upgraded if the bank’s National Long-Term Rating is upgraded.

The prospect of an upgrade appears unlikely in the near term because of the pressure on the operating environment.

In the medium term, an upgrade of NDB’s rating could stem from a much stronger franchise and financial profile, in particular higher capital buffers that can absorb risks related to the operating environment.

Factors that could, individually or collectively, lead to negative rating action/downgrade: NDB’s subordinated debt would be downgraded if the bank’s National Long-Term Rating is downgraded. NDB’s rating would be downgraded if there were deterioration in its financial profile relative to the universe of rated entities in Sri Lanka, in particular its capital buffers, or increased risk appetite through aggressive loan growth or increased exposure to riskier customer segments.