Fitch affirms Nations Trust Bank at ‘A’; Outlook Stable

Thursday, 30 October 2014 01:17 - - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has affirmed Sri Lanka-based Nations Trust Bank PLC’s (NTB) National Long-Term Rating at ‘A(lka)’. The Outlook is Stable. Fitch has also affirmed NTB’s subordinated debt at ‘A-(lka)’ and assigned an expected rating of ‘A(lka)(EXP)’ to its proposed senior unsecured debentures of up to LKR3bn. The final rating on the proposed debentures is contingent upon receipt of final documents conforming to information already received. KEY RATING DRIVERS The ratings reflect NTB’s expanding franchise, continued process improvements, and its high and increasing exposure to customer segments that are more susceptible to economic cycles. Fitch believes that although the successful implementation of the bank’s medium-term strategic plan could strengthen its overall franchise and funding profile, overly aggressive lending to SME and consumer segments could weaken its risk profile, if not well managed. NTB’s loan growth slowed during 1H14 to 4% from 12% in 2013, although it was still above the sector average. NTB’s exposure to the SME, consumer lending, credit card and lease segments increased to 77% of gross loans at end-1H14 from 75% at end-2013. The increase in exposure to segments that are more susceptible to economic cycles could put pressure on NTB’s asset quality. Deterioration in its asset quality was already apparent as its reported gross non-performing loan (NPL) ratio increased to 4.82% in 1H14 from 3.51% in 2013. NTB’s provisioning coverage remained lower than the average of higher-rated peers. NTB’s net interest margins (NIM) have remained higher than that of its peers, a reflection of its portfolio, which has higher-yielding customer segments. However, Fitch expects NTB’s NIM to fall with decreasing lending rates. This could put more pressure on its profitability given potentially higher credit costs and high operating costs alongside its plans for expansion. The proposed debentures are rated at the same level as NTB’s National Long-Term Rating as they constitute unsecured and unsubordinated obligations of the bank. The debentures have tenors of four and five years and carry fixed coupons, and are to be listed on the Colombo Stock Exchange. NTB expects to use the proceeds to fund its medium-term lending and reduce asset and liability mismatches. RATING SENSITIVITIES An increase in risk appetite in conjunction with its efforts to speedily implement its strategic plan by expanding in segments that are susceptible to economic cycles could result in a rating downgrade. Aggressive loan growth or loan pricing leading to weaker asset quality or weaker capitalisation would be key indicators of this. An upgrade is contingent upon NTB demonstrating progress in building a strong commercial banking franchise, which will enhance the stability of its funding profile; and the achievement of capital and asset quality levels in line with higher-rated commercial banks. The senior and subordinated debt ratings will move in tandem with NTB’s National Long-Term Rating.