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

Fitch Ratings Lanka has affirmed Nations Trust Bank PLC’s (NTB) National Long-Term Rating at ‘A(lka)’ with a Stable Outlook. A full list of rating actions is provided at the end of this commentary. The ratings reflect NTB’s broadly stable credit profile, efforts to improve its franchise, and exposure to customer segments which are more susceptible to economic cycles.

Continued consolidation of NTB’s franchise alongside sustained improvements to its credit profile may result in a rating upgrade.

In particular, such improvements may be manifested in capitalisation, asset quality and funding profile, bringing them to levels closer to those of higher-rated commercial banks. Aggressive loan growth or increased risk appetite, for instance, through the execution of its expansion plan, leading to a weakened credit profile may result in a rating downgrade.

Fitch is of the view that significant exposure to consumer and retail/SME customer segments (about 65% of loans at end-2011), and a shift in NTB’s loan book composition in favour of these segments, could put asset quality under pressure.

Gross non-performing loans as a share of total loans rose slightly to 2.9% at end-H112 from 2.8% at end-2011.

Fitch expects asset quality to be managed through close credit monitoring and improved risk management systems.

Equity/assets decreased to 7.6% in H112 from 8.4% at end-2011, largely due to the continued strong expansion in lending. Loans grew 14.4% in H112 and 37.7% in 2011. Loan growth is likely to moderate in 2012 but remain closer to the upper limit of the regulatory 23% credit ceiling.

NTB’s profitability, as measured by pre-tax return on assets, moderated to 2.75% (annualised) in H112 from 2.78% at end-2011 and could be constrained in 2012 and 2013 by higher credit and operating costs.

Fitch notes that NTB’s current and savings accounts (CASA) remained at just 22% of total deposits at end-H112, similar to commercial bank peers that have less established franchises. Intense competition for deposits will likely continue to constrain any improvement in CASA through active branch expansion.

NTB accounted for 2.4% of banking sector assets at end-2011 and had 52 branches at end-H112.

The bank has been in operation since 1999 and is in the process of repositioning to the broader domestic market beyond its previous niche focus on consumer products and leases as the next phase of its growth.