Fitch affirms NTB rating at ‘A’; Outlook stable

Fitch Ratings Lanka said yesterday it has affirmed Nations Trust Bank Plc’s (NTB) National Long-Term rating at ‘A(lka)’. The Outlook is Stable. A full list of rating actions is provided at the end of this commentary.

NTB’s ratings reflect its improved financial position, particularly in terms of its asset quality and capitalisation since end-2009, and a developing franchise among most customer segments.

Fitch also notes the bank’s high exposure to consumer products and leases that renders its asset quality more susceptible to economic downturns.

The continued consolidation of the bank’s franchise particularly in the area of funding alongside a sustained improvement in its financial profile closer to that of higher-rated licensed commercial banks may result in a rating upgrade. NTB’s aggressive pursuit of credit expansion that could potentially weaken capitalisation and liquidity profile may result in a rating downgrade.

Total loans expanded by 24.6% in 2010 compared with 23.2% for the sector. Lending to the consumer/retail and corporate (including SME) customer segments comprised 45% and 55%, respectively, of NTB’s loan book at end-2010.

Leases, personal loans and credit cards accounted for 20%, 15% and 9%, respectively, of its loan book at end-2010. Loans expanded by 27.4% in 9M11, driven largely by growth in the corporate segment and leases. Fitch expects strong loan growth to continue with the planned credit expansion and focus on lending to the SME segment to increase.

Despite the reduction in interest income from credit cards due to a regulatory cap imposed in Q410, NTB’s profitability as measured by return on assets (ROA) improved. ROA reached 1.4% in 2010 largely due to a reduction in loan loss provision charges and wider net interest margins (NIMs), and increased further to 1.7% (annualised) in 9M11 due to a reduction in effective tax rates.

However, NIMs contracted to 5.2% (annualised) in 9M11 from 6.4% in 2010 – a trend observed across peers – from a reduction in yields, and may contract further should funding costs increase due to competition for deposits. Profitability may also come under pressure due to operating cost increases.

NTB’s gross non-performing loan ratio declined to 4.9% at end-2010, after peaking at 8.5% at end-2009, supported by improved macroeconomic conditions, and further to 3.5% at Q311.

Un-provided (by specific provisions) NPLs fell sharply to 14.9% of equity at Q311 from 39.8% at end-2009. Fitch is of the view that credit growth needs to be carefully managed given the profile of the bank’s loan book.

Equity/assets rose to 8.2% at end-2010 and 8.5% at Q311 from 6.8% at end-2009, supported by the exercise of warrants attached to the shares issued through a rights issue that brought in equity of Rs. 1,257 m by Q110 and Rs. 733 m by Q111. Capitalisation may be diluted if equity accretion fails to keep pace with strong credit expansion planned.

NTB’s funding profile continued to shift to a higher share of deposit funding (Q311: 63%). Current and savings accounts (CASA) accounted for 27% of total deposits at Q311, which was lower than that of larger private LCB peers with more mature franchises. The bank expects its deposit base and CASA to increase as it expands its branch presence.

NTB accounted for 2.3% of banking sector assets and had 47 points of presence at end-2010.

The bank has established itself in chosen segments since it began operations in 1999. NTB is to be repositioned to the broader market in the medium term as the next phase of its growth.