Fitch assigns NDB ‘B+’/Stable international rating
Wednesday, 3 July 2013 00:01
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Fitch Ratings has assigned Sri Lanka-based National Development Bank PLC (NDB) long-term foreign- and local-currency Issuer Default Ratings (IDRs) of ‘B+’ with Stable Outlooks.
Fitch has also assigned NDB a ‘b+’ Viability Rating (VR), a Support Rating (SR) of ‘4’, and Support Rating Floor (SRF) of ‘B’. A full list of rating actions is provided at the end of this commentary.
Key rating drivers
NDB’s LT IDR reflects its standalone risk profile and satisfactory track record as a project financing institution with historically stronger capitalisation, asset quality and profitability compared with other major financial institutions in Sri Lanka. However, these strengths are counterbalanced by potential risks from NDB’s aggressive loan growth in recent years, and its expansion into other areas of commercial lending, as it seeks to become a full-service universal bank.
In funding, Fitch believes that it will take several years before NDB’s share of deposits, and particularly low-cost current and savings accounts, become comparable to its well-established domestic peers. This is because of widespread competition in the industry where loan growth has far outstripped deposits in the past two to three years.
The SR of ‘4’ and SRF of ‘B’ reflect Fitch’s expectations of somewhat limited extraordinary support from the state, given the latter’s own fiscal challenges as reflected in its ‘BB-’ rating, and NDB’s lower systemic importance than larger Government banks or larger systemically important banks.
Rating sensitivities
Successful transformation into a full-fledged universal bank without any material deterioration in its current credit metrics, together with an improved operating environment in Sri Lanka, could result in an upgrade of NDB’s IDRs and VR. The Stable Outlook, however, indicates that this is unlikely to occur over the next one to two years.
On the other hand, the IDRs and VR could be downgraded if there is a sustained and substantial weakening in asset quality, in particular stemming from aggressive loan growth, together with a material decline in its capital position and other loss absorption indicators.
The SR and SRF are sensitive to the sovereign’s ability and propensity to provide timely support, particularly if the sovereign rating were to change. The SRF could be upgraded if NDB’s share of banking system assets and deposits were to increase to levels that are more in line with other systemically important domestic banks.
NDB was established in 1979 as a specialised bank and transformed into a licensed commercial bank in 2005. The government of Sri Lanka indirectly held over 30% of NDB’s voting shares at end-March 2013, through various state-owned institutions.
A full list of NDB’s ratings: Long-Term Foreign- and Local-Currency IDRs assigned at ‘B+’; Stable Outlook
Short-term Foreign Currency IDR assigned at ‘B’
Viability Rating assigned at ‘b+’ Support Rating assigned at ‘4’ Support Rating Floor assigned at ‘B’
National Long-Term Rating affirmed at ‘AA-(lka)’; Stable Outlook
Outstanding subordinated debentures affirmed at ‘A+(lka)’
