Feb 19 - Fitch Ratings has placed National Commercial Bank of Jamaica
Limited's (NCBJ) long-term foreign and local currency Issuer Default Ratings
(IDR) of 'B-' on Rating Watch Negative. A full list of rating actions follows at
the end of this press release.
KEY RATING DRIVERS
The placement of NCBJ's IDRs on Rating Watch Negative reflects the continued
downside risks generated by the recent debt exchange announced by the Jamaican
Government, given the potential for a more challenging operating environment in
the event of an unsuccessful debt exchange or the government's inability to meet
other pre-conditions for securing an IMF programme. Despite the former, the bank
remains well positioned to manage the fallout from the government's debt
Around 30% of the bank's assets (1.6x equity) as of Sept. 30, 2012, will be
subject to restructuring under the Jamaican debt exchange, leading to a
reduction in interest income after settlement on Feb. 22, 2013.
Fitch downgraded the sovereign's foreign and local currency IDRs to 'C' from
'B-' on Feb. 12, 2013. The downgrade of Jamaica's sovereign ratings reflected
the government's announcement of a domestic debt exchange involving
approximately J$860 billion in both foreign currency (FC) and local currency
(LC) domestic debt. In Fitch's opinion, the exchange, if completed, would
constitute a 'distressed debt exchange' (DDE) in line with its criteria, as the
operation adversely affects the original contractual terms of domestic bond
holders. Hence, the sovereign's FC and LC IDRs will be lowered to 'Restricted
Default' (RD) upon completion of the exchange.
RATING DRIVERS AND SENSITIVITIES - VR & IDRs
NCBJ's Viability Rating (VR) drives its long-term IDRs. The bank's VR reflects
its strong domestic franchise, solid profitability, and adequate capitalization
in light of the bank's risk profile. Nevertheless, NCBJ's ratings remain
constrained by the sovereign's weak credit profile given high exposure to the
Jamaican government, lending concentrations, as well as a challenging operating
Investments and loans to the Jamaican government, public entities and entities
with a Jamaican government guarantee continued to represent a high proportion of
NCBJ's total assets at 52%, or about 3 times (x) its equity, in the fiscal year
ended September 2012 (FYE12). Fitch remains concerned about this high asset
concentration given the government of Jamaica's weak credit profile.
Despite the bank's exposure to the Jamaican government, Fitch believes NCBJ is
sufficiently capitalized to absorb any unexpected losses related either to the
debt exchange or its impaired loans portfolio. The bank's Fitch Core Capital
ratio reached 33.7% at FYE12, comparing favorably to international peers
(emerging market commercial/universal banks). Although the reduction in interest
revenue related to the exchange will negatively affect profitability, Fitch
assumes bank management will offset some of this reduction in income with other
measures to improve efficiency and funding costs. As a result, Fitch believes
profitability will remain positive in FY2013 and continue to compare favorably
to international peers.
Future rating actions will be highly contingent on a change in Fitch's view of
the sovereign given the bank's sizable sovereign exposure. Jamaica's ratings
will be raised out of default shortly after Fitch determines that the exchange
has been successful and the agency will assign a new rating consistent with
Jamaica's prospective credit profile and debt structure. At that point, Fitch
will resolve the Rating Watch Negative on NCBJ's IDRs and assess if these could
be above, capped or below the sovereign rating.
Additionally, a downgrade of the bank's ratings could be driven by an unexpected
marked deterioration of asset quality that weakens profitability or
capitalization to a level that is no longer consistent with its current peers
(emerging market commercial banks with a VR of 'b-', 'b' or 'b+'). Although not
Fitch's base case scenario, unexpected deposit instability may also trigger a
negative rating action.
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support rating is constrained by the sovereign's weak credit profile.
As such, the Support floor has been downgraded to 'C' from 'B-', in line with
the sovereign's ratings although Fitch continues to believe that NCBJ's systemic
importance makes the government's propensity to support the bank high despite
its weak capacity.
NCBJ is the largest bank in the system in terms of assets with more than 40%
market share of the commercial banking system in recent years. In 2002, the
Jamaican government sold a majority stake in the bank to Advantage Investment
Corporation (AIC), one of Canada's largest privately held mutual fund management
Fitch has taken the following actions on NCBJ's ratings:
--Long-term foreign and local currency Issuer Default Ratings (IDR) of 'B-'
placed on Rating Watch Negative;
--Short-term foreign and local currency IDR affirmed at 'B';
--Viability Rating affirmed at 'b-'
--Support Rating affirmed at '5';
--Support floor downgraded to 'C' from 'B-'.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria', Aug. 15, 2012;
--'Fitch Downgrades Jamaica to C', Feb. 12, 2013;
--'National Commercial Bank of Jamaica Limited (NCBJ)' April 26, 2012.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
National Commercial Bank of Jamaica Limited (NCBJ)