June 23, 2014 / 10:37 AM / in 3 years

RPT-Fitch Affirms National Development Bank at 'B+'; Outlook Stable

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June 23 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Sri Lanka-based National Development Bank PLC’s (NDB) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) at ‘B+’ with a Stable Outlook. The agency has also affirmed NDB’s Viability Rating (VR) at ‘b+'. The expected rating of ‘B+(EXP)’ assigned to NDB’s proposed USD notes issuance, has been withdrawn as the bank no longer expects to proceed with the debt issue as previously envisaged. NDB’s National Long-Term Rating has also been affirmed at ‘AA-(lka)’ with a Stable Outlook. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - IDRS, VR, NATIONAL RATING AND DEBT

NDB’s IDRs, VR and National Rating reflect its intrinsic risk profile driven by its long and relatively stable operating history with better asset quality and capitalisation compared with rating peers, counterbalanced by its developing franchise as a commercial bank.

NDB’s subordinated debt is rated one notch below the National Long-Term Rating to reflect its relatively lower recovery prospects in the event of liquidation. NDB is engaged in merger discussions with DFCC Bank (B+/Stable). This is as a part of the Government of Sri Lanka’s “Master Plan” to consolidate the financial system, which includes establishment of one large development bank to provide impetus to policy-driven development banking activities in the country. Fitch believes that the merged bank will primarily focus on supporting economic development. Fitch is of the view that synergies from such an amalgamation could be beneficial to the credit profile in the long run although credit neutral in the short to medium term. Fitch will further comment on the matter once details and the time frame of this deal become clearer.

NDB’s continued to experience strong loan growth of 18.6% in 2013, above the average of 8.8% for the banking sector. Its loan book composition has remained stable - SME and retail lending accounted for 36% and project finance accounted for a 14% at end-2013 with the balance of 50% mostly stemming from the commercial banking book. Unlike most of its peers, NDB was not significantly affected by the sharp drop in global gold prices as its exposure to pawning advances has been minimal and reduced to just 1% of loans at end-2013. Its regulatory NPL ratio increased to 2.7% at 1Q14 and 2.5% at end-2013 from 1.3% at end-2012, but remained better than that of its peers. The deterioration reflected the seasoning of NDB’s loan book in the aftermath of strong loan expansion alongside a challenging macroeconomic environment

Higher loan impairment charges affected NDB’s profitability and the sector in general. NDB’s return on assets decreased to 1.43% in 2013 from 2% in FY12 (after adjusting for the one-off capital gain from the sale of its insurance subsidiary). NDB’s Fitch Core Capital (FCC) reduced to 15.2% at end-2013 from 18.7% at end-2012 (including the capital gain), but remained strong relative to most peers. Fitch expects NDB’s capitalisation to trend lower towards that of its commercial bank peers, as NDB intends to sustain its growth momentum but continue to remain healthy.

NDB’s share of CASA remained relatively low at 26% at 1Q14, reflecting its still developing deposit franchise. The bank also benefits from funding lines from multilateral agencies and such loans accounted for about 10% of NDB’s loan book at end-2013.

RATING SENSITIVITIES - IDRS, NATIONAL RATING AND DEBT

The consolidation of NDB’s franchise alongside its ability to sustain strong credit metrics could result in an upgrade of NDB’s IDRs, VR and National Rating. The IDRs, VR and National Rating could be downgraded if there is a sustained and substantial increase in risk appetite that could materially weaken its capital position.

The ratings of NDB’s subordinated debt are primarily sensitive to changes in its National Long-Term Rating.

A full list of NDB’s ratings:

Long-Term Foreign- and Local-Currency IDRs: affirmed at ‘B+'; Stable Outlook Short-Term Foreign-Currency IDR: affirmed at ‘B’

Viability Rating : affirmed at ‘b+’

Support Rating : affirmed at ‘4’

Support Rating Floor: affirmed at ‘B’

Expected rating on proposed USD senior unsecured notes: Withdrawn

National Long-Term Rating: affirmed at ‘AA-(lka)'; Stable Outlook

Outstanding subordinated debentures: affirmed at ‘A+(lka)'

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