Fitch revises NDB’s outlook to negative but affirms AA rating

Fitch Ratings said yesterday it has revised National Development Bank PLC’s (NDB) Outlook to Negative from Stable. Its National Long-Term rating has been affirmed at ‘AA(lka)’. Fitch has also affirmed NDB’s subordinated debentures at ‘AA-(lka)’.

The Outlook revision reflects NDB’s increased risk profile in terms of its decreasing capitalisation alongside aggressive loan expansion and potential pressure on its asset quality and profitability through portfolio seasoning and higher credit costs. Thus, a sustained deterioration of NDB’s profile in terms of these credit metrics could result in a rating downgrade, while its ability to stem such deterioration could revise the Outlook back to Stable.
Notwithstanding the deterioration, the ratings continue to reflect NDB’s strong credit metrics in terms of its capitalisation, asset quality, and profitability.
NDB’s strong loan expansion of 41.8% in 2011 (28.8% in 2010) led to a decline in its equity/assets to 12.7% from 14.7%. Fitch expects lending momentum to remain high alongside its expanding operations, as part of the repositioning of the bank to target the mass market.
Fitch…
Pre-provisioning return on assets stood at 3.60% (annualised) in Q112 (3.10% (adjusted for gains) in 2011).
However, Fitch believes that NDB’s profitability could be pressured by higher credit costs following a strong increase in lending and higher operating costs alongside its expanding operations.
NDB’s gross non-performing loan (NPL) ratio remained among the lowest in the sector at 1.3% at Q112. However, Fitch believes that the bank’s high loan growth and the shift in its loan book composition towards mid-sized corporates and SMEs among others could test its credit risk management.
Specific provision coverage also remained high in a local context at 74% of NPLs at Q112 (2011: 78%; 2010: 96%). The agency notes that the bank’s historically high specific loan loss reserves have decreased with the release of discretionary specific provisions leading to a weakened provision buffer to absorb a potential increase in credit costs.
Fitch notes that the share of deposit funding continued to increase (57% at end-2011, 55% at end-2010) supported by deposit growth of 35% yoy. However, the share of low-cost current and savings accounts (CASA) remained low (23%) relative to peers that have more mature franchises.
The agency believes that the NDB’s ability to secure a stable CASA and thereby cushion its net interest margins (4.2% in 2011) from the rising interest rates is essential to sustain its long-term profitability in view of the intensified competition for deposits and continued strong credit growth.
NDB was established in 1979 as a specialised bank and transformed into a commercial bank in 2005. NDB accounted for 3.9% of banking sector assets at end-2011 and operates through 62 branches.