ECONOMYNEXT – Fitch Ratings Lanka has confirmed Nations Trust Bank PLC’s (NTB) National Long-Term Rating at ‘A(lka)’ with a stable outlook, saying it had higher interest margins, though a difficult operating environment had was pushing up bad loans.
It had a higher concentration on leasing and credit cards and weak asset quality than peers.
“We expect profitability to continue to be dampened by credit costs, although it is likely to remain better than that of similarly rated peers due to a higher net interest margin,” the rating agency said.
“NTB’s modest franchise and profitability are balanced against its higher-than-peer product concentration in leasing and credit cards and weak asset quality relative to similarly rated peers,” Fitch Ratings said.
“NTB’s impaired-loan ratio, based on stage 3 loans, continued to rise to 11.2 percent by end-2020 from 10.9 percent at end-2019, reflecting the continued deceleration in lending amid challenging operating conditions.”
The 6.7 had contraction in loans exceeded the 3.5 percent decrease in stage 3 loans.
NTB’s loan loss allowances have been rising and increased to 3.8% of gross loans by end-1H21, but coverage of impaired loans remains low at 35.6% relative to similarly rated peers.
The operating environment for Sri Lankan banks reflects the risk of doing banking business due to the sovereign’s credit profile (CCC) and the impact of the coronavirus pandemic.
NTB’s loans/deposits ratio has grown to 98 per cent by end-1H21 due to the resumption of lending and is likely to remain high due to its reliance on medium-term, non-deposit funding to reduce asset and liability maturity mismatches, Fitch said.
Sri Lanka sovereign’s credit profile is rated at (CCC) and remains negative due to the potential deterioration in the sovereign credit profile and pressure on domestic operating conditions
Fitch expects pressure on NTB’s asset quality to persist in the near to medium term, stemming from the assessment of the operating environment.
“The bank also has a moderate share of foreign-currency denominated funding and is exposed to challenges in access to – and pricing of – foreign-currency funding due to the sovereign’s credit profile,” Fitch said.
NTB’s impaired-loan ratio on stage 3 loans, has risen to 11.2 per cent by end-2020 from 10.9 per cent at end-2019.
Its loan facility has contracted 6.7 per cent exceeded the 3.5 per cent decrease in stage 3 loans (bad loans).
Fitch says this reflects the continued deceleration in lending amid challenging operating conditions.
NTB’s loan loss allowances have been rising and increased to 3.8 per cent of gross loans by end-1H21, “but coverage of impaired loans remains low at 35.6 per cent relative to similarly rated peers,” Fitch said.
“We expect profitability to continue to be dampened by credit costs, although it is likely to remain better than that of similarly rated peers due to a higher net interest margin.”
The banks operating profit/risk-weighted assets has decreased to 3.4 per cent in 2020 from 3.9 per cent in 2019 alongside muted income generation and higher impairment charges before rebounding to 4.3 per cent in 1H21.
NTB’s common equity Tier 1 ratio of 13.46 per cent at end-1H21 remained well above the 10.7 per cent median for similarly rated banks.
“Unprovided impaired loans remain high relative to CET1 at 53.8%, putting pressure on its capital buffers,” Fitch ratings said.
The full statement is reproduced below:
Fitch Affirms Nations Trust Bank at ‘A(lka)’; Outlook
Stable
Fitch Ratings – Colombo – 29 Sep 2021: Fitch Ratings Lanka has affirmed the National Long-Term Rating on Nations Trust Bank PLC (NTB) at ‘A(lka)’ ‘. The Outlook is Stable. At the same time Fitch has affirmed the bank’s outstanding subordinated debt at
‘BBB+(lka)’.
KEY RATING DRIVERS
NATIONAL LONG-TERM RATING
NTB’s National Long-Term Rating is driven by its intrinsic credit profile, which in turn is highly influenced by our assessment of the challenging operating environment and the impact on banks’ asset quality.
NTB’s modest franchise and profitability are balanced against its higher-than-peer product concentration in leasing and credit cards and weak asset quality relative to similarly rated peers.
The operating environment for Sri Lankan banks has a high influence on banks’ ratings, as it is likely to constrain their intrinsic credit profiles through its effect on financial and non-financial key rating factors, including their company profiles.
The operating environment for Sri Lankan banks reflects the risk of doing banking business due to the sovereign’s credit profile (CCC) and the impact of the coronavirus pandemic.
The operating environment outlook remains negative due to the potential for deterioration in the sovereign credit profile and pressure on domestic operating conditions beyond our expectation independent of changes in the sovereign rating.
Fitch expects pressure on NTB’s asset quality to persist in the near to medium term, stemming from our assessment of the operating environment.
NTB’s impaired-loan ratio, based on stage 3 loans, continued to rise to 11.2% by end-2020 from 10.9% at end-2019, reflecting the continued deceleration in lending amid challenging operating conditions.
The 6.7% contraction in loans exceeded the 3.5% decrease in stage 3 loans. NTB’s loanloss allowances have been rising and increased to 3.8% of gross loans by end-1H21, but coverage of impaired loans remains low at 35.6% relative to similarly rated peers.
We expect profitability to continue to be dampened by credit costs, although it is likely to remain better than that of similarly rated peers due to a higher net interest margin.
Operating profit/risk-weighted assets decreased to 3.4% in 2020 from 3.9% in 2019
alongside muted income generation and higher impairment charges before rebounding to 4.3% in 1H21.
NTB’s common equity Tier 1 ratio of 13.46% at end-1H21 remained well above the
10.7% median for similarly rated peers. Unprovided impaired loans remain high relative to CET1 at 53.8%, putting pressure on its capital buffers.
NTB’s loans/deposits ratio rose to 98% by end-1H21 due to the resumption of lending and is likely to remain high due to its reliance on medium-term, non-deposit funding to reduce asset and liability maturity mismatches.
The bank has a moderate share of foreign currency-denominated funding and is exposed to challenges in access to and pricing of foreign-currency funding due to the sovereign’s credit profile.
We expect NTB’s loan book to become more evenly distributed among its customer segments in the medium term, although SME and retail would likely dominate, even though the bank has tilted its business mix towards corporates since 2018 due to challenging operating conditions.
Nonetheless, product concentrations in credit cards and leasing are likely to remain a feature of NTB’s loan book, despite muted near-term growth potential due to pandemic-related restrictions and the ban on vehicle imports.
SUBORDINATED DEBT
NTB’s Sri Lankan rupee-denominated subordinated debt is rated two notches below the National Long-Term Rating.
This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries. There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption features.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of NTB’s National Long-Term Rating would likely arise from a weakening in its overall credit profile relative to the universe of Sri Lankan entities rated on the National Rating scale.
This could result from increased capital-impairment risk through asset-quality deterioration or sustained rapid loan expansion.
NTB’s subordinated debt would be downgraded if the bank’s National Long-Term Rating is downgraded.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action appears unlikely in the near term due to the ongoing
macroeconomic pressure.
An upgrade in the longer term is contingent upon a sustained improvement in the bank’s credit profile relative to the universe of Sri Lankan entities rated on the National Rating scale.
This could be through reduced product concentration and higher capital buffers against its risk appetite, alongside a stronger franchise could support an upgrade.
NTB’s subordinated debt would be upgraded if the bank’s National Long-Term Rating is upgraded.