Fitch affirms Nations Trust Bank's 'A-(sri)' rating

FITCH Ratings Lanka Ltd (FRL) has affirmed the 'A-(sri)' (A minus) national Senior Unsecured Long-term rating of Nations Trust Bank Ltd. ("NTB"). The rating outlook is stable.

The A-(sri) rating denotes a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong.

This capacity may, nevertheless be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.

The affirmation of NTB's rating reflects the bank's operational and financial profile, sustained asset quality, a reasonably good risk management framework and satisfactory capitalisation level.

The rating also recognises the relatively small size of NTB within the banking industry with a 1.4% share of system assets as at December 04.

Profitability in terms of ROA was 0.36% (annualised) as at June 05. During 2004, ROA reduced to 0.22% compared to 1.45% in 2003 in the absence of one-off capital gains, higher taxation, increased provisioning and high operating costs as the bank builds scale.

However, there has been an improvement in operational profitability with ROA (at the pre-provisioning level excluding one-off capital gains) increasing from 0.97% in 2003 to 1.32% in 2004.

Asset quality is comparatively good and has been maintained with gross NPL ratio of about 6% as at June 05 and December 04. Loan loss reserve (LLR) coverage reduced somewhat as at June 05 to 54% from 60% in 2004. Nevertheless NTB's LLR coverage compares favourably with peers.

Similarly solvency in terms of Net NPL/Equity ratio was relatively good at 23% as at June 2005 despite increasing from 17% as at December 04.

NTB's capital position is comfortable with the Total Risk Weighted Capital Ratio estimated at 15.02% as at June 05 (Tier 1-10%) while the corresponding ratio as at December 04 was 13.91% (Tier 1-10.44%).Tier 2 capital was boosted by the Euro 5 million equivalent LKR denominated subordinated loan from FMO.

The impending merger with Mercantile Leasing Ltd. to be effected through a share swap is likely to raise NTB's capital base to about LKR 2 billion from about LKR 1.4bn as at June 05.

NTB is a relatively young commercial bank established in 1999 with the acquisition of the Sri Lankan branch of Hong Kong based Overseas Trust Bank.

The bank was promoted by the John Keells Group (rated AAA (sri) by FRL) and the Central Finance group, together with the International Finance Corporation (IFC).

The promotors (with the exception of the IFC) collectively hold 45% of NTB's equity. The bank has continued to expand its franchise through selective acquisitions and has a network of 30 branches.