Fitch rates NDB sub debt ‘AA-(lka)’

Fitch Ratings Lanka has assigned National Development Bank PLC’s (NDB) proposed subordinated debentures of up to Rs 1bn a National rating of ‘AA-(lka)’.

The agency has also affirmed NDB’s National Long-term (LT) rating at ‘AA(lka)’ with a stable outlook.

The ratings reflect NDB’s strong financial profile in terms of its capitalization, asset quality and profitability compared with local peers.

The ratings are constrained by its developing franchise and shorter history as a licensed commercial bank (LCB), which is reflected in a less diversified loan portfolio and a more modest deposit base.

NDB’s ratings may be upgraded if the bank consolidates its franchise as an LCB while maintaining a strong financial profile.

A significant weakening of NDB’s financial profile on a sustained basis eroding its capital position could result in a downgrade.

Since its transformation to a LCB in 2005, NDB has operated as a niche player, focusing on selected customer segments. However, management is gradually repositioning the bank over the medium term, and has set about extending its product offering and expanding its customer reach.

To facilitate the shift in NDB’s focus, accompanying structural changes are being implemented, including the merging of certain business lines, the migration of the core banking systems onto a single platform and centralisation of processing for most business lines.

NDB’s equity and assets ratio of 14.8 percent and core and total capital adequacy ratios of 17.8 percent and 20.3 percent at end-2010 remained well above larger LCB peers’. However, Fitch notes that NDB’s capitalization could get diluted if equity accretion fails to keep pace with the expected increased asset growth and with the gradual shift in its business model. NDB’s net non performing loan (NPL) and equity ratio (excluding discretionary provisions on performing loans) remained low at 2 percent at end-2010.

Core profitability as measured by return on assets (adjusted for gains on equities and government securities) increased to 1.6 percent in 2010 (1.3 percent in 2009), driven by provision reversals and higher non-interest income.

While NDB’s lean cost structure has supported profitability, anticipated cost increases as the bank builds scale could impact profitability.