Fitch affirms NTB at 'A(lka)'

Fitch Ratings Lanka has affirmed Nations Trust Bank Plc's (NTB) National Long-Term rating at 'A(lka)'. The outlook is stable.

NTB's ratings reflect its improved financial position, particularly in terms of its asset quality and capitalisation since end-2009, and a developing franchise among most customer segments. Fitch also notes the bank's high exposure to consumer products and leases that renders its asset quality more susceptible to economic downturns. The continued consolidation of the bank's franchise particularly in the area of funding alongside a sustained improvement in its financial profile closer to that of higher-rated licensed commercial banks may result in a rating upgrade. NTB's aggressive pursuit of credit expansion that could potentially weaken capitalisation and liquidity profile may result in a rating downgrade.

Total loans expanded by 24.6% in 2010 compared with 23.2% for the sector. Lending to the consumer/retail and corporate (including SME) customer segments comprised 45% and 55%, respectively, of NTB's loan book at end-2010. Leases, personal loans and credit cards accounted for 20%, 15% and 9%, respectively, of its loan book at end-2010. Loans expanded by 27.4% in 9M11, driven largely by growth in the corporate segment and leases. Fitch expects strong loan growth to continue with the planned credit expansion and focus on lending to the SME segment to increase.

Despite the reduction in interest income from credit cards due to a regulatory cap imposed in Q410, NTB's profitability as measured by return on assets (ROA) improved. ROA reached 1.4% in 2010 largely due to a reduction in loan loss provision charges and wider net interest margins (NIMs), and increased further to 1.7% (annualised) in 9M11 due to a reduction in effective tax rates. However, NIMs contracted to 5.2% (annualised) in 9M11 from 6.4% in 2010 - a trend observed across peers - from a reduction in yields, and may contract further should funding costs increase due to competition for deposits. Profitability may also come under pressure due to operating cost increases.

NTB's gross non-performing loan (NPL) ratio declined to 4.9% at end-2010, after peaking at 8.5% at end-2009, supported by improved macroeconomic conditions.