Fitch cuts NDB’S Outlook to Negative

„Flags high loan growth and increasing exposure to riskier retail, SME customer segments

Fitch Ratings yesterday revised National Development Bank PLC’S (NDB) Outlook to Negative from Stable while affirming the National Longterm Rating at A+(lka) on the rating agency’s expectation of continued pressure on the bank’s capitalisation stemming from high loan growth and increasing exposure retail and SME segments.

“The revision in the Outlook reflects our expectation of continued pressure on NDB’S capitalisation stemming from its rising risk appetite in terms of high loan growth and increasing exposure to riskier retail and SME customer segments,” Fitch said.

The rating agency believes the bank could remain challenged in the medium term to maintain capital buffers that are corresponding with its risk appetite, even with capital raising, due to its above-sector growth aspirations—loan growth has averaged at 18 percent annually since 2014 - and probable higher regulatory requirements as a domestic systemically important bank (D-SIBS).

Fitch noted that capitalisation has been weakening, with the group’s Tier 1 capital ratio declining to 9.6 percent at endseptember 2018 (end-2014:12.9 percent), while the bank’s ratio stood at 8.4 percent (2014: 10.0 percent). Fitch expects NDB to face greater capital pressure as its asset base is likely to cross the Rs.500 billion threshold in 2019 (end-2018: Rs.473 billion).

“This will require the bank to maintain minimum Tier 1 and total capital ratios of 10.0

percent and 14.0 percent, respectively, which include an additional regulatory capital buffer of 1.5 percent imposed on D-SIBS,” the rating agency said. The bank raised only Rs.3.4 billion from its Rs.6.2 billion rights issue in 4Q18, subsequent to which the Tier 1 ratio for

the group and bank rose to 10.4 percent and 9.2 percent respectively at end-2018.

Meanwhile Fitch noted that NDB expects to increase its exposure to the retail and SME segments, which they regard as more vulnerable to deteriorating domestic economic conditions.

“The bank remains mostly exposed to corporates and its reported gross nonperforming loan ratio (2.85 percent at end- 2018) compares well against peers, but its rising exposure to riskier customer segments could pressure asset quality, especially in light of rapid loan growth and Fitch’s expectation that the overall operating environment will remain challenging,” Fitch said. “The bank’s near-term profitability has improved and its increased focus on retail and SME segments, as well as a higher share of rupee-based lending, could support better net-interest margins.

However, the potential upside to the bank’s profitability is likely to be constrained by the bank’s relatively weak deposit franchise and potentially higher impairment charges,” Fitch noted.