Sri Lanka’s NDB bank downgraded by Fitch Ratings
View(s):A sharp shift to a more risky, commercial banking outfit from a specialized project lender has led to NDB Bank being downgraded to ‘AA-(lka)’ from ‘AA(lka)’ by Fitch Ratings.
In a statement, Fitch said the downgrade reflects its expectation that NDB’s risk profile will materially increase as a result of its changing business model, from being a well-capitalised, specialised project lender to a new entrant in a highly competitive domestic commercial banking sector. Project loans have reduced as a share of total loans to 14 per cent in 2012 from 58 per cent in 2005. “Its’ shift towards SME and retail lending will, in Fitch’s opinion, materially alter the bank’s risk profile, notwithstanding the diversification benefits provided by growth in these sectors,” the statement said. Fitch said the ‘Outlook is Stable’ but also downgraded the bank’s outstanding subordinated redeemable debentures to ‘A+(lka)’ from ‘AA-(lka)’. AA’ category national ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherent differs only slightly from that of the country’s highest rated issuers or obligations, the agency added.
Fitch said it believes NDB is still lagging its larger commercial banking peers, specifically in terms of its franchise in lending and deposits, and that it may face challenges in gaining critical mass across key product segments. For example, NDB has a 3 per cent market share in deposits whereas most incumbents’ market share is in the low double-digit range.
NDB’s current and savings accounts ratio was 24 per cent and loans to deposits ratio was 111 per cent at end-2012, while it has high deposit concentrations. Comparatively the median ratios for these in the ‘AA(lka)’ rating category, were 39 per cent and 91 per cent, respectively.
“These risks are (however) counterbalanced by the bank’s satisfactory risk management policies, its’ prudent approach to provisioning, as well as by its satisfactory track record as a project lender. Its historical track record as a project lender allows it to benefit from longer-term wholesale funding. Other present attributes from its current business, such as high capitalisation and a low non-performing loan (NPL) ratio, are likely to diminish as NDB increasingly shifts to SME and retail lending,” the statement said.
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