"NTB's ratings reflect the group's modest profitability and capital position in relation to the bank's relatively high-risk loan book and its adequate liquidity," Fitch said.

The bank reported a foreign exchange loss of over 800 million rupees in the June 2009 quarter, which was offset by exceptional bond trading gains of over a billion rupees as interest rates fell steeply, Fitch said.

The bank had realized over 800 million of the gains which Fitch said had mitigated the risk profit-reversal if market rates rise.

"Consequently NTB's equity position remains intact," Fitch said. Group equity to assets improved marginally to 5.88 percent at the end of the June quarter from 5.80 percent at the end of March.

Fitch says foreign exchange trading within NTB's domestic banking unit (DBU) has historically been subjected to daily profit reconciliations.

But open positions had been created and maintained within the foreign currency banking unit due to lack of independent monitoring of transaction approvals.

The bank's internal policy had prohibited trades within the foreign currency banking unit (FCBU),

"NTB has taken steps to mitigate such occurrences in future, including the implementation of a treasury middle-office function which facilitates independent monitoring of operations," Fitch said.

"The bank also commenced monitoring of FCBU open positions, as well as daily profit reconciliations, despite the continued prohibition on trading within the unit."

NTB's profitability in terms of return on assets (ROA) had remained broadly flat year-on-year at 0.96 percent at the end of the 2008 financial year.. ROA has generally remained below the 1 percent mark, compared to the peer median of 1.15 percent in 2008, Fitch said.

NTB's core profitability excluding exceptional items improved in the second quarter of 2009, driven by lower credit and operating costs.

Core operating profit before taxes increased to an annualised 1.06 percent at end of the 2009 first half, from 0.54 percent at the end of the first quarter.

But Fitch expects core ROA to remain constrained, in the near term, by slowing fee income and possibly high credit costs in the present weak economic climate despite the the possibility of better net interest margins and bond gains if rates fall further.

NTB's liquidity has been good and above the regulatory minimum of 20 percent over the 12 months to end-June 2009. Fitch expects operating liquidity to generally remain good, as deposit growth is expected to outpace loan growth, at least over the near term.

Updated