Sri Lanka’s National Development Bank rated ‘B+’ by S&P

June 26, 2013 (LBO) – Sri Lanka’s National Development Bank was given a ‘B+’ rating by Standard and Poor’s Rating Services, ahead of a planned international fund raising. “The ratings on NDB reflect the bank’s satisfactory business and revenue diversification and adequate risk management practices,” S & P analyst Amit Pandey said in a statement.

“The ratings also reflect the bank’s funding and liquidity position, which is weaker than other large banking peers. We assess NDB’s stand-alone credit profile as ‘b+’.”

The outlook on the rating was stable. S & P gave the bank ‘B’ short term rating.

The full statement is reproduced below:

National Development Bank PLC Assigned ‘B+/B’ Rating; Outlook Stable

SINGAPORE (Standard & Poor’s) June 26, 2013–Standard & Poor’s Ratings Services said today that it had assigned its ‘B+’ long-term and ‘B’ short-term counterparty credit ratings to Sri Lanka’s National Development Bank PLC (NDB). The outlook on the long-term rating is stable.

“The ratings on NDB reflect the bank’s satisfactory business and revenue diversification and adequate risk management practices,” said Standard & Poor’s credit analyst Amit Pandey. “The ratings also reflect the bank’s funding and liquidity position, which is weaker than other large banking peers. We assess NDB’s stand-alone credit profile as ‘b+’.”

The issuer credit rating on NDB is the same as the bank’s stand-alone credit profile (SACP). We assess that there is a “moderate” likelihood that the government would provide timely and sufficient extraordinary support to NDB in the event of financial distress. The bank’s SACP is at the same level as the sovereign rating on Sri Lanka (B+/Stable/B), and therefore the bank does not get any uplift over the SACP.

Standard & Poor’s assesses NDB’s business position as “adequate,” capital and earnings as “moderate,” risk position as “adequate,” funding as “below average,” and liquidity as “adequate,” as our criteria define these terms.

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank’s anchor SACP, the starting point in assigning an issuer credit rating. Our anchor SACP for a commercial bank operating only in Sri Lanka is ‘bb-‘.

NDB’s business position reflects our view of the bank’s satisfactory business and revenue diversification, and the fact that NDB is a well-managed bank compared with peers in emerging markets. NDB is the ninth-largest bank in Sri Lanka. The bank provides a full range of banking services and operates on a universal banking platform. NDB’s revenue base is stable and diversified. Fee income has been about 17% of net revenue for the past five years.

The bank’s capital and earnings are “moderate” based on our expectation that Standard & Poor’s pre-diversification risk-adjusted capital (RAC) ratio will fall into the moderate category in the next two years. The ratio is 8% as of Dec. 31, 2012. NDB’s earnings profile is better than the industry. In our view, the bank’s profitability could decline somewhat in 2013 because we expect its margin to fall and credit costs to rise. Moreover, given the high loan growth of about 20%, we expect the RAC ratio to decline to about 6.5% in the next two years.

NDB’s risk position reflects the bank’s adequate risk management practices for its size and scale and its good loan loss experience. NDB’s credit costs have been lower than the industry average. In the past eight years, the bank’s peak credit cost (as a percentage of average assets) was about 31 basis points in 2009, compared with the industry average of 93 basis points.

NDB’s funding and liquidity reflect the bank’s smaller branch network. NDB’s funding profile has improved over time, but it still remains weaker than other large banking peers. Nevertheless, we expect NDB’s funding profile to improve further, albeit at a slower pace. The bank’s sizable holdings of government bonds and central bank balances underpin its liquidity.

“The stable outlook reflects our view that NDB will maintain its financial profile over the next 12 months, despite a slight weakening in its asset quality and capitalization,” said Mr. Pandey.

We could downgrade NDB if we lower the sovereign rating or the bank’s SACP deteriorates, which could happen if NDB’s asset quality weakens substantially leading to a considerable increase in credit costs.

We could upgrade NDB if we upgrade the sovereign, provided that the bank’s SACP improves. An improvement in NDB’s funding profile to levels in line with the industry could result in a better SACP–a scenario that we view as unlikely in the near term.