Fitch rates National Development Bank’s Basel III Sub Debt Final A-(lka)

Aug 31, 2020 (LBO) – Fitch Ratings Lanka has assigned National Development Bank’s proposed Basel III-compliant subordinated unsecured debentures a final National Long-Term Rating of ‘A-(lka)’.

The final ratings are the same as the expected ratings assigned on 23 July 2020 and follow the receipt of documents conforming to information already received.

The proposed debentures total up to LKR6.5 billion with maturities of five years and will be listed on the Colombo Stock Exchange. The bank expects the proposed debentures to qualify as Basel III-compliant regulatory Tier 2 capital. The proposed debentures include a non-viability clause whereby they will convert to ordinary voting shares if so determined by the Monetary Board of Sri Lanka. The bank plans to use the proceeds from the proposed debentures to strengthen its Tier 2 capital base and support loan-book expansion.

KEY RATING DRIVERS

NDB’s Sri Lankan rupee-denominated subordinated debt is rated two notches below the National Long-Term Rating anchor. This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries. There is no additional notching for non-performance risks.

NDB’s National Long-Term Rating reflects its modest franchise and more balanced business model but thinner capitalisation relative to similarly rated peers.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

NDB’s subordinated debt would be upgraded if the bank’s National Long-Term Rating is upgraded.

The prospect of an upgrade appears unlikely in the near term due to the deteriorating operating environment. An upgrade of NDB’s rating in the medium term would stem from an improvement of its credit profile relative to the rated universe of Sri Lankan entities. A much stronger franchise and financial profile, in particular, higher capital buffers that can absorb risks related to the operating environment, would be consistent with positive rating action.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

NDB’s subordinated debt would be downgraded if the bank’s National Long-Term Rating is downgraded.

NDB’s rating would be downgraded if there were to be deterioration in its financial profile relative to the universe of rated entities in Sri Lanka, in particular, its capital buffers, or increased risk appetite through aggressive loan growth or higher exposure to riskier customer segments.