Fitch rates Nations Trust Bank’s Basel III subordinated debt final A-

Dec 05, 2019 (LBO) – Fitch Ratings has assigned Nations Trust Bank PLC’s (NTB, A(lka)/Stable) proposed Basel III-compliant subordinated unsecured debentures a final National Long-Term Rating of ‘A-(lka)’.

The final rating is the same as the expected rating assigned on 14 March 2019 and follows the receipt of documents conforming to information already received other than the amount of the debentures and the tenure.

The proposed debentures will total up to LKR4.5 billion, with maturities of five and seven years, and will be listed on the Colombo Stock Exchange. They will qualify as Basel III-compliant regulatory Tier 2 capital for the bank and include a non-viability clause whereby they will convert to ordinary shares if so determined by the Monetary Board of Sri Lanka. The bank plans to use the proceeds to strengthen its Tier 2 capital base and for medium-term funding.

KEY RATING DRIVERS

Fitch rates the proposed Tier 2 instrument one notch below NTB’s National Long-Term Rating to reflect the notes’ subordinated status and higher loss-severity risks relative to senior unsecured instruments. The notes would convert to equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

NTB’s National Long-Term Rating is used as the anchor rating for the proposed instrument, as it reflects the bank’s standalone financial strength and best indicates the risk of the bank becoming non-viable.

Fitch has not applied additional notching to the proposed notes for non-performance risk, as the proposed notes do not have going-concern loss-absorption features, in line with the agency’s criteria.

NTB’s National Long-Term Rating was affirmed on 23 May 2019 and reflects its higher-than-peer product concentration and modest franchise.

RATING SENSITIVITIES

The rating of NTB’s proposed Basel III-compliant notes will move in tandem with its National Long-Term Rating. The rating is also sensitive to divergence between the final Bank Rating Criteria, when published, and the current Exposure Draft.

Increased capital impairment risk through sustained rapid loan expansion or asset-quality deterioration could result in a downgrade of NTB’s rating. An upgrade is contingent on lower product concentration, higher capitalisation and a more stable funding profile, alongside progress in building a stronger franchise.