ICRA Nepal reaffirms AMC Quality 3+ rating to Nabil Investment Banking indicating adequate assurance on management quality

 ICRA Nepal has reaffirmed “[ICRANP] AMC Quality 3+ (AMC3+)” (pronounced ICRA NP Asset Management Company Quality Three Plus) fund management quality rating (FMQR) assigned to Nabil Investment Banking Limited (Nabil Invest), indicating adequate assurance on management quality.

ICRA Nepal assigns FMQR on a scale of AMC1 through AMC5, with AMC1 indicating highest assurance on management quality and AMC5 indicating poor assurance on management quality. For the FMQR categories 2, 3 and 4, the sign of + (plus) appended to the symbols indicate their relative position within the FMQR categories concerned. Thus, the FMQR of 2+, 3+ and 4+ are one notch higher than 2, 3, and 4, respectively.

The adequate assurance on management quality factors in the ownership and continued technical support of Nabil Bank Limited, a Class ‘A’ commercial bank in Nepal (rated [ICRANP-IR] AA- for issuer rating) along with established organisational structure, system and processes for current level of operations. The FMQR also factors in satisfactory investor service practices of Nabil Invest & the processes followed by it in generating healthy returns for first scheme managed by it while the second scheme has remained impacted by significant downturn in market index since its launch.

The rating action also derives comfort from experienced senior management and fund supervisors involved in the management and supervision of the current mutual fund schemes under the company. However, the requisite extent of involvement of supervisors in managing the schemes is not clearly mandated by strong legal framework and hence remains a rating concern.

The FMQR is nonetheless constrained by the divestment of a chunk of stake by Nabil Bank (from 74% earlier to 52% as of now with concomitant increase in stake of CG Finco); however, extent of support from the sponsor has remained similar which provides some comfort. 

The rating is also constrained by the company’s moderate track record in Nepalese Capital market as merchant banker, portfolio manager and fund manager along with uncertain operating environment amidst volatility in the market, evolving risk management framework with respect to fund management, absence of separate risk management committee, unviability of hedging tools for investment in the market, evolving nature of mutual fund industry and low awareness about the mutual fund among general investor.

 The first scheme under the company i.e. Nabil Balance Fund-I amounting Rs 75 crore was issued in April 2013 and is set to mature in mid-Apr-18. The balance scheme of Nabil Invest registered healthy growth in Net Assets Value (NAV) till mid-Mar-18 (NAV of NPR 17.80 as of mid-Mar-18 i.e. growth of 80% since its launch with an average of 20% cash dividend during last five years) compared to the growth in stock market index (around 150% over the same period) while adhering to regulatory guidelines and investment policies which reflects positively on the investment strategy of Nabil Invest. 

The second scheme under the company i.e. Nabil Equity Fund is an equity-oriented scheme amounting to Rs 1.25 arba which was issued in November 2016 with timeline of 7 years. NAV of this scheme has however been impacted by significant decline in equity index since its launch (26% decline till mid-Mar-18) with NAV of 8.66 as of mid-Mar-18 (against face value of NPR 10). 

Given the substantial correction in market index in recent periods and the room left for further equity investment 54% invested in equity as of mid-Jan-18 vs. 86% cap as stated in prospectus). Considering the volatility of evolving Nepalese stock market and its effect on the underlying equity investments of the scheme, ability of the AMC in maintaining good growth trend in NAV after upside in equity index would remain a key rating driver.