ICRA Nepal assigns AMC Quality 3 rating indicating adequate assurance on management quality to CBIL Capital

ICRA Nepal has assigned “[ICRANP] AMC Quality 3 (AMC3)” fund management quality rating (FMQR) to CBIL Capital Limited (CBIL Capital), indicating adequate assurance on management quality. The adequate assurance on management quality factors in the ownership and technical support of Citizens Bank International Limited, class ‘A’ commercial bank in Nepal (rated [ICRANP-IR] BBB+ for issuer rating) along with adequately established organizational structure and the background of fund supervisors. The FMQR is nonetheless constrained by the uncertain operating environment amidst volatility in the market with political instability, developing systems and processes with respect to fund management, evolving nature of mutual fund industry, unavailability of hedging tools for investment in the market and low awareness about the mutual fund among general investor. The rating also takes note of the absence of track record of CBIL Capital as fund manager and merchant banker. FMQR of CBIL Capital also factors in the system and processes being developed for the proposed level of operation (Citizens Mutual Fund-I amounting to Rs 1 arba). Moreover, CBIL Capital plans to further strengthen the human resources to facilitate the proposed mutual fund operation. Fund supervisors to be involved in the management and supervision of the proposed scheme is also expected to provide necessary guidance to CBIL Capital. The proposed equity oriented growth scheme of CBIL Capital is projected to register healthy growth in NAV while focusing more on plough back of generated profits towards investment growth, which reflects positively on the Investment strategy of CBIL Capital. However, sustainability of the growth and return to investors over longer time frame remains to be seen considering the volatility of evolving Nepalese stock market and its effect on the underlying equity investments of the scheme. ICRA Nepal takes comfort from sponsor’s (Citizens Bank International Limited) support in the subsidiary AMC as demonstrated by 67% shareholding in CBIL Capital, which however remains lower to support of some of other sponsors in their respective AMCs. The adequate track record and experienced management of sponsor is expected to reflect positively on the operation of AMC, with the latter benefitting from the sponsor’s support of the former in the form of technical support, human resource support and oversight related functions. The rating should, however, not be construed as an indication of the prospective performance of the Mutual Fund scheme or of volatility in its returns. Established in 2006, National Investment and Capital Market Limited was renamed to CBIL Capital Limited after Citizens Bank injected additional equity in the company in FY16 that accounted for 67% of current capital of the company. At present, CBIL Capital is involved in issue management, underwriting, share registration, private placement, financial advisory and asset management services. CBIL Capital has obtained Mutual Fund Depository’s License in addition to Fund Manager’s License from SEBON, and has plans to start fund management & depository service by launching its first mutual fund viz. Citizens Mutual Fund – I shortly. The close ended mutual fund scheme amounting Rs 1 arba will have tenure of seven years and plans to invest 60-85% (planned to be increased progressively) of scheme size in equity market. CBIL Capital has also obtained membership from CDS and Clearing Limited. Primarily on account of reduced investment income and increased technical service fees (among others), CBIL Capital reported loss of Rs 67.70 lakh for 9MFY17 over an asset base of Rs 13.1 crore as of mid-Apr-17 as against net profit of Rs 1.13 crore for FY16 over an asset base of Rs 12.50 crore  as of mid-Jul-16. As on mid-Apr-17, capital of the company was Rs 10 crore, while its net worth was about Rs 9.50 crore on same date. 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.