ICRA Nepal assigns BBB+ issuer rating to Kumari Bank and LBBB+ to its debenture; Ratings indicate moderate degree of safety

ICRA Nepal has assigned an issuer rating of [ICRANP-IR] BBB+ (pronounced ICRA NP issuer rating triple B plus) to Kumari Bank Limited (KBL). The rating is considered to have a moderate degree of safety, regarding the timely servicing of financial obligations with the rated entity carrying moderate credit risk. The issuer rating is only an opinion on the general creditworthiness of the rated entity and not specific to a particular debt instrument.

ICRA Nepal has also assigned [ICRANP] LBBB+ (pronounced ICRA NP L triple B plus) to the proposed subordinated debenture program of KBL. Instruments with this rating are considered to have a moderate degree of safety, regarding the timely servicing of financial obligations. Such instruments carry moderate credit risk. 

Strengths and opportunities

• Adequate track record (since 2001) and its improving risk management practices in last few years
• Good asset quality indicators with non-performing loans (NPLs) declining to 0.97% as of mid-July 2019 (0+ dpd of ~7%) compared to 1.86% as of mid-July 2017
• Ability of the bank to manage the risks arising out of acquisition of various classes of banks (in June 2017), which had relatively inferior underwriting norms and borrower quality
• Fairly diversified credit portfolio with ~51% retail/SME loans resulting in moderate credit concentration risks (~19% among top 20 borrowers as on mid-July 2019)
• Experienced senior management team, along with its improving market position through rapid franchise expansion remain positives for sustainable growth over the medium term
• The franchise expansion plans augur well for the growth of the retail/SME segments which could further lower portfolio concentration risks and help improve yields. This in turn is likely to support its profitability profile going forward.

Weaknesses and threats

• Weak deposits profile with low chunk of current and savings accounts (CASA) at ~28% as on mid-July 2019 (~43% for industry)
• Relatively higher cost of funds and hence weakened competitive positioning in the current base rate-based lending regime
• Concentration among top 20 depositors remains on the higher side (~30% as on mid-July 2019), which could pressurise its liquidity profile in case of increased volatility in interest rates
• Though the bank’s credit growth remained low at ~15% in the low interest rate regime of FY2015-2017, a spike in the credit growth trend in the last two years (~30% against ~20% growth in industry) with similar plans over the near term.
• Declining capitalisation (CRAR of 12.07% as of mid-July 2019) is also a concern, although it is comfortable against the regulatory minimum of 11%. However, this is expected to be supplemented by the proposed debenture issue plans.
• Lower profitability profile with return on net worth (RoNW) and return on assets (RoA) of ~12% and 1.46% respectively in FY2019 (~16% and 1.96% for industry), primarily on account of lower net interest margins (NIMs) of 3.30% for FY2019 (3.82% for the industry).
• However, KBL’s margins are already compliant with the recently revised interest spread calculation norms while many players in the industry would need to lower their spreads.
• Lack of strong institutional promoters and the uncertain operating environment/liquidity constraints that the banks in Nepal are currently facing, which could have a bearing over the bank’s growth plans.

 Bank Profile

Kumari Bank Limited is the 15^th Class ‘A’ commercial bank of Nepal, which has been in operation from April 2001. In June 2017, KBL acquired four various classes of banking and financial institutions in a bid to raise the minimum paid-up capital as required by the regulator. The acquisition increased the capital fund and assets base of KBL in addition to increasing its footprints across the country. The corporate office of the bank is located at Tangal, Kathmandu. The share capital of the bank is distributed among the promoter and the public in the ratio of 51:49. The shares of KBL are registered and traded at the Nepal Stock Exchange (NEPSE). Mr. Surender Bhandari is the Chief Executive Officer of the bank.

KBL has made its presence felt throughout the country through its 105 branches, three branchless banking and 84 ATMs as of mid-July 2019. The bank has a market share of 2.54% in terms of deposit base and 2.63% of total advances of the Nepalese banking industry as on mid-July 2019 (2.96% and 3.06% share among the commercial banks). KBL reported a profit after tax of NPR 1,334 million during FY2018-19 (28% YoY growth) over an asset base of NPR 100,257 million as of mid-July 2019. As on same date, KBL’s CRAR was 12.07% (tier I CRAR 11.20%) and gross NPLs were 0.97%. In terms of technology platform, KBL has implemented Finacle across all its branches.