ICRA Nepal assigns IPO Grade 3 to the proposed 10% rights issue of Siddhartha Bank Limited

ICRA Nepal has assigned “[ICRANP] IPO Grade 3”, indicating average fundamentals to the proposed rights issue amounting to Rs 68.3 crore of Siddhartha Bank Limited (SBL). SBL is proposing to come out with 10% rights issue of 6,826,117.19 equity shares of face value Rs 100, each to be issued to existing shareholders at par. The issue is being made to comply with the increased paid up capital requirement set by Nepal Rastra Bank (NRB), the banking sector regulator in Nepal. The average fundamental grading factors in SBL’s established track record (since 2002), healthy rate of business growth (aided by merger in FY2016) and healthy profitability level maintained over the years, notwithstanding the seasonal moderation during Q1FY2018. Comfortable capitalization profile, adequate franchise and experienced management team are likely to support the incremental growth prospects of the bank. The grading also factors in low credit concentration risk (12% of total loans on mid-Oct 20173 among top 20 borrower groups) which partly comforts the asset quality profile of the bank, notwithstanding the seasonal spike in delinquencies during Q1FY2018. The grading is also comforted by fair non-interest income level, aiding the diversity of earning profile. However, the grading remains constrained by moderate funding profile of the bank vis-à-vis the industry. The bank fares moderately in terms of current and savings account (CASA) deposit proportion (33% in mid-Oct 2017 vs. industry average of ~43%) and deposit concentration (top 20 depositors accounting for 27% of total deposits as on mid-Oct 2017). Resulting low granularity exposes SBL to liquidity and/or pricing risk, as reflected in >100% increase in the average deposit cost of SBL during past 12-15 months (average cost of deposits increased from ~3.4% in FY2016 to ~7.4% in Q1FY2018). The spike in deposit rates followed the shortage of investable deposits in the banking system. On the long run, bank’s credit growth will depend on its ability to offer finer lending rates, which in turn will depend on its funding profile. ICRA Nepal assigns IPO grading on a scale of IPO Grade 1 through IPO Grade 5, with Grade 1 indicating strong fundamentals and Grade 5 indicating poor fundamentals. For the grading categories 2, 3 and 4, the sign of + (plus) appended to the grading symbols indicate their relative position within the grading categories concerned. Thus, the grading of 2+, 3+ and 4+ are one notch higher than 2, 3, and 4, respectively.