ICRA Nepal assigns LAA to proposed debenture of Nepal SBI Bank; Also assigns AA issuer rating to SBI

ICRA Nepal has assigned [ICRANP] LAA (pronounced ICRA NP L Double A) to the proposed subordinated debenture programme of Nepal SBI Bank Limited (SBI). Instruments with this rating are considered to have a high degree of safety regarding the timely servicing of financial obligations and carry very low credit risk.

ICRA Nepal has reaffirmed the issuer rating for SBI at [ICRANP-IR] AA (pronounced ICRA NP Issuer Rating Double A). Issuers with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such issuers carry very low credit risk. The rating is only an opinion on the general creditworthiness of the rated entity and not specific to any particular debt instrument. ICRA Nepal has also reaffirmed the rating of [ICRANP] LAA (pronounced ICRA NP L Double A) for SBI’s existing subordinated debentures of NPR 200 million. 

Strength and opportunities

1. Strong promoter profile (a 55% stake held by State Bank of India and a 15% stake held by Employees Provident Fund), along with the existence of a technical support service agreement (TSSA) with the parent bank. The bank’s association with the parent through the TSSA provides access to management (MD/CEO, COO and CFO and four other departmental heads of SBI are deputed by the parent bank) and technology support.
2. Established underwriting norms and risk management framework are reflected in its consistently strong asset quality (0+ days delinquencies of ~1.8% as of mid-July 2019), which supports the rating assignment/reaffirmation.
3. Cautious growth approach (~18% credit growth in last two fiscals compared to ~20% for the industry), while ensuring adequate controls.
4. Healthy capitalisation, adequate franchise, comfortable credit-to-deposit ratio adjusted for core capital (CCD of ~74% as of mid-July 2019) and experienced board/management team augur well for its incremental growth prospects.
5. Established track record (operating since 1993), adequate earnings profile and good market position in Nepal with a share of ~3.5% in industry credit and deposits as of midJuly 2019.

Weaknesses and threats

1. Moderation in the bank’s deposit profile in the recent years with a decreasing share of low-cost current and savings accounts (CASA declined to 39% as of mid-July 2019 from ~51% three years ago), which has resulted in higher cost of funds compared to the industry (7.01% for FY2019 against 6.48%).
2. High operating costs have pushed up the bank’s base rate, creating competitive pressures in the current lending regime, which is based on the base rate.
3. Relatively high concentration on top accounts also remains a rating concern (~35% deposits and ~28% credit among the top 20 customers as of mid-July 2019).
4. Shortage of fresh lendable funds in the industry over the last few years, which has led to volatility in interest rates.

Bank Profile

Incorporated in July 1993, Nepal SBI Bank Limited (SBI) is the first Indo-Nepal joint venture in the financial sector. SBI is a subsidiary of State Bank of India, which has a 55% stake in the bank, the rest being held by Employees Provident Fund (15%) and the general public (30%). The bank has a technical support services agreement with the parent bank. Hence, the latter provides management support to the bank through its expatriate officers including the MD/CEO and other senior personnel in the management team. The bank’s shares are listed on the Nepal Stock Exchange. The registered and corporate office of the bank is in Kesharmahal, Kathmandu.

SBI is present across the country through its 88 branches and 118 ATMs as of August 2019. The bank has a market share of 3.40% in terms of deposit base and 3.55% of total advances of commercial banks as of mid-July 2019. SBI reported profit after tax of NPR 2,304 million in FY2019 (14% YoY growth) over an asset base of NPR 118,307 million as of mid-July 2019. As on the same date, SBI’s CRAR was 14.01% and gross NPLs were 0.20%. In terms of technology platform, SBI has implemented Finacle across all of its branches.

Source: ICRA Nepal