ICRA Nepal has assigned BBB+ and LBBB+ to Bank of Kathmandu and its debenture respectively; Rating indicates moderate degree of safety

ICRA Nepal has assigned [ICRANP-IR] BBB+ (pronounced ICRA NP Issuer Rating triple B plus) to the Bank of Kathmandu Limited (BOK). Issuers with this rating are considered to have a moderate degree of safety regarding timely servicing of financial obligations. Such issuers carry moderate 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] LBBB+ (pronounced ICRA NP L triple B plus) for BOK’s subordinated debentures of NPR 600 million. Instruments with this rating are considered to have a moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. 

Strengths and opportunities:

• Established track record in the industry (operating since 1995),
• Adequate market presence (through 84 branches as of mid-April 2019)
• Established underwriting norms, despite being challenged by a large one-off slippage in FY2015
• Healthy capitalization profile of the bank (CRAR of ~14% as on mid-April 2019) which, coupled with a conservative growth approach is likely to enable the bank to maintain comfortable capitalization and solvency over the medium term
• Adequate granularity of the credit portfolio, as reflected in low credit concentration among top borrowers (top 20 borrowers accounted for ~19% of total credit on mid-April 2019)
• Steady profitability indicators supported by its steady net interest margins (NIMs) of ~3.5% over the last two to three years
• Experienced management team and institutional ownership profile of the bank (~18% stake from Government owned Citizen Investment Trust-CIT & Employees’ Provident Fund-EPF)

Weaknesses and threat:

• Relatively high non-performing loans (NPLs) of BOK vis-à-vis commercial bank industry average. As of mid-July 2019, the bank’s reported gross NPLs stood at 1.50% (~1.82% as of mid-July 2018) marginally higher than the commercial bank average of ~1.4%
• Relatively higher deposit concentration among top accounts (~31% of total deposits concentrated among top 20 depositors’ group) as on mid-April 2019, which could impact the deposit stability given the interest rate volatility and occasional deposit price war in the industry
• Moderate deposit profile with low CASA proportion of 35% as on mid-April 2019 vs. ~41% for commercial bank industry

Increased share of term deposits, has kept BOK’s cost of deposits relatively higher (~7.5% for 9M FY2019 and ~7.0% during FY2018). This could weaken its competitive positioning and affect the credit profile of the borrowers in the ‘base-rate-plus’ lending regime.

Source: ICRA Nepal