Subordinate debenture program of NMB Bank get ‘[ICRANP] LA-’ rating; bank looking to issue debentures worth Rs.3,000 Million

ICRA Nepal has assigned [ICRANP] LA- (pronounced ICRA NP L A minus) to the proposed subordinated debenture program worth NPR 3,000 Million of NMB Bank Limited. Instruments with this rating are considered to have an adequate degree of safety regarding the timely servicing of financial obligations. Such instruments carry low credit risk.

ICRA Nepal has reaffirmed the issuer rating for NMB at [ICRANP-IR] A- (pronounced ICRA NP issuer rating A minus). This is considered to be an adequate credit quality rating. The rated entity carries average credit risk. Similarly, ICRA Nepal has reaffirmed the rating of NMB’s existing subordinated debentures of NPR 500 million at [ICRANP] LA-.

The assigned/reaffirmed ratings factor in the bank’s strong capitalization (capital to risk assets ratio (CRAR) of 15.36% as of mid-October 2018) following fresh equity infusion in FY2017 and FY2018. NMB’s strong capitalization profile along with its extensive track record, experienced management team and good franchise network augurs well for its incremental growth prospects. The ratings also draw comfort from NMB’s institutional promoters (~24% stake held by FMO and Employees’ Provident Fund Nepal, including board representation from both entities, thereby adding to the governance aspect of the bank). The rating action also takes into consideration the bank’s moderate and steady rate of business growth, established underwriting norms and risk management framework along with good asset quality (gross non-performing assets (NPAs) of 0.76% as of mid-October 2018) and solvency indicators. The ratings also factor in the bank’s adequate fair profitability (return on assets (RoA) of ~1.9%) supported by adequate net interest margins (NIMs) of ~3% and good non-interest income levels.

The rating concerns arise from the tight liquidity situation faced by the Nepalese banking industry, including NMB, because of higher growth in banking sector credit vis-à-vis deposits during the last four to five years. As a result, NMB’s liquidity ratio has declined with a commensurate increase in the credit-to-deposit ratio. The higher credit-to-deposit ratio has helped the bank offset the impact of the rising cost of funds, thereby stabilizing NIMs and supporting profitability. However, the high deposit concentration (~32% of the total deposits are among the top 20 depositors) has lowered the liquidity cushion available to the bank. NMB’s credit concentration among the top borrower groups also remains on the higher side (~27% of the total credit was among the top 20 borrower groups as of mid-October 2018), which also remains a concern. The ratings also remain impacted by NMB’s moderate funding profile. Despite the recent improvement, the bank’s current and savings deposit (CASA) mix is below the industry average (37% as of mid-October 2018 vs. the commercial bank average of ~43%), which reflects in the higher cost of funds for NMB vis-à-vis its established peers. This, coupled with the bank’s relatively higher operating expense ratio, has resulted in a relatively higher base rate for NMB, which is a competitive disadvantage in the base rate plus lending model followed by the banking industry. The ratings also remain constrained by the uncertain operating environment faced by banks in Nepal because of high credit growth, rise in interest rates on the deposit and lending side, rising competition despite consolidation, and tight liquidity, which may impact the asset quality in coming periods.