NTB's ratings take into account its evolving franchise within most business segments, healthy profitability, and improved capital position. Fitch also notes that the bank's loan book contains a relatively higher proportion of consumer products and leases.
The continued consolidation of NTB's lending and deposit franchise, and risk management processes and controls, together with a sustained healthy capital structure, could result in an upgrade of its ratings. Conversely, an unexpected weakening of NTB's asset quality or earnings could result in a rating downgrade; however this is less likely over the medium-term.
NTB recorded loan growth of 23% in the nine months to end-September 2010 (9M10), which was higher than its peers'. Much of this growth (83%) stemmed from medium and large-corporate exposures, which increased to 35% of loans at end-9M10 from 24% at end-December 2009 (FYE09), and reduced the bank's reliance on consumer products and leasing to some extent (end-9M10: 33% and 19% of loans, respectively). Fitch notes that NTB's cost of funds is somewhat higher than larger peers', which is partly a function of its late entry into the banking sector and thus its evolving deposit franchise, and also driven by the higher proportion of money market repurchase agreements which the bank uses to fund its government securities trading book. Therefore the agency notes that NTB is likely to continue its somewhat high reliance on high-yield consumer products and leasing over the medium-term, if it is to sustain a healthy level of profitability and, in turn, a healthy capital structure.
Similar to most peers, a widening net interest margin (NIM) and capital gains on the held-for-trading government securities portfolio helped boost NTB's profitability in 9M10. Its return on asset (ROA) improved to an annualised 1.46% at end-9M10, compared to an average of 0.98% between FYE07 and FYE09. However, Fitch expects NTB's ROA to come under pressure over the medium-term, which is in line with its expectations for the sector, as the present high liquidity within the local banking system is disbursed to meet with improving credit demand. Furthermore, capital gains on bond trading is likely to be limited over the medium-term, as market interest rates have gradually started to trend upwards since October 2010.
Fitch notes that the bank's NPL ratio has generally remained lower than most of its peers' during benign economic environments such as the one seen at present, but has peaked higher during times of economic stress. NTB's gross NPL ratio reduced to 4.47% at end-9M10, from a peak of 8.47% at FYE09, driven by the bank's concerted recovery efforts and good credit controls amid improving economic conditions, and regular write-offs of fully-provided credit card and personal loan NPLs. Low NPLs, combined with an equity infusion in Q110 (see below), has improved the bank's net NPL/equity ratio to a relatively strong 16.74% at end-9M10 (FYE09: 39.82%).
The bank received an equity infusion of LKR1.26bn in Q110, due to the exercising of the first (of two) round of warrants attached to its 2008 rights issue, to which key shareholders John Keells Group ('AAA(lka)'/Stable, 29% stake of NTB) and Central Finance Company PLC (CF, A+(lka)'/Stable, 19% stake of NTB) subscribed in full. A further capital infusion of up to LKR735m could materialise in Q111, if the second round of warrants is exercised.
At FYE09, NTB accounted for a share of 3% of total licensed commercial bank assets in Sri Lanka, and currently operates through a network of 40 outlets and employs over 1,500 staff.
source - www.dailymirror.lk
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