NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has removed from Rating Watch Negative and affirmed National Commercial Bank Jamaica Limited's (NCBJ) long-term foreign and local currency Issuer Default Ratings (IDR) at 'B-'. At the same time, Fitch has assigned a Negative Outlook to NCBJ's long-term IDRs. A full list of rating actions is at the end of this press release.
RATING ACTION RATIONALE
The affirmation of NCBJ's IDRs and removal of the Rating Watch Negative reflects the bank's resilient financial performance following the National Debt Exchange (NDX) that settled on Feb. 22, 2013. The Outlook is Negative given downside risks for a more challenging operating environment if the government is not successful at implementing its IMF programme.
Despite this risk, the bank was well positioned to manage the fallout from the government's debt restructuring. Around 30% of the bank's outstanding assets (1.8x equity) as of March 31, 2013, were subject to restructuring under the NDX, resulting in reduced interest income and losses on investment activities during the second quarter of fiscal year 2013.
On March 1, 2013, Fitch upgraded Jamaica's local and foreign currency IDRs to 'CCC' from 'RD' following the material completion of the NDX, an event which Fitch deemed a default in line with the agency's Distressed Debt Exchange Criteria. Fitch also affirmed the country ceiling at 'B-'.
KEY RATING DRIVERS - VR & IDRs
NCBJ's Viability Rating (VR) drives its long-term IDRs. NCBJ's IDRs are one notch above Jamaica's sovereign ratings and constrained by its Country Ceiling. Although it is rare that a bank is rated above the sovereign, particularly a bank with a very large exposure to sovereign debt, NCBJ's funding, profitability and equity base have proven to be resilient to sovereign stress.
Despite these strengths, Fitch believes that given the current exposure to sovereign assets and more generally, the bank's intrinsic connection to the national economy as the largest commercial bank in the country limits future differentiation of NCBJ's ratings with those of the sovereign.
With around 38% market share of deposits in the commercial banking system at end-Dec 2012, NCBJ's strong domestic franchise provides an ample funding base. During the two debt exchanges that occurred in 2010 and earlier this year, the bank's deposit base continued to expand while its capital base remained ample. Fitch recognizes that NCBJ's formidable funding base buttresses the bank's ability to confront times of sovereign stress without undermining its liquidity or forcing it to realize such assets to repay decreasing deposits.
Stable spreads, loan growth and the steady expansion of non-interest income will offset some of the losses associated with the NDX in FY13. Fitch expects NCBJ's return on average assets ratio (ROAA) to fall to a level between 2.2% and 2.5% by FYE13 (averaged 3.3% over last four years) mostly due to the impact of NDX in the second quarter of the fiscal year. However, profitability will continue to support internal equity generation and remain in line with that of similarly rated peers (emerging market commercial banks with Viability Rating [VR] of 'b-/b/b+').
Despite sustained profitability and single-digit asset growth, lower net income combined with a higher proportion of dividend distributions reduced NCBJ's equity/assets ratio to 16.5% at end-March 2013 from 17.5% at FYE12. Nevertheless, this ratio compared favorably to similarly rated peers, and supports Fitch' view of the bank's above average resilience to trends in the operating environment.
Investments and loans to the Jamaican government, public entities and entities with a Jamaican government guarantee continued to represent a high proportion of NCBJ's total assets at 48%, or about 2.9 times (x) its equity, at end-March 2013. Fitch Ratings remains concerned about this high asset concentration given the government of Jamaica's weak credit profile.
NCBJ's lending concentration has declined in recent years. At end-March 2013, the 20 largest exposures by economic groups represented 32% of total lending and 58% of total equity. Fitch expects concentrations to continue declining as exposure to the retail sector increases. Although the bank's nonperforming loans (NPLs)/gross loans ratio remains high, it improved to 5.7% at end-March 2013 from 8.1% at FYE12 due to write-offs related to one large loan.
RATING SENSITIVITIES - VR & IDRs
Future rating actions will be highly contingent on a change in Fitch's view of the sovereign given the bank's sizable sovereign exposure.
Additionally, a downgrade of the bank's ratings could be driven by an unexpected marked deterioration of asset quality that weakens profitability or capitalization to a level that is no longer consistent with its current peers. Although not Fitch's base case scenario, unexpected deposit instability may also trigger a negative rating action.
KEY RATING DRIVERS - Support and Support Rating Floor
The bank's Support rating of '5' reflects the sovereign's weak credit profile and limited capacity to support NCBJ. The Support floor has been revised to 'CCC' from 'C', in line with the sovereign's ratings. Fitch continues to believe that NCBJ's systemic importance makes the government's propensity to support the bank high despite its weak capacity.
RATING SENSITIVITIES - Support and Support Rating Floor
There is limited upside to the bank's support rating as the sovereign's weak financial profile is expected to persist over the medium-term. The Support Floor Rating will move in line with sovereign's ratings.
Fitch has taken the following actions on NCBJ's ratings:
--Long-term foreign and local currency Issuer Default Ratings (IDR) removed from Rating Watch Negative and affirmed at 'B-'; Outlook Negative;
--Short-term foreign and local currency IDR affirmed at 'B';
--Viability Rating affirmed at 'b-';
--Support Rating affirmed at '5';
--Support floor revised to 'CCC' from 'C'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria', Aug. 15, 2012;
--'Fitch Upgrades Jamaica to CCC', March 1, 2013.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
- Security Upgrades & Downgrades
- Fitch Ratings
Theresa Paiz Fredel
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
+57 1 326 9999
Elizabeth Fogerty, New York, +1 212-908-0526