Applications for NMB Bank's “10% NMB Debenture 2085” to be open from tomorrow; Everything to know about the issue

Company Profile

NMB Bank was established in Poush 04, 2053 as ‘C-class’ financial institution, which upgraded to ‘A-class’ commercial bank in Baisakh 24, 2065. The bank’s 17 percent stake lies with FMO Netherlands and this company has been rated as AAA by S&P and Fitch. Apart from FMO, the other institutional investor include Employee Provident Fund, Young Lean Realty (Malaysia) Holding Realty (with 5% stake) and other individual shareholders from business houses of Nepal. Over the years it has gone through merger and acquisition will the following institutions:

1. Clean energy development bank
2. Bhrikuti Development bank
3. Pathibhara Bikas Bank
4. Prudential Finance company

Currently NMB bank has a network of 110 branches all over the country along with 4 extension counter and numerous branchless banking units.

According to ICRA Nepal’s assessment, NMB’s market share was about 3.4% in terms of deposit base and 3.7% of total advances of commercial banks as of mid-October 2018 (2.9% and 3.2% share, respectively, in the banking industry).

Subsidiary companies

1. NMB Capital (fully owned subsidiary)
2. NMB Microfinance Bittiya Sanstha (51% stake ownership)

Objectives of the issue:

• Collecting capital necessary for business expansion and increasing investment
• Increasing Supplementary capital of the company
• Fulfilling the goals of the company

About the issue

NMB Bank Limited (NMB) will be issuing “10% NMB Debenture 2085” from Falgun 30, 2075. The issue for 30 lakh units debenture will remain open till Chaitra 4, 2075. If the issue is not subscribed till Chaitra 4, then this debenture issue can be extended upto Chaitra 14, 2075.

The commercial bank will be issuing 12 lakh units i.e. 40% for the general public while remaining 18 lakh units i.e. 60% of the issue will be for the private placement. The debenture will be providing 10% return on the investment which will be paid semi-annually and this debenture matures in 10 years.

Interested applicants can place applications for minimum 25 units and maximum 12 lakh units for par value of Rs 1,000. The application can be placed form the branches of any financial institutions providing C ASBA facilities.

Capital structure

Shareholding composition

Board of Directors

Management Head

CEO – Sunil KC

Academic Qualification – MBA

Experience – Standard Chartered Bank (2046 to 2065)

                        NMB Bank (2065 and running)

Credit rating

ICRA Nepal has assigned [ICRANP] LA- (pronounced ICRA NP L A minus) to the proposed subordinated debenture program 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. Similarly, ICRA Nepal has reaffirmed the rating of NMB’s existing subordinated debentures of NPR 500 million at [ICRANP] LA-.

Strengths and opportunities:

• 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.
• Strong capitalization profile along with its extensive track record, experienced management team and good franchise network augurs well for its incremental growth prospects.
• Strong institutional promoters (~24% stake held by FMO1 and Employees’ Provident Fund Nepal, including board representation from both entities, thereby adding to the governance aspect of the bank).
• Moderate and steady rate of business growth
• Established underwriting norms
• Risk management framework along with good asset quality (gross non-performing assets (NPAs) of 0.76% as of mid-October 2018)
• Solvency indicators.
• 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.
• Higher credit-to-deposit ratio has helped the bank offset the impact of the rising cost of funds, thereby stabilising NIMs and supporting profitability.

Weaknesses and threats:

• 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.
• Decline in NMB’s liquidity ratio with a commensurate increase in the credit-to-deposit ratio.
• High deposit concentration (~32% of the total deposits are among the top 20 depositors) has lowered the liquidity cushion available to the bank.
• 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).
• Moderate funding profile.
• Below industry average current and savings deposit (CASA) mix (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.
• 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.
• 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.

Source: ICRA Nepal (https://icranepal.com/releases.php)

Financial performance

Assets Held

Major indicators

Conclusion

Given the information above, NMB Bank seems to be in a fairly comfortable position. The bank already has one subordinated debenture that will retire soon. This debenture gives 10% coupon interest till 2085 BS, which is close to the fixed deposit rates in many commercial banks right now.

Given the current market rate volatility, this rate might not seem very attractive but in course of 10 years the scenario might change and the market rate may change too. Therefore, the final decision lays in your hand. The 10% return might be a trade off for interest rate volatility over the period of 10 years.

Source: Company Prospectus and ICRA Nepal