Debenture program of Bank of Kathmandu Limited receives average ratings from ICRA; issue worth Rs.1.60 Arba graded

ICRA Nepal has assigned [ICRANP] LBBB+ to the proposed NPR 1,600 million subordinated bond programme of the Bank of Kathmandu Limited (BOK). Instruments with this rating are considered to have a moderate degree of safety regarding the timely servicing of financial obligations. Such instruments carry moderate credit risk. ICRA Nepal has also reaffirmed the existing rating of [ICRANP] LBBB+ for the NPR 600 million subordinated bond programme of BOK.

ICRA Nepal has also reaffirmed the existing rating of [ICRANP-IR] BBB+ assigned to 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 assigned/reaffirmed ratings continue to draw comfort from BOK’s long track record in the industry and its experienced management team. The assigned ratings also draw comfort from the institutional shareholding in BOK (two government-owned entities holding ~18% equity stake as of mid-October 2019). The comfortable capitalisation profile (expected to strengthen further after debenture issuance) also remains a comfort against the near-term credit shocks, given the relatively moderate asset quality and delinquency level of the bank. It has also enabled the bank to maintain a good solvency profile despite the relatively high non-performing loans (NPLs). The rating also factors in the fair profitability profile for BOK, despite the limited economies of scale.

The ratings are, however, curbed by its moderate asset quality with relatively high delinquencies. BOK’s portfolio concentration levels also remain high, which can be partly attributed to its relatively moderate franchise strength. This exposes the bank to the repricing and liquidity risk. A relatively higher proportion of overdraft loan also remains a rating concern as the bank’s ability to track the repayment capacity on such loans remains limited. BOK’s consistently lower-than-industry growth, amid volatile interest rate outlook, though, is a positive from the risk aversion perspective, and also limits the economies of scale available to the bank. This could suppress its long-term ability to create internal capital. BOK’s deposit profile also remains moderate with a lower-than-industry CASA proportion resulting in a higher cost of funds, thereby affecting the bank’s competitive positioning and margins in the base-rate-plus lending regime being practiced in the highly fragmented Class A banking industry. This remains an impediment in building a good borrower profile and remains a credit negative.

Rating action also factors in the recent regulation changes brought in by NRB, requiring banks to tag the repayment capacity of the borrowers against tax filings and set aside higher credit provision for borrowers in non-compliance. This is likely to create the impediment in the credit growth and increase the credit cost for banking sector players, especially the banks with moderate competitive strengths and borrower profile. Also, regulatory changes in the method of interest spread calculation (by disregarding the investment yield) are likely to squeeze the profit margins for the entire industry, especially the banks with lower scale. This could have an impact on the profitability and capitalisation for the bank and remains a rating concern.

Going forward, BOK’s ability to improve its assets quality indicators, attain targeted business growth with commensurate risk mitigation approach and improve the deposit profile in terms of concentration and proportion of low-cost deposits also remains key monitor able.

Source: ICRA Ratings Nepal