ICRA Nepal has reaffirmed the issuer rating of [ICRANP-IR] A- to Global IME Bank Limited (GBIME), indicating adequate credit quality. The rated entity carries low credit risk. ICRA Nepal has also reaffirmed the rating of [ICRANP] LA- to GBIME’s subordinated debentures worth NPR 1500 Million. 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.
The rating actions factor in the bank’s ability to strengthen its positioning in the industry as the largest player (~7% market share), mainly through the recent merger with the erstwhile Janata Bank Nepal Limited (JBNL) in December 2019. The merger has also further diversified its large franchise base and improved its capitalization profile (CRAR1 of 11.87% for the bank and 12.28% for the merged entity as of mid-October 2019). The rating also takes into consideration the bank’s adequate track record (since 2007) and its fair asset quality indicators with non-performing loans (NPLs) of 0.85% (industry average of 1.61%) and 0+ days delinquencies of ~6% as of mid-October 2019. Though the consolidated NPLs and delinquencies would increase to 1.02% and ~10% respectively, the bank’s demonstrated track record in managing the asset quality in post-merger scenarios, provides some comfort.
The rating further derives comfort from the bank’s balanced portfolio mix with a sizeable share of retail/SME loans (~52%) that augur well for the bank’s credit concentration risks. GBIME’s prudent risk management practices and adequate underwriting controls, along with an experienced board/management profile remain positives for controlled growth, going forward. The rating action also considers the bank’s adequate earnings profile, notwithstanding some possible moderation post-merger with JBNL, which had a slightly higher cost structure. ICRA Nepal would monitor the merger impacts in the bank’s key indicators over the near to medium term and any sustainable improvements/degradations therein could have a bearing on the ratings assigned.
The rating is, however, constrained by the bank’s relatively higher cost of funds 7.09% for Q1 FY2020 (6.63% for the industry) which emanates from the high share of term deposits compared to the industry. Considering the merger with JBNL, the deposit mix has slightly moderated with the portion of low-cost current/call and savings accounts (CASA) coming down from ~49% to ~47% as of mid-October 2019. This would have a bearing on the bank’s cost of funds and could impact its competitive positioning. The rating also remains constrained by the recent spike in credit growth trend with ~23% growth reported in FY2019 (~18% for the industry). This has further spiked to ~33% in Q1 FY2020 (annualized) as against the ~22% industry average growth.
The rating actions also take note of the mismatch in the bank’s credit and deposit growth over the last few years, which has led to tight credit to core capital deposits ratio (CCD ratio, capped at 80% by regulations for local currency asset/liabilities) at ~78% as of mid-October 2019.
Source: ICRA Ratings Nepal