Nepal Bank upcoming Subordinated Debenture Programme of worth Rs 2.5 billion rating done by ICRA Nepal

ICRA  Nepal  has  assigned a  rating  of[ICRANP-IR]  A  (pronounced  ICRA  NP  issuer  rating  A)to Nepal Bank  Limited  (NBL),indicating an adequate degree of safety regarding the timely servicing of the financial  obligations. Such issuers carry a low credit risk. The rating is only an opinion on the general creditworthiness of the rated entity and is not specific to any debt instrument.

ICRA Nepal has also assigned a rating of[ICRANP] LA(pronounced ICRA NP long-term debt rating A)to NBL’s proposed subordinated debenture programme worth NPR 2,500 million.Instruments with this rating are considered to have an adequate degree of safety regarding the timely servicing of the financial obligations. Such instruments carry a low credit risk.

The assigned ratings factor in NBL’s ownership profile with the Government of Nepal (GoN)holding a 51% equity stake. The ratings also factor in NBL’s long track record in the industry. This,along with the strong branch network and the traction achieved by the bank across the country, especially in the semi-urban and rural areas of the country,remains a positive for its diversified liability profile and assets. NBL’ slow cost of funds(notwithstanding the recent increase) has help edit maintain one of the lowest base rates in the industry,which remains a positive for its competitive positioning going forward. The assigned ratings also take comfort from NBL’s strong CASA deposit proportion(~65% as of mid-January 2020), its strong capitalisation profile (~17% as of mid-January 2020)supported by sizeable equity infusions in the last two-three years,and its granular credit and deposit portfolio. The bank has also been able to improve its profitability in the last three to four years,supported by adequate net interest margins (NIMs), which have also been factored in while assigning the ratings.

The ratings are, however, constrained by NBL’s relatively high level of gross NPLs and delinquency levels. Although the NPLs have been on a declining trend over the years, the bank continues to witness a high 0+ days delinquency level. This could create asset quality concerns over the medium term, considering the uncertain operating environment at present and its expected impact on the repayment capacity of the borrowers. The Nepal Rastra Bank(NRB)has recently instructed banks to adopt tighter measures to ascertain the credit repayment capacity of the borrowers against their tax-paid income sources, with the banks required to set aside a higher credit provision for borrowers in non-compliance. This is likely to create an impediment in credit growth and pose a challenge for the scalability of banks like NBL which have sizeable retail/SME lending portfolios. The scalability issue,coupled with a high operating expense ratio,could suppress NBL’s profitability profile over the longer term. NBL’s relatively low non-interest income proportion also limits the scope for revenue diversification and could impact profitability,considering the gradual reduction in the interest spread cap imposed by the regulator over the years.

Bank profile

Nepal Bank Limited (NBL), operating since November 1937, is the oldest bank in Nepal. It was established as a joint venture between the GoN and the general public under the public-private partnership(PPP) model. Established before the Nepal Rastra Bank (NRB; the banking sector regulator),NBL was subsequently converted into a public company in July 2005 and has since been functioning as a class A commercial bank licensed by the NRB.

Source: ICRA Ratings Nepal