Viability rating of  B+ assigned

International ratings agency, Fitch has affirmed National Commercial Bank (NCB) of Jamaica a Long-Term Foreign and Local Currency Issuer Default Rating (IDR) of B+ with a negative outlook.

At the same time, Fitch has been assigned the bank with a viability rating of B+. According to Fitch, “the negative outlook on NCB reflects that downside risks remain for NCB’s credit profile, given the economic implications of the coronavirus pandemic, reflected in the negative outlook for the operating environment score.”

Fitch believes the deep recession of at least 10.5 per cent in 2020 will result in asset quality deterioration and will weigh on the bank’s profitability. NCB’s IDRs are driven by its viability rating, which reflects its stand-alone creditworthiness, highly influenced by Fitch’s assessment of Jamaica’s operating environment and the bank’s company profile.

The international ratings agency believes “the operating environment impacted by the deep economic recession set challenges on the banking system’s financial performance, and consequently NCB’s financial performance. It says NCB’s company profile is a key strength due to its strong local competitive position as the largest bank in Jamaica with a consolidated market share by assets of 39 per cent and deposits of 33 per cent at September 2020.

NCB entered pandemic with reasonable asset quality

Fitch is of the view that NCB entered the economic downturn with reasonable asset quality for its rating category. As of September 2020, the 90-day past due ratio slightly increased to 2.7 per cent in 2020, up from 2.5 per cent as at financial year 2019, mainly due to the deterioration of the consumer credit segment (45 per cent of the total portfolio).

Similarly, stage three loans increased to 3.1 per cent at financial year 2020, up from 2.5 per cent at 2019. Asset quality ratios remained relatively stable, and benefited mainly from relief programs for the consumer segment.

Fitch in its assessment reports that as of September 2020, 20 per cent of NCB’s loan portfolio was under the relief programme. The sound impaired loan reserve coverage of 136 per cent provides protection in the current operating environment.

Fitch expects the bank’s non-performing loan portfolio ratio to increase in 2021 when the restructured loans season, and considering the significant exposure to sensitive sectors to the crisis such as tourism (11 per cent of total loan portfolio).

Loan impairment likely to rise

Operating profit to average total assets ratio decreased to 1.2 per cent at financial year 2020, down from the 3.04 per cent recorded in the previous financial year in 2019. This was as a result of the significant increase in loan impairment charges, mostly due to expected losses estimation because of higher Stage II loans, but also from lower non-interest income related to gains on the bank’s securities portfolio and the insurance business.

Fitch expects that profitability will remain under pressure and lower than pre-pandemic levels in 2021, reflecting high credit costs and lower business volumes. The bank’s capital ratio of tangible common equity to tangible assets reduced to 13.3 per cent at financial year 2020 from the 16.1 per cent recorded in 2019.

This reflected lower earnings, higher asset growth, and increased intangible assets. Nevertheless, loan loss allowances and voluntary capital reserves further supports the bank’s capitalisation assessment.

Fitch expects bank’s loss absorption capacity to remain sound in 2021, driven by sound reserves coverage and the expected re-capitalisation of total results. The ratings agency assessed NCB’s liquidity position as being sound and has strengthened, as core deposits grew by 18 per cent for 2020.

Accordingly, the loan-to-deposit ratio improved to 81 per cent at end-September 2020 (FYE 2019: 87.6 per cent), as deposits increased their share in the total funding mix. The bank benefits from a well-diversified and low-cost deposit base that covers more than one-half of the bank’s funding needs (57 per cent at FYE 2019), and also, NCB has proven access to local and global capital and debt markets.

Support Rating and Support Rating Floor assessment

Fitch affirmed NCB’s Support Rating (SR) at ‘4’ and Support Rating Floor (SRF) at ‘B+’. The Support Rating Floor of ‘B+’ is equalized with the sovereign rating, reflecting NCB’s systemic importance.

Despite the government’s record of having provided extraordinary support to the banking system during prior crises, NCB’s Support Rating of ‘4’ reflects uncertainties about the sovereign’s ability to provide support in light of its high level of indebtedness.