International credit ratings agency, Fitch has revised National Commercial Bank of Jamaica’s (NCBJ) issuer default ratings (IDRs) to stable from negative.

In addition, Fitch has affirmed (NCBJ’s) Long-Term Foreign and Local Currency IRD at ‘B+’. The revision of the outlook to stable mirrors the Jamaican sovereign’s rating outlook due to the assignment of a government support rating (GSR) at the level of the sovereign.

Fitch has also withdrawn NCBJ’s support rating and support rating floor, as they are no longer relevant to the agency’s coverage following the publication of its updated bank rating criteria on November 12, 2021. In line with the updated criteria, Fitch has assigned a GSR of ‘b+’.

The revised ratings and IRD’s ‘B+’ assignment towards NCBJ is due to its strong local competitive position as the largest bank in Jamaica with a consolidated market share by assets of 38 per cent and deposits of 33 per cent at September 2021.

Deterioration in NCBJ’s NPL portfolio

At the end of September 2021, the 90-days non-performing loan (NPL) deteriorated to 4.1 per cent, mainly reflecting the deterioration of some of the top borrowers in the commercial segment. Similarly, stage 3 loans increased to 4.1 per cent of total loans at financial year, coming from 2.7 per cent at 2020.

Loan loss allowances and non-distributable reserves cover 78 per cent of impaired loans at 2021. Fitch will monitor NPL trend in 2022 due to the high expected credit growth and the evolution of top deteriorated borrowers that pressure the agency´s asset quality assessment.

Fitch does not use the core metrics to assess NCBJ’s profitability and capitalisation as there are no public risk-weighted sssets available for the consolidated banking group analysed. Operating profit to average total assets ratio increased to 2.3 per cent at 2021, from 1.2 per cent at 2020, mainly due to lower loan impairment charges and extraordinary trading income.

NCBJ adopted a conservative provisioning approach in 2020 to address the risks stemming from the pandemic, which significantly reduced the need for provisions in 2021. Fitch expects that improvements in profitability will be sustainable in 2022, reflecting credit growth and higher non-interest income generation.

More on NCBJ’s financial performance

NCBJ’s capital ratio of tangible common equity to tangible assets was 12.8 per cent at 2021, down from 13.3 per cent at 2020, reflecting asset growth. Fitch does not anticipate significant pressure on the bank’s loss absorption capacity in 2022, driven by sufficient reserves coverage (loan and capital reserves), earnings generation and conservative dividend upstreaming.

NCBJ’s liquidity position is conservative and has strengthened as core deposits grew by 17 per cent at 2021. This was driven by the banking system’s ample liquidity due to the Bank of Jamaica (BOJ) accommodative monetary policy stance.

Accordingly, the loan-to-deposit ratio is sound, at 80.2 per cent as of 2021. Moreover, NCBJ benefits from the largest market share in the country, a well-diversified and low-cost deposit base that covers more than one-half of the bank’s funding needs (61 per cent at 2021) and, in addition, has proven access to local and global capital and debt markets.

Fitch has assigned NCBJ a GSR of ‘b+’, the same level of the sovereign rating to reflect NCBJ’s systemic importance. Despite the government’s record of having provided extraordinary support to the banking system during prior crises.

NCBJ’s GSR of ‘b+’ reflects a limited probability of support being forthcoming because of significant uncertainties about the ability of the sovereign to do so, based on its ‘B+’ Long-term IDRs.