Affirms Issuer Default Ratings at ‘B+’

Durrant Pate/ Contributor

Jamaica’s largest commercial bank, NCB, has received a positive outlook from international credit ratings agency, Fitch.

This is an upgrade from the stable outlook, which was given in Fitch’s last rating assessment. In addition, NCB’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) were affirmed at ‘B+’ by Fitch, which also affirmed the bank’s Viability Rating (VR) at ‘b+’.

The rating outlook on the Long-term IDRs have been revised to positive from stable following a similar action on Jamaica’s Long-term IDRs. The rating actions follow Fitch’s revision of the outlook on the Jamaican banking system’s ‘b’ operating environment (OE) score to positive.

Outlook on local business environment

The outlook revision on Jamaica’s OE score to positive reflects Fitch’s assessment of the country’s post-pandemic economic recovery. Even though Fitch expects real Gross Domestic Product (GDP) growth to decelerate to 2.3 per cent in 2023 and two per cent in 2024, (converging towards its medium-term potential growth rate estimated around 1%-2%), it notes that the economy has recovered from the deep recession in 2020, while inflation is expected to improve and unemployment will remain below its 2020 peak.

Fitch expects this recovery to benefit the bank’s financial performance. According to Fitch, “NCB’s Viability Rating (VR) drives its Long-Term Issuer Default Ratings (IDRs). The VR is in line with the implied VR. The bank’s VR is influenced by Jamaica’s sovereign rating and broader operating environment considerations. The bank’s business profile also weighs on the VR, 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 December 2022.”

It cites improved asset quality, where at the end of September 2022, the 90-day non-performing loan (NPL) ratio improved to 3.3 per cent (FYE 2021: 4.0%), mainly reflecting more conservative underwriting standards for consumer loans in a high inflation environment and the improvement in collection practices. Similarly, stage-3 loans reduced to 3.3 per cent of total loans at FYE 2022 from 4.1 per cent at FYE 2021.

Fitch assess that “loan loss allowances cover 61.7 per cent of impaired loans but if the non-distributable reserve held in the equity is included, the coverage increases to 105 per cent of impaired loans at FYE 2022 vs. 78 per cent the prior year. Fitch expects the NPL ratio to remain stable in 2023 due to lower inflation, recovering employment, and stricter risk management”.

Sound profitability continuing

The operating profit to average total assets ratio remained sound at 2.0 per cent at FYE 2022 (2.3% at FYE 2021), mainly due to low loan impairment charges and sound net interest and non-interest income.

Fitch notes that “NCB adopted a conservative provisioning approach in 2020 to address the risks stemming from the pandemic, which significantly reduced the need for provisions in 2021 and 2022. Fitch expects that profitability will be sustainable at FYE 2023, reflecting credit growth, low funding cost, and higher non-interest income generation”.

NCB’s liquidity position is conservative and has remained sound as core deposits grew by 6.8 per cent at FYE 2022. Accordingly, the loan-to-deposit ratio is sound at 83.1 per cent at FYE 2022. Moreover, it has been assessed that NCB 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 (57.7% at FYE 2022) and its proven access to debt markets.