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Business
May 17, 2011

Ja’s mediocre credit rating constrained NCB’s upgrade, says S&P

Jamaica’s mediocre sovereign rating ‘constrained’ the island’s most profitable bank National Commercial Bank of Jamaica (NCB) from getting a rating upgrade, according to recent analysis from rating agency Stand & Poors (S&P).

It resulted in NCB’s counter-party credit rating remaining unchanged year on year at B-/stable/C, which mirrored the rating for the island, the document indicated. Counter-party credit ratings evaluate the creditworthiness of both public and private companies. An A rating facilitates borrowing at amongst the lowest rates.

“S&Ps Ratings Services’ ratings on NCB are constrained by the sovereign rating on Jamaica (B-/Stable/C) due to the bank’s high exposure to securities and loans with the government and public entities. NCB’s high loan concentration, the slow pace of the country’s economic recovery, soft domestic demand, and rising unemployment could put pressure on asset quality and the group’s financial performance, in our view. However, despite the difficult operating environment, the bank has shown adequate financial performance,” stated S&P in its analysis released in late April.

NCB had $171.7 billion in Jamaican government securities at September, 2010 or 51 per cent of its $334.9 billion in total assets according to NCB annual report.

S&P, a worldwide a leader of financial- market intelligence, with offices in 23 countries and a history that dates back more than 150 years stated that NCB could benefit from Jamaica receiving an upgrade, all things being equal.

“The stable outlook reflects our view that NCB’s financial profile benefits from the Jamaican government’s improved financial position following the debt restructuring. Any positive rating action would depend on the sovereign rating on Jamaica. A negative rating action would take place if current economic conditions in the country significantly pressure the bank’s liquidity in either Jamaican or US dollars, or if profitability declines to less than one per cent and nonperforming assets rise to more than 10 per cent,” it stated.

NCB’s nonperforming assets as a percentage of customer loans stood at 3.45 per cent as at September 2010 or well below the S&P red-flag marker of 10 per cent according to S&P data.

S&P lauded NCB’s performance but said that last year’s Jamaica Debt Exchange (JDX) highlighted the negative effect that heavy exposure to government paper could have on bank operations.

“NCB maintains a large exposure to Jamaica’s government in the form of securities, loans, and guarantees (54 per cent of total assets at year ended September 30, 2010). As a consequence of the JDX, the interest rate paid on these securities was lowered, affecting NCB’s profitability given the high importance of interest income from securities (62 per cent of total interest income). However, in our view, the bank’s profitability levels remained one of its key strengths in 2010, reflecting NCB’s efforts to improve other revenue sources and its cost containment policy, while maintaining a strong focus on improving its operational efficiency. For fiscal 2010, NCB reported a return on assets (ROA) of 3.4 per cent, and for first-quarter of fiscal 2011, its ROA was 3.3 per cent. We do not expect NCB’s ROA to fall below three per cent in 2011,” S&P said.

The rating agency reasoned that its concentration on NCB’s loan portfolio remained “high” due to its corporate orientation with 46 per cent of the total portfolio.

“In the future, we might expect to see improved diversification given NCB’s strategy to increase loan demand in retail banking segments such as its Middle Market Unit (MMU) and Small and Midsize Enterprises (SMEs) groups,” it stated. “Credit remains scarce in Jamaica and we believe NCB will face a challenge to increase its loan portfolio, considering the bank’s conservative underwriting policies and the current economic environment.”

It however expects to see a higher proportion of MMU and SMEs in NCB’s total loan portfolio as a result of its growth strategies. Along with the bank’s adequate track record in asset quality, these strategies it noted should help offset the drags on the bank’s profitability (due to the JDX). NCB’s strategy of reducing funding costs prior to JDX and its focus on improving efficiency have underpinned steady improvement in net income during the past five years, it noted.

In S&Ps view, the bank’s financial profile remains adequate. Loans totaled $86 billion at September 30, 2010 (net of provision for credit losses), which was $2.2 billion lower than the group’s loan portfolio at the end of September 2009. “This decline reflects lower loan growth in the corporate unit as well, coupled with a three per cent appreciation of the Jamaican dollar against the US dollar during the financial year. Approximately 50 per cent of NCB’s loan portfolio is denominated in US dollars. NCB’s loan portfolio represents 26 per cent of its total assets–a small level in comparison to other Central American and Caribbean banks,” stated S&P.

It added that NCB’s asset quality is adequate, with nonperforming loans of 3.4 per cent of its total loan portfolio at September 30, 2010, and reserve coverage at 1.3 times. In fiscal 2010, NCB’s profitability levels were adequate in S&P’s view, and believed that fiscal 2011 profitability levels would depend on the success of revenue-diversification strategies and the Jamaican macroeconomic environment. “Jamaica’s interest rates, inflation, and GDP will play a critical role in the bank’s performance. NCB maintains an adequate level of capital, in our view. The group’s adjusted total equity-to-assets ratio was 13.7 per cent at Sept. 30, 2010, but this capitalisation level is overstated because the local regulator does not consider market risk in its regulatory capital calculation,” stated S&P.

NCB’s counter-party Credit Ratings History included:

B-/Stable/C in April 2011;

B-/Stable/C in April 2010;

CCC/Watch Pos/C in March 2010;

CCC/Watch Dev/C in January 2010;

CCC/Negative/C in November 2009;

CCC+/Negative/C in August 2009;

B-/Negative/C in March 2009; and

B/Negative/B in September 2008.

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