Fitch Revises National Commercial Bank Jamaica Limited's Outlook to Positive; Affirms Ratings
Fitch has also revised NCBJ's Rating Outlook to Positive from Stable, which is in line with Fitch's revision of the sovereign's Rating Outlook from Stable to Positive on Feb. 19, 2015.
A full list of rating actions follows at the end of this press release.
Fitch has revised the Outlook on NCBJ's Long-Term IDRs in line with the sovereign due to the high influence of the operating environment on NCBJ's ratings and its resilient financial performance under sovereign stress. NCBJ's SRF is equalized with the sovereign's long-term IDR due to the bank's systemic importance.
KEY RATING DRIVERS - IDRS and VR
The operating environment has a high influence on National Commercial Bank Jamaica Ltd.'s (NCBJ) Viability Rating (VR) as Jamaica's small and weak economy limits the bank's overall financial profile relative to higher rated emerging market peers (universal/commercial banks).
Asset quality weighs heavily on the bank's ratings due to NCBJ's significant exposure to the Jamaican government. At September 2014 (FYE14) NCBJ's holdings of Jamaican government securities (including government guaranteed bonds) represented 48.0% of total assets, or 2.9x equity. Fitch views this exposure as a significant source of credit risk given the sovereign's speculative grade rating (long-term IDR of 'B-,' Positive Outlook).
In addition, the bank's loan portfolio exhibits material levels of concentration, as is typical of a smaller economy, which has contributed to volatility in the bank's loan quality indicators. Loan impairment indicators are weaker than similarly rated international peers (emerging market commercial/universal banks with 'b' category VRs) as of Dec. 31, 2014.
NCBJ's ratings also consider the bank's resilient financial performance despite two sovereign debt restructurings from 2010 to 2013 thanks to its scale and its stable and low-cost funding. In addition, the bank has partly offset declining interest income through fees from an expanding suite of services.
Solid earnings and a policy limiting dividend distributions have strengthened the bank's capitalization levels which compare favourably to international peers. However, Fitch views NCBJ's capital levels as adequate given the bank's exposure to the Jamaican government.
In term of the bank's funding, the bank relies primarily on customer deposits but also makes use of its significant government securities holdings in the repo market. Repos represented 30.8% of total liabilities at Dec. 31, 2014. NCBJ maintains a significant structural mismatch between short-term assets and liabilities. However, this is partly mitigated by its solid liquidity profile, with holdings of cash and available for sale securities equal to 122% of customer deposits at FYE2014.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
The sovereign's speculative grade rating limits the government's capacity to provide support, resulting in a support rating of '5'. However, the Support Rating Floor of 'B-,' which is equalized with the sovereign rating, reflects NCBJ's systemic importance, as well as the Jamaican government's provision of extraordinary support to the banking system during prior crises.
RATING SENSITIVITIES - IDRS AND VR
The bank's ratings are sensitive to a change in Fitch's view of the sovereign given the bank's sizable sovereign exposure. In addition, a marked deterioration in financial performance, including a decline in asset quality, weakened profitability that pressures the bank's capital position, or sudden deposit instability, to a level that is inconsistent with its current peers (emerging market commercial banks with a VR of 'b-', 'b' or 'b+') could trigger a downgrade.
RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
While Jamaica's propensity to provide timely support to NCBU remains high due to the bank's systemic importance, its ability to do so is not likely to change given the sovereign's high level of indebtedness. As such, the support rating and the SRF have no upgrade potential.
Fitch has affirmed National Commercial Bank Jamaica Ltd.'s ratings as follows:
--Long-term foreign and local currency IDR affirmed at 'B-'; Outlook revised to Positive from Stable;
--Short-term foreign and local currency IDR affirmed at 'B';
--Viability Rating affirmed at 'b-';
--Support Rating affirmed at '5';
--Support Rating Floor affirmed to 'B-'.
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