Fitch notes persisting challenges for NCBJ even as it affirms rating

 


Fitch Ratings has affirmed National Commercial Bank Jamaica Limited's (NCBJ) Long-Term and Short-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-' and 'B', respectively. Fitch has also affirmed NCBJ's Viability Rating (VR) at 'bb-'

However it notes challenges to the financial institution as including persistently high loan impairment charges, credit costs, and operational expenses. Despite expectations for a decrease, the necessity for provisions continued to grow in 2024, following an increase in 2023.

Fitch has additionally affirmed NCB Financial Group Limited's (NCBFG) Long-Term Foreign and Local Currency IDRs and Short-Term Foreign and Local Currency IDRs at 'B+' and 'B', respectively. The Rating Outlook for both NCBJ and NCBFG's Long-Term IDRs is Positive.

The Positive Outlook on the Long-Term IDRs is aligned with the Positive Outlook on Jamaica's sovereign rating and reflects Fitch's expectations of continued improvement in the Operating Environment (OE).

VR Driven Ratings; Highly Influenced by Business Profile: NCBJ's VR drives its IDRs. The bank's VR is highly influenced by NCBJ's Business Profile due to its due to its dominant position as the largest bank in Jamaica with a consolidated market share by assets of 37% and deposits of 32% at FYE 2024, considerable pricing power, minimal competitive pressure, and robust, long-lasting customer relationships.

Operating Environment Influence: The VR is moderately impacted by Jamaica's sovereign rating and broader OE considerations. The OE Positive Outlook is indicative of Jamaica's favorable performance on Fitch's core metrics, with an Operational Risk Index (ORI) ranked at the 36th percentile and a GDP per capita of USD7.1 million. Additionally, the OE Positive Outlook highlights robust governance, substantial progress in debt reduction, a solid fiscal framework, and a strong political commitment to achieving large primary surpluses. Fitch anticipates that these improvements will support the expansion of the banking sector, thereby enhancing the financial performance of banks.

Stable Asset Quality: Fitch evaluates NCBJ's asset quality as stable, highlighting the institution's effective risk management practices and the robust diversification of its securities and loan portfolios. Fitch's evaluation considers that approximately 20% of total assets consist of government investment securities with creditworthiness comparable to the sovereign. As of FYE 2024, the 90-day non-performing loans (NPL) ratio stood at 3.1%, reflecting a controlled level of loan impairments.

Challenged Profitability: NCBJ's profitability performance faced several challenges. The operating profit relative to average total assets was 0.5%, indicating lower operational efficiency compared to the four-year average from fiscal years 2021-2024, which was 1.2%. This decline was mainly attributed to persistently high loan impairment charges, credit costs, and operational expenses. Despite expectations for a decrease, the necessity for provisions continued to grow in 2024, following an increase in 2023. However, the positive OE, along with anticipated improvements in cost efficiency and a projected significant reduction in provisions, is expected to enhance earnings and profitability, potentially reversing the bank's downward trend.

Adequate Capitalization: As of FYE 2024, NCBJ showcased adequate capitalization metrics, indicating a robust capital position, by effectively managing healthy dividend upstreaming and aligning asset growth with its capabilities. The tangible common equity to tangible assets ratio was 11.4%, providing a strong foundation for risk management. As of FYE 2024, NCBJ comfortably meets the minimum required capital adequacy ratio at 15.1%.

Additionally, the bank is required to maintain a mandatory banking reserve fund in equity, which Fitch views as a complementary safeguard against potential losses. Fitch expects a modest improvement in capitalization, driven by the bank's aim to boost its earnings and profitability, which is expected to positively influence retained earnings and, in turn, its capitalization.



Key ratings drivers NCBJ

Fitch expects a slight improvement in the NPL ratio in 2025, driven by lower inflation, reduced interest rates, and the successful implementation of stricter risk management measures, especially in the consumer segment. During the same period, loan loss allowances covered 80.8% of impaired loans; however, when including the non-distributable reserve held in equity, the coverage increases to 101% of NPLs.

Robust Funding and Liquidity Profile: NCBJ benefits from holding the largest market share in deposits in the country, supported by a well-diversified, low-cost deposit base that meets 58% of its funding needs, along with proven access to debt markets. As of FYE 2024, NCBJ's funding and liquidity profile was strong, with a gross loans-to-customer deposits ratio of 80.3%, maintaining a balanced funding structure. The bank's emphasis on maintaining a balanced funding and liquidity profile contributed to its financial stability in 2024. Fitch anticipates liquidity to remain strong, given NCBJ's conservative position in this area.

Rating Sensitivities

Ratings are sensitive to changes in the sovereign rating actions;

--The VR could be downgraded if the bank's tangible equity ratio is sustained below 10%, due to either accelerated growth, a relevant deterioration in asset quality or profitability.

Photograph: Nationaldebtreleif.com

Information source: Fitch

Caribbean Money Daily

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