NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed National Commercial Bank of Jamaica Limited's (NCBJ) long-term foreign and local currency Issuer Default Ratings (IDR) of 'B-' on Rating Watch Negative. A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
The placement of NCBJ's IDRs on Rating Watch Negative reflects the continued downside risks generated by the recent debt exchange announced by the Jamaican Government, given the potential for a more challenging operating environment in the event of an unsuccessful debt exchange or the government's inability to meet other pre-conditions for securing an IMF programme. Despite the former, the bank remains well positioned to manage the fallout from the government's debt restructuring.
Around 30% of the bank's assets (1.6x equity) as of Sept. 30, 2012, will be subject to restructuring under the Jamaican debt exchange, leading to a reduction in interest income after settlement on Feb. 22, 2013.
Fitch downgraded the sovereign's foreign and local currency IDRs to 'C' from 'B-' on Feb. 12, 2013. The downgrade of Jamaica's sovereign ratings reflected the government's announcement of a domestic debt exchange involving approximately J$860 billion in both foreign currency (FC) and local currency (LC) domestic debt. In Fitch's opinion, the exchange, if completed, would constitute a 'distressed debt exchange' (DDE) in line with its criteria, as the operation adversely affects the original contractual terms of domestic bond holders. Hence, the sovereign's FC and LC IDRs will be lowered to 'Restricted Default' (RD) upon completion of the exchange.
RATING DRIVERS AND SENSITIVITIES - VR & IDRs
NCBJ's Viability Rating (VR) drives its long-term IDRs. The bank's VR reflects its strong domestic franchise, solid profitability, and adequate capitalization in light of the bank's risk profile. Nevertheless, NCBJ's ratings remain constrained by the sovereign's weak credit profile given high exposure to the Jamaican government, lending concentrations, as well as a challenging operating environment.
Investments and loans to the Jamaican government, public entities and entities with a Jamaican government guarantee continued to represent a high proportion of NCBJ's total assets at 52%, or about 3 times (x) its equity, in the fiscal year ended September 2012 (FYE12). Fitch remains concerned about this high asset concentration given the government of Jamaica's weak credit profile.
Despite the bank's exposure to the Jamaican government, Fitch believes NCBJ is sufficiently capitalized to absorb any unexpected losses related either to the debt exchange or its impaired loans portfolio. The bank's Fitch Core Capital ratio reached 33.7% at FYE12, comparing favorably to international peers (emerging market commercial/universal banks). Although the reduction in interest revenue related to the exchange will negatively affect profitability, Fitch assumes bank management will offset some of this reduction in income with other measures to improve efficiency and funding costs. As a result, Fitch believes profitability will remain positive in FY2013 and continue to compare favorably to international peers.
Future rating actions will be highly contingent on a change in Fitch's view of the sovereign given the bank's sizable sovereign exposure. Jamaica's ratings will be raised out of default shortly after Fitch determines that the exchange has been successful and the agency will assign a new rating consistent with Jamaica's prospective credit profile and debt structure. At that point, Fitch will resolve the Rating Watch Negative on NCBJ's IDRs and assess if these could be above, capped or below the sovereign rating.
Additionally, a downgrade of the bank's ratings could be driven by an unexpected marked deterioration of asset quality that weakens profitability or capitalization to a level that is no longer consistent with its current peers (emerging market commercial banks with a VR of 'b-', 'b' or 'b+'). Although not Fitch's base case scenario, unexpected deposit instability may also trigger a negative rating action.
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support rating is constrained by the sovereign's weak credit profile. As such, the Support floor has been downgraded to 'C' from 'B-', in line with the sovereign's ratings although Fitch continues to believe that NCBJ's systemic importance makes the government's propensity to support the bank high despite its weak capacity.
NCBJ is the largest bank in the system in terms of assets with more than 40% market share of the commercial banking system in recent years. In 2002, the Jamaican government sold a majority stake in the bank to Advantage Investment Corporation (AIC), one of Canada's largest privately held mutual fund management companies.
Fitch has taken the following actions on NCBJ's ratings:
--Long-term foreign and local currency Issuer Default Ratings (IDR) of 'B-' placed on Rating Watch Negative;
--Short-term foreign and local currency IDR affirmed at 'B';
--Viability Rating affirmed at 'b-'
--Support Rating affirmed at '5';
--Support floor downgraded to 'C' from 'B-'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria', Aug. 15, 2012;
--'Fitch Downgrades Jamaica to C', Feb. 12, 2013;
--'National Commercial Bank of Jamaica Limited (NCBJ)' April 26, 2012.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
National Commercial Bank of Jamaica Limited (NCBJ)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=676589
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