Fitch Rates Nations Trust Bank’s Basel III Subordinated Debt ‘A-(lka)(EXP)’

March, 18, 2019

Fitch Ratings has assigned Nations Trust Bank PLC's (NTB, A(lka)/Stable) proposed Basel III-compliant subordinated unsecured debentures an expected National Long-Term Rating of 'A-(lka)(EXP)'.

The proposed debentures will total up to LKR3.5 billion, with maturities of five years, and will be listed on the Colombo Stock Exchange. They will qualify as Basel III-compliant regulatory Tier 2 capital for the bank and include a non-viability clause whereby they will convert to ordinary shares if so determined by the Monetary Board of Sri Lanka. The bank plans to use the proceeds to strengthen its Tier 2 capital base and for medium-term funding. 

The final rating is subject to the receipt of final documentation conforming to information already received.

KEY RATING DRIVERS

Fitch rates the proposed Tier 2 instrument one notch below NTB's National Long-Term Rating to reflect the notes' subordinated status and higher loss-severity risks relative to senior unsecured instruments. The notes would convert to equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka. 

NTB's National Long-Term Rating is used as the anchor rating for the proposed instrument, as it reflects the bank's standalone financial strength and best indicates the risk of the bank becoming non-viable. 

Fitch has not applied additional notching to the proposed notes for non-performance risk, as the proposed notes do not have going-concern loss-absorption features, in line with the agency's criteria.

NTB's National Long-Term Rating was affirmed on 26 June 2018 and reflects its higher-than-peer product concentration, improved capitalisation and modest franchise.

RATING SENSITIVITIES

The rating of NTB's proposed Basel III compliant notes will move in tandem with its National Long-Term Rating.

Increased capital impairment risk through sustained rapid loan expansion or asset-quality deterioration could result in a downgrade of NTB's rating, while an upgrade is contingent upon lower product concentration, higher capitalisation and a more stable funding profile, alongside progress in building a stronger commercial-banking franchise.

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