VIS reaffirms entity ratings of NBP

June 26, 2023 (MLN): The VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of National Bank of Pakistan (PSX: NBP) at ‘AAA’ for long-term and ‘A-1+’ for the short term with a stable future outlook, the latest press release issued by VIS showed.

A long-term rating of ‘AAA’ signifies the highest credit quality; risk factors are negligible being only slightly more than for the risk-free Government of Pakistan’s debt.

A short-term rating of ‘A-1+’ signifies the highest certainty of timely payment; short-term liquidity, including internal operating factors and access to alternative sources of funds, is outstanding and safety is just below risk-free Government of Pakistan’s short-term obligations.

The previous rating action was announced on June 27, 2022.

Assigned ratings continue to take into account NBP's position as the country's second-largest commercial bank with systemic importance, strong domestic operations and sovereign sponsorship.

The Bank also enjoys its role in handling treasury transactions for the Government of Pakistan (GoP) as an agent of the State Bank of Pakistan (SBP).

On international front, the Bank has advanced further in the process of closing certain overseas branches, which were a drag on profitability.

Going forward, the closure of 2 overseas subsidiaries along with 3 international branches is planned; regulatory approvals have been sought.

The ratings take into account weakening in asset quality indicators on a timeline during the rating review period.

Given infection levels compare unfavorably to peer-rated banks, the rectification of asset quality will remain important from a rating perspective.

Subsequently, the ratings reflect the consolidation strategy opted by the management involving limited new-to-bank private lending and focus on risk-free government-backed lending to avoid potential credit risk headwinds and NPL accretion in the medium-term.

Moreover, on the lending side, the concentration risk (funded & unfunded) in terms of the bank’s core equity is on the higher side; however, the same remains mitigated as majority exposures pertain to sovereign-backed public accounts.

The ratings incorporate heightened market risk exposure as the net deficit on investments increased sizably on a timeline.

Overall, the liquidity profile is comfortable with sound liquid asset coverage to deposits and borrowings coupled with a sufficient cushion over regulatory requirements for LCR and NSFR.

Despite a dip in deposit granularity, the withdrawal risk is manageable as around half of the deposits pertained to public sector entities’ which tend to be stickier than the private sector.

The rating factor in healthy profit generation despite spread compression, high taxation expense, and increase in efficiency ratio.

The capital adequacy ratio remains sound and compliant with the assigned ratings.

However, net NPLs to Tier 1 Capital compare adversely vis-à-vis large-sized banks.

Going forward, improvement in infection ratios, maintenance of capital and liquidity buffers, and market risk management will remain important from the rating perspective.

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