NCB share price drops 14.5 per cent on Standard & Poor's rating revision

Published: Friday October 3, 2008

Jamaica's second largest commercial bank, National Commercial Bank (NCB) has had its 'stable' rating revised to 'negative' by the world's leading rating agency Standard & Poor's (S&P).

This news follows the meltdown of the US' financial system and this revision is due in part to the events that have seen some of Wall Street's leading institutions, so to speak, go to the wall.

The S&P revision, which was made on Tuesday, makes it clear that in the renowned credit rating agency's opinion, NCB's performance will be affected by both national and international financial and economic pressures.

This may well have contributed to the NCB share price starting the week at J$21.65 and yesterday closing at J$18.15, registering a 14.5 per cent decline.

Standard & Poor's credit analyst Leonardo Bravo commented:

"S&P revised its outlook on NCB to negative from stable; the counterparty credit ratings were affirmed at B/B. The outlook revision reflects our opinion that, although the bank's performance continues to be adequate for the current 'B' rating, there are important economic and liquidity pressures from both local and global markets that could have an impact upon the bank's finances over the next 12 months.

"We believe that the bank faces a less benign operational environment, with compressing margins, various exposures to the weaker pricing of Jamaican sovereign bonds, tighter liquidity in the international markets, and high inflation."

Bravo further pointed out that the Bank of Jamaica's tighter monetary policies have increased interest rates in Jamaica and could further compress interest margins that
affect profitability.

The meltdown of the US financial system now means that US banks will place a premium on liquidity, making it more difficult for Jamaican financial institutions to readily access US dollars from many of them.

Bravo continued: "Margins will be constrained by the increases in international interest rates. As a consequence of tighter liquidity in global markets, we think that availability of US dollars to the NCB from correspondent banks could be more limited."

S&P noted that Jamaican sovereign bonds prices have fallen nearly 10 per cent since June 2008. Credit spreads over government bonds and credit default swaps have also widened. S&P is of the view that this exposes NCB to realised and unrealised market losses and to margin calls in repo operations due to the decrease in the prices
"We expect NCB's profitability to be negatively affected by these market risks and by provisions needed to cover for potential credit losses," read S&P's explanation for the revision.

But it was not all doom and gloom from S&P. It pointed out that despite the fact that NCB operates in a challenging economy with high inflation, a high debt burden and less than impressive macroeconomic indicators, it still manages to put in creditable performances in successive quarters.

"The ratings are constrained by NCB's larger-than-peer loan concentration in its main clients and its operating in a relatively small, highly indebted, and nondiversified economy. The bank's relevant market presence in the Jamaican banking system, adequate performance in a challenging environment and consistent improvements in its operating performance support the ratings," read the report.

NCB continues to perform well, of that there is no doubt.
According to deputy managing director Dennis Cohen, speaking at a Mayberry Investor Forum last month, NCB posted a net profit of J$2.5 billion in 2005. Last year that figure rose to J$6.6 billion and for the third quarter of this year, it has already surpassed its net profit for the full year of 2007. On one of the bank's key indicators, customer deposits, in 2005 the figure stood at J$85 billion and by 2007, it had increased to J$118 billion. As of June this year it was J$119 billion.

Speaking with Caribbean Business Report from NCB's Kingston headquarters, Managing Director of NCB Patrick Hylton said: "It has to be made clear that this is in no way a downgrade but rather a revision. What it basically says is that with the risks in the external environment, there will be reduced prospects for US liquidity resulting in spreads tightening.

"On the local front both inflation and interest rates continue to rise and this will have an impact on all financial institutions not just NCB. In our strategic planning we have always maintained that with the challenging environment it will be difficult for us to maintain the same trajectory and this S&P decision to revise our rating is in keeping with that thinking. We have long been cognisant of these challenges, but remain confident that we will continue to perform well."

Continuing to explain the reasons for S&P's outlook on NCB, Bravo said: "The negative outlook takes into account possible future stress on profitability and US dollar funding. If current conditions in the local and global markets place significant pressure upon the bank's liquidity in either Jamaican or US dollars, or if profitability is significantly affected by realised or unrealised losses or if asset quality deteriorates to 2003 levels (more than five per cent), the ratings could be lowered. If the bank is able to maintain its current profile and face current conditions adequately, the outlook could be revised to stable."


Source: Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20081002T230000-0500_140872_OBS_NCB_SHARE_PRICE_DROPS______PER_CENT_ON_STANDARD___POOR_S_RATING_REVISION.asp