Fitch Upgrades National Commercial Bank Jamaica Limited to 'B'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has today upgraded National Commercial Bank Jamaica Limited's (NCBJ) long-term foreign currency and local currency Issuer Default Ratings (IDRs) and Support Rating Floor (SRF) to 'B' from 'B-', its Viability Rating (VR) to 'b' from 'b-' and its Support Rating (SR) to '4' from '5'. Short-term foreign and local currency IDRs were affirmed at 'B.' A full list of rating actions is at the end of this rating action commentary.

The IDRs and VR have been upgraded to reflect the improving operating environment. On Feb. 11, 2016, Fitch upgraded Jamaica's foreign and local currency IDRs to 'B' from 'B-' in light of the government's continued adherence to targets agreed with the IMF. In addition, falling energy prices and the satisfactory performance of remittances and tourism have supported business confidence and credit growth. The Rating Outlook has been revised to Stable from Positive.

KEY RATING DRIVERS

IDRS and VR

The bank's IDRs and VR reflect the high influence of the operating environment given its large exposure to the sovereign as well as its reach into the major sectors of the Jamaican economy through its diverse corporate and retail banking, insurance and securities services.

NCBJ's asset quality is directly correlated with the sovereign due its large holdings of government securities, representing 46.7% of total assets on a consolidated basis at December 2015. While NCBJ's loan quality indicators have registered steady improvement since 2014, they continue to lag behind regional peers (Latin American banks with VRs of 'b-'/'b'/'b+').

NCBJ's non-performing loans (NPLs) declined to 4.8% of gross loans at December 2015, compared to 5.4% at fiscal year-end (FYE) 2014. Fitch expects that NPLs will continue to improve as the bank works out a large legacy problem credit. Loan quality indicators may also benefit from an improving business environment and better credit information through the relatively new credit bureau. The bank's loan loss reserves in the contra-asset account are weaker than regional peers but are mitigated by non-distributable reserves in the capital account. Considering these additional reserves, reserve coverage increases to 109.3% of impaired loans at December 2015.

NCBJ's ratings also reflect the bank's resilient financial performance despite two sovereign debt restructurings from 2010 to 2013, thanks to its diversified sources of income. The bank has mitigated a declining net interest margin through fees and commissions from an expanding suite of services.

The bank's capital position compares favourably to regional peers thanks to a moderated rate of asset growth, stable earnings and a reasonable dividend distribution policy. In November 2015, it was announced that NCBJ had agreed to purchase a 29.9% stake in Guardian Holdings the Caribbean's leading insurer. While details of the transaction are not yet public, the acquisition, which is subject to regulatory approval, is not expected to materially impact the bank's capital position. Given NCBJ's systemic importance, the Bank of Jamaica requires that NCBJ maintain a regulatory capital ratio of 12.5% compared to the 10% regulatory minimum. In addition, local capital calculation rules are more stringent than Fitch or Basel standards in several ways, the most significant of which is the deduction of retained earnings from qualifying capital.

NCBJ reports a solid liquidity profile, surpassing local requirements, thanks to its liquid investment portfolio. At December 2015, liquid assets, including cash, bank deposits and available for sale securities, covered customer deposits by 108.7%. However, given the Jamaican government's speculative grade rating, NCBJ's portfolio of government bonds could become illiquid during a period of stress.

NCBJ's ratings also reflect its strong company profile and leading franchise. It is the largest financial institution in the country with a market share among commercial banks of 41% by assets and 37% by deposits at FYE 2015.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating Floor of 'B' is equalized with the sovereign rating, reflecting NCBJ's systemic importance. However, notwithstanding the government's record of extraordinary support to the banking system during prior crises, NCBJ's Support Rating of '4' reflects uncertainties over the sovereign's capacity to provide future support in light of its high levels of indebtedness.

RATING SENSITIVITIES

IDRS, VR and SRF

The bank's IDRs, VR and SRF are sensitive to a change in Fitch's view of the sovereign, given the bank's sizeable government exposure. In addition, a sustained deterioration in financial performance, including a decline in asset quality, weakened profitability that pressures the bank's capital position, or sudden deposit instability, to a level that is inconsistent with its peers, could result in a negative rating action.

SUPPORT RATING AND SUPPORT RATING FLOOR

While Fitch views the sovereign's propensity to provide timely support to NCBJ as high due to the bank's systemic importance, NCBJ's SR has limited upside potential as the government's high level of indebtedness is not expected to improve in the near term. The SR is potentially sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank.

Fitch has taken the following rating actions:

National Commercial Bank Jamaica Ltd

--Long-term foreign and local currency IDRs upgraded to 'B' from 'B-'; Outlook revised from Positive to Stable;

--Short-term foreign and local currency IDRs affirmed at 'B';

--Viability Rating upgraded to 'b' from 'b-';

--Support Rating upgraded to '4' from '5';

--Support Rating Floor revised to 'B' from 'B-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000082

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000082

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Mark Narron, +1-212-612-7898
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andres Marquez, +57 1 326 9999
Director
or
Committee Chairperson
Alejandro Garcia, +52 (81) 8399-9146
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Mark Narron, +1-212-612-7898
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andres Marquez, +57 1 326 9999
Director
or
Committee Chairperson
Alejandro Garcia, +52 (81) 8399-9146
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com