Nabil Bank Limited: Ratings downgraded; continue to remain on Watch

with Negative Implications1

April 9, 2024
Summary of rating action
INSTRUMENT/FACILITY RATED AMOUNT RATING ACTION
Issuer Rating NA [ICRANP-IR] A+@*; downgraded from [ICRANP-IR] AA-@
Subordinated Debenture Program NPR 2,000 million [ICRANP] LA+@; downgraded from [ICRANP] LAA-@
Subordinated Debenture Program NPR 2,000 million [ICRANP] LA+@; downgraded from [ICRANP] LAA-@
*The symbol ‘@’ indicates Rating Watch with Negative Implications; Instrument details are provided in Annexure-1

Rating action
ICRA Nepal has downgraded the issuer rating of Nabil Bank Limited (Nabil) to [ICRANP-IR] A+@ (pronounced ICRA NP
Issuer Rating A plus) from [ICRANP-IR] AA-@ (pronounced ICRA NP Issuer Rating double A minus), indicating adequate
degree of safety regarding the timely servicing of financial obligations and low credit risk. The rating continues to remain
on 'Watch with Negative Implications' (denoted by ‘@’). The rating is only an opinion on the general creditworthiness of
the rated entity and not specific to any particular debt instrument. The sign of + (plus) or – (minus) appended to the rating
symbols indicates their relative position within the rating categories concerned.

ICRA Nepal has also downgraded the bank’s subordinated debenture rating to [ICRANP] LA+@ (pronounced ICRA NP L A
plus) from [ICRANP] LAA-@ (pronounced ICRA NP L Double A Minus). The rating continues to remain on 'Watch with
Negative Implications' (denoted by @). Instruments with this rating are considered to have an adequate degree of safety,
regarding the timely servicing of financial obligations. Such instruments carry low credit risk.

Rationale
The rating action mainly factors in the sustained deterioration in the bank’s assets quality with higher-than-industry-
average non-performing asset (NPAs) of 3.80% as of mid-January 2024 and sustained high 0+ days delinquencies (DPD)
(~25% as of mid-January 2024, albeit with major concentration in 1-30 days overdue bucket). The latest reported NPAs
and delinquencies remain partly benefitted from the restructuring/rescheduling of stressed account 2 and higher than
industry-average growth reported by the bank in the last 12 months. Further, the bank’s ability to improve its asset quality
over the near term also remains a challenge amid liquidity pressure on the leveraged borrowers, following the
introduction of working capital guidelines by the central bank in early 2023 and economic slowdown induced demand
moderation in the interim. Additionally, Nabil’s capitalization indicators have also weakened in the recent quarters on
account of the recent cash dividend (paid out of FY2023 profits), implication of tax on bargain purchase gain (on
acquisition of erstwhile Nepal Bangladesh Bank Limited-NBBL) paid during H1FY2024 and muted internal capital
generation in recent quarters amid rising credit costs. Nabil still continues to maintain a relatively high deposit
concentration (despite marginal improvement) which raises concerns given the bank’s relatively higher credit to deposit
(CD) ratio among the industry players.

Nonetheless, the rating positively factors in Nabil’s long track of operation (since 1984), its healthy market share, strong
promoters, seasoned management team and established brand. Although competitive positioning in the industry and its
financial indicators has taken a hit over the last few years following intense competition for deposits (resulting in rise of
deposit cost across the industry including former industry leaders like Nabil) and acquisition of NBBL with relatively

1 Please refer here for details on rating watch and its meaning/implications.
2 ~3.5% of total credit portfolio, not included in the 0+ days delinquency mentioned above.
moderate credit profile, the bank nonetheless remains relatively better in the industry in terms of scale and return on
assets, supported by its economies of scale, despite the increase in credit cost. ICRA Nepal also positively takes note of
recapitalization plans of the bank through preference share issuance (subject to regulatory approval), which could help
the bank shore up the capital cushion going forward.

Going forward, Nabil’s ability to improve its asset quality profile and enhance its capital cushion to better withstand
probable credit shocks will remain key rating sensitivities. ICRA Nepal also notes the pending receivable from foreign bank
against a counter-guarantee claim, which remain unhonoured by the latter amid the ongoing litigation in the foreign
court. While the contested amount remains moderate vis-à-vis Nabil's capital base, any additional provisioning expense
regarding the same could further weaken the bank’s already modest profitability and capital position and could challenge
the bank’s ability to maintain the regulatory capital threshold (including proposed countercyclical buffer). Inability to
restore the capital cushion and improve asset quality in following quarters will warrant further rating downgrade.

Key rating drivers

Credit strengths
Long track record and favourable scale; good promoter profile and experienced management team – Operating since
1984, Nabil has a long track record as the first private sector bank of the country. The bank’s competitive positioning
remains good, notwithstanding the recent moderation. Nabil’s geographic coverage remains strong with 266 branches
across the country as of mid-January 2024 while its market share remains strong at 7.99% (among commercial banks’
deposits) and 8.35% (among commercial banks’ credit) as of mid-January 2024. Despite the dilution following the
acquisition of NBBL, individuals and individuals associated with Chaudhary Group (one of the leading business families in
Nepal) maintain largest stake in the bank. Nabil’s board of directors and the management team comprise of seasoned
professionals in the Nepalese banking and business sector.

Healthy profitability profile supported by adequate NIMs and operating efficiency – Nabil, on a larger scale, has
outperformed its peers in terms of profitability and return indicators over the years. In the past, the bank’s profitability
was strongly supported by its net interest margins (NIMs) given its low cost of deposits. Although the bank has reported
a dilution in its interest margins in recent years due to regulatory cap on interest spread, the bank continues to maintain
good NIMs vis-à-vis industry peers. Nabil’s FY2023 profitability vis-à-vis industry peers was better on account of regulatory
forbearance on interest spreads following the acquisition of NBBL in FY2022 end; offsetting the impact of higher provision
cost of FY2023 to some extent. Despite the discontinuation of spread-related forbearance after FY2023 end, Nabil’s
H1FY2024 NIMs vis-à-vis industry peers was supported by its relatively lower cost of deposits in the industry, lower
operating expense ratio, lower provisioning expense and higher CD ratio vis-à-vis peers. While Nabil’s NIMs is still
expected to remain marginally better in the industry and a key driver to its long-term profitability profile, its profitability
over the near to medium term will remain largely driven by its ability to manage asset quality.

Improved portfolio granularity – The portfolio concentration has declined since the last rating exercise aided by the
interim credit growth and granularity on the incremental profile. The concentration on top-20 borrowers has decreased
to ~11% of credit book (~95% of tier-I capital) as of mid-January 2024 from ~13% (~95% of tier-I capital) as of mid-January
2023. The deposit concentration, although still higher among the peers, has marginally eased to ~24% among top-20
depositors as of mid-January 2024, from ~25% as of mid-January 2023.

Credit challenges
Stress in asset quality amid unfavourable economic environment – Nabil has reported a sustained deterioration in its
asset quality in the quarters since last rating exercise, wherein NPAs have spiked to 3.80% as of mid-January 2024
(industry average of 3.63%) from 2.98% as of mid-January 2023. The bank’s 0+ days delinquency levels also continue to
remain high at ~25% as of mid-January 2024. Credit provision cover on NPAs has remained at similar levels in the last few
years including mid-January 2024. However, fresh slippages continue to pressurize the bank’s solvency ratio (net NPA to
net worth of 8.16% as of mid-January 2024), which remains on a higher side among the industry peers. Nabil’s 0+ days
delinquencies as of mid-January 2024 remains concentrated in the 0-30 days overdue bucket, which has kept the
provision expenses in check. However, incremental deterioration of delinquency accounts could warrant higher
provisioning expense in following quarters which could further erode the profitability, capitalization, and solvency
indicators. The combined impact of moderate borrower quality onboarded through acquisition, tighter regulations,
demand slowdown and liquidity pressure across the spectrum of borrowers could challenge the bank’s ability to report a
major turnaround in asset quality over the near term.

Erosion in capitalisation profile – The bank reported recent sharp moderation in capitalisation ratios over the last few
quarters as a combined result of rising delinquencies (and risk weight), cash dividend payouts from FY2023 profits and
sizeable tax payments against bargain purchase gains related to the acquisition of NBBL. As a result, Nabil has one of the
modest capitalization profiles in the industry (tier-I of 8.93% and CRAR of 11.54% as of mid-January 2024, against
regulatory minimum of 8.5% and 11%) despite being among the larger players. Given the expectation of increased asset
quality pressure over the near term and 0.5% counter-cyclical buffer required to be maintained by mid-July 2024, Nabil’s
ability to maintain an adequate cushion over the regulatory threshold remains to be seen. ICRA Nepal takes note of the
pending receivable from foreign bank, which has not been honoured by the latter amid pending litigation. Any
provisioning requirement on the said transaction could further weaken the bank’s capitalization. While ICRA Nepal has
also taken note of the bank’s recapitalization plans using fresh preference share issuance (pending regulatory approval),
Nabil’s incremental capital position will remain a key rating monitorable and sensitivity. Inability to achieve meaningful
improvement in the capital front and continuous asset quality pressure could trigger further rating downgrade.

Moderate funding and liquidity profile – Nabil’s CASA deposit proportion remains moderate at ~34% as of mid-January
2024 (~35% as of mid-January 2023, when last rated) vis-à-vis industry average of ~35%. While the bank’s cost of deposit
remains better among the peers, a lower proportion of CASA deposits could weaken the long-term competitiveness of
the bank under the currently practiced base-rate-plus lending regime. Bank’s high credit to deposit ratio (85% as of mid-
January 2024 vs. regulatory cap of 90%) also remains a concern given the relatively higher deposit concentration among
top depositors. Although the bank fares comfortable in terms of regulatory liquidity ratio, it remains on a lower side
among the industry (total liquid assets/total liability ratio of ~24% as of mid-January 2024 against regulatory minimum of
20%).

Regulatory risk and difficult operating environment – The banking industry as well as borrowers have been facing stress
from H1FY2022, following the roll-back of Covid-relaxations and introduction of stringent working capital regulations
from H1FY2023 affecting fresh credit creation. The incremental regulatory changes have also remained stringent such as
introducing the requirement of borrower-wise provisioning (against facility-wise provisioning also in practice across major
banks) and higher provisioning requirement for group units in case of stress reported in any group unit. The borrowing
rates have remained elevated until recent past which coupled with the high debt burden, has reduced the repayment
capability of the borrowers. This coupled with the ineligibility of many borrowers for fresh loans after the implementation
of working capital guidelines, has exacerbated liquidity pressure across the spectrum, which is partly reflected in
increased asset quality stress for banks and hence remains a rating concern across the industry.

Analytical approach: For arriving at the ratings, ICRA Nepal has applied its rating methodologies as indicated below.
Links to the applicable criteria:
Bank Rating Methodology
Issuer Rating Methodology
Link to the last rating rationale:
Rationale- Nabil Bank Limited-Ratings Surveillance March 2023

Company profile
Nabil Bank Limited (Nabil), the first private sector class A commercial bank in Nepal, started its commercial operations
from July 1984 as Nepal Arab Bank Limited. The name was changed to Nabil bank, following the withdrawal of joint
venture partner Emirates Bank International in 1997. The bank acquired another class-A commercial bank, Nepal
Bangladesh Bank Limited (NBB) on July 11, 2022. Nabil’s head office is located at Kathmandu.

The major promoters of the bank are NB International Ltd., Ireland (39.44%), IFIC Bank Ltd. (7.77%), Rastriya Beema
Company Ltd. (7.63%), among others. Mr. Gyanendra Prasad Dhungana is the Chief Executive Officer of the bank. The
bank’s equity share is listed in Nepal Stock Exchange (NEPSE) where Nabil is among the leading companies in term of
market capitalization.

As of mid-January 2024, Nabil has presence throughout the country through its 266 branches, 21 extension counters and
314 ATMs. Nabil has market share of ~8% in terms of deposit base and ~8.3% of total advances in Nepalese commercial
banking industry as on mid-January 2024. Nabil reported a profit after tax of ~NPR 6,405 million during FY2023 over an
asset base of NPR 477,391 million as of mid-July 2023, against profit after tax of ~NPR 4,256 million over an asset base of
NPR 418,427 million as of mid-July 2022. During H1FY2024, the bank reported profit after tax of NPR 3,203 over an asset
base of ~NPR 519,383 million as of mid-January 2024. As of mid-January 2024, Nabil’s CRAR was 11.54% with Tier I capital
of 8.93% and gross NPAs stood at 3.80%. In terms of technology platform, the bank has implemented Finacle across all
its branches.

Key financial indicators

July 2019 July 2020 July 2021 July 2022 July 2023 January 2024
Year Ended
(Audited) (Audited) (Audited) (Audited) (Audited) (Provisional)
Net interest income 7,159 6,984 8,076 8,919 17,749 8,243
Profit before tax 6,041 5,095 6,255 6,288 9,281 4,522
Profit after tax 4,239 3,463 4,528 4,256 6,405 3,203
Loan and advances 132,486 153,011 205,131 309,071 341,455 375,013
Total assets 192,804 226,916 277,432 418,427 477,391 519,383

Operating ratios
Yield on average advances 11.44% 10.34% 8.12% 8.09% 12.66% 11.68%
Cost of deposits 5.43% 5.32% 4.26% 4.94% 7.62% 7.36%
Net interest margin/ATA 4.05% 3.33% 3.20% 2.56% 3.96% 3.31%
Non-interest income/ATA 1.23% 1.02% 0.94% 0.74% 0.78% 0.74%
Operating expenses/ATA 1.64% 1.51% 1.83% 1.17% 1.46% 1.44%
Credit provisions/ATA 0.23% 0.41% 0.33% 0.32% 1.21% 0.79%
PAT/ATA 2.40% 1.65% 1.80% 1.22% 1.43% 1.29%
PAT/net worth 19.37% 14.12% 15.16% 9.80% 11.66% 11.42%
Gross NPAs 0.74% 0.97% 0.84% 1.62% 3.39% 3.80%
0+ days delinquencies 6.82% 6.86% 13.87% 15.60% 21.50% 25.43%

Capitalisation ratios
Capital adequacy ratio 12.50% 13.07% 12.77% 13.09% 12.54% 11.54%
Tier-I Capital 11.40% 10.90% 10.67% 10.77% 10.22% 8.93%
Net NPAs/net worth 1.03% 1.95% 2.10% 3.74% 7.06% 8.16%

Liquidity ratios
 July 2019 July 2020 July 2021 July 2022 July 2023 January 2024
Year Ended
(Audited) (Audited) (Audited) (Audited) (Audited) (Provisional)
Total liquid assets/total liability 28.56% 30.27% 23.46% 22.81% 25.62% 23.74%
Total advances/total deposits 81.96% 80.65% 92.46% 95.20% 85.53% 86.15%
Source: Nabil, ICRA Nepal Research; Amount in NPR million unless mentioned otherwise

Instrument Detail:
Instrument Name Interest Amount Interest Issue Year Maturity Period
Rate Payment
Nabil Debenture 2082 10% p.a. 2,000 million Half yearly FY2020 7 years
NBBL Debenture-2085 10.25% p.a. 2,000 million Half yearly FY2019 10 years

For further details please contact:

Analyst contacts
Mr. Sailesh Subedi (Tel No. +977-1-4519910/20)
sailesh@icranepal.com

Ms. Kushum Bhattarai (Tel No. +977-1-4519910/20)

kushum@icranepal.com

Relationship contacts
Ms. Barsha Shrestha (Tel. No. +977-1-4519910/20)
barsha@icranepal.com

About ICRA Nepal Limited

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Our parent company, ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and
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