Nabil Bank Limited: Ratings reaffirmed

January 24, 2022

Summary of rated instruments
INSTRUMENT/FACILITY RATED AMOUNT RATING ACTION
Issuer Rating NA [ICRANP-IR] AA- (reaffirmed)
Subordinated Debenture NPR 2,000 million [ICRANP] LAA- (reaffirmed)

Rating action
ICRA Nepal has reaffirmed the issuer rating of [ICRANP-IR] AA- (pronounced ICRA NP issuer rating Double A minus) to
Nabil Bank Limited (Nabil), indicating a high degree of safety regarding the timely servicing of financial obligations. Such
issuers carry very low credit risk. The sign of + (plus) or – (minus) appended to the rating symbol indicates the entity’s
relative position within the rating categories concerned. The rating is only an opinion on the general creditworthiness of
the rated entity and is not specific to any debt instrument.

ICRA Nepal has also reaffirmed the rating of [ICRANP] LAA- (pronounced ICRA NP L Double A Minus) assigned to the bank’s
subordinated debentures. Instruments with this rating are considered to have a high degree of safety regarding timely
servicing of financial obligations. Such instruments carry very low credit risk. The sign of + (plus) or – (minus) appended
to the rating symbol indicates the entities relative position within the rating categories concerned.

Rationale
The rating reaffirmation continues to derive comfort from Nabil’s long track of operation (since 1984), strong promoters
and established brand reputation. Nabil’s low cost of fund (~4.5% as of mid-October 2021 vs industry average of ~5.0%)
continues to underpin its strong competitive positioning vis-à-vis peers despite the moderation caused by the stiff
competition on the liability front from fast growing peers banks with stronger geographical coverage. The bank’s
established underwriting controls, its seasoned staffs and management team and its ability to attract good borrowers (on
account of better lending rates) continues to reflect positively on its asset quality thus far (notwithstanding the recent
rise of delinquencies). Moreover, the bank’s comfortable capital to risk weighted assets ratio (CRAR) of 13.58% and tier-
I capital of 10.69% (against the minimum regulatory requirement of 11% and 7% respectively) provides additional comfort
to its solvency profile. The rating also positively factors in the bank’s healthy profitability profile which has been largely
retained in the recent years. The bank has adopted a retail-SME focussed strategy in the last two to three years through
sizeable addition of branches across the country. This has helped the bank to achieve good growth (~34% credit portfolio
growth in FY2021) and to improve its portfolio granularity (concentration in top-20 borrowers reduced to ~18% as of mid-
October 2021 from ~27% as of mid-July 2020 (last rating) and top-20 depositors to 25% from 35% during the same period).
This remains a positive from the bank’s ability to retain its market share and lower portfolio concentration risk.

ICRA Nepal notes the preliminary agreement signed between Nabil and Nepal Bangladesh Bank Limited (NBB; rated at
[ICRANP-IR] BBB+& and [ICRANP] LBBB+&; rating watch with developing implications) for the acquisition of the latter in
the initial agreed share swap ratio of 100:43. Although the financial profile and asset quality of Nabil could witness some
moderation following the acquisition of NBB (with a relatively weaker footing as compared to Nabil), Nabil’s
earning/profitability is expected to benefit from the strong non-fund based business and therefore non-interest income
of NBB. Moreover, the increase in market share and improvement in geographical coverage through extended branch
network (~235 branches post-acquisition) is also likely to aid Nabil’s long-term competitive positioning.
The ratings, however, are constrained by the increased zero plus (0+) days delinquency (~12% as of mid-October 2021
that increased from ~7% as of mid-July 2020) and NPLs (1.13% as of mid-October 2021 from 0.84% as of mid-July 2021;
0.97% as of mid-July 2020). The bank’s higher credit growth achieved in FY2021 (~34%) despite the covid-induced
economic uncertainties and the management’s plan of continuing the high credit growth strategy to enable the optimum
utilization of capital could lower the bank’s capital cushion (especially at tier I level) and therefore its ability to withstand
any credit/operational shocks. The high growth strategy remains a concern especially since the gap in the cost of deposits
and base rate between Nabil and other competitors in the industry has been narrowing over the years. This could have a
bearing on the asset quality of the incremental credit portfolio of the bank. The post-merger integration challenges
(assuming the successful acquisition of NBB) will remain among the key concern over the near term. The frequent changes
in regulatory norms surrounding and affecting the bank’s operating environment also remains among the rating concerns.

Going forward, Nabil’s ability to maintain its competitive positioning in the industry, protect its profitability profile and
generate post-acquisition synergy will remain key rating sensitivities. Moreover, containing its delinquencies, maintaining
healthy asset quality indicators as well as adequate capital cushion to withstand probable credit shocks will remain among
other key rating drivers.

Key rating drivers

Credit strengths
Long track record, strong promoter profile and experienced management team– Operating since 1984, Nabil bank is
the first private sector bank of Nepal with a long track record of operations. The bank’s track record in terms of growth,
profitability and assets quality has remained strong over the years. Chaudhary group, one of the leading family-owned
business houses in Nepal, along with its associated companies (including NB International Limited) has ~52% equity stake
in the bank. Nabil’s board of directors and the management team are seasoned professionals in the Nepalese banking
sector with long history and adequate experience.

Strong competitive position, long-established relationship with customers and adequate market share– Nabil
competitive position in the industry remains strong which emanates largely from its long track record, established brand
and traction with the customers and Nabil’s ability to offer better lending rates to the borrowers (courtesy of its lower
cost of fund). This translates into a healthy market share (~5.3% share in total deposits and total credits as of mid-October
2021) for the bank despite its relatively moderate branch network and a good borrower profile which translates into
healthy assets quality.

Healthy profitability profile supported by adequate NIMs and gain on sale of securities despite the increased operating
expenses – Nabil has outperformed its industry peers in terms of profitability profile and return indicators over the years
with strong Net Interest Margins (NIMs) and moderate operating expenses. The bank reported an average return on
assets (RoA) of 1.99% and return on net worth (RoNW) of 16.54% in the last three years ending FY2021. RoA of 1.80%
and RoNW of 15.16% for FY2021 remains better compared to the industry average of ~1.3% and ~12.0% respectively.
Despite some moderation, the NIMs of 3.20% in FY2021 remains well above the industry average of 2.68%. Further, the
increased operating expenses in FY2021 (~1.83% of average total assets; ATA) has been offset by the higher profit in sale
of investment securities (0.49% of ATA) to maintain healthy profitability profile. The bank’s ability to curb the increased
operating expenses while maintaining healthy NIMs amid the increased cost of fund will remain crucial for its incremental
profitability profile and remains a key monitorable.

Adequate capitalisation profile supported by healthy internal capital generation and retention – Nabil has maintained
an adequate capitalisation level (CRAR of 13.58% and tier-I of 10.69% as of mid-October 2021, marginally above the
industry average of 13.52% and 10.41% respectively), supported by healthy capital generation rate and profit retention
within the bank. The higher retention was primarily due to the central bank’s policy level restriction on distribution of
cash dividend in FY2020 and FY2021. The capital adequacy remains above the minimum regulatory required CRAR of
~11% and tier-I of 7% and remains adequate to absorb possible near-term credit shocks. However, the bank’s ability to
maintain the cushion commensurate to its growth plans and post-acquisition rise in the risk-asset base remains to be
seen.

Improved portfolio granularity – The portfolio concentration has declined significantly since the last rating exercise aided
by the higher credit growth and granularity on the incremental profile. The concentration on top-20 borrowers has
decreased to ~18% (~136% of tier-I capital) as of mid-October 2021 from ~27% (~202% of tier-I capital) as of mid-July
2020 making Nabil one of the moderately granular banks in the industry. The deposit concentration, albeit on a higher
side, has also improved with top-20 depositors contributing for ~25% of total portfolio as of mid-October 2021 (from
~35% as of mid-July 2020). The portfolio granularity is expected to further improve assuming successful acquisition of
NBB.

Credit challenges
Increased delinquency and NPLs raises the asset quality concerns – Nabil reported moderate asset quality with NPLs of
0.84% as of mid-July 2021 that improved from 0.97% as of mid-July 2020. However, the increased delinquency levels to
~12% as of mid-October 2021 from ~7% as of mid-July 2020 raises the asset quality concern. Further, the increased NPLs
of 1.13% as of mid-October 2021 remains marginally below the industry average of 1.23% and the fresh slippage has also
moderated its solvency to 3.75% as of mid-October 2021 (vs. 1.95% as of mid-July 2020). While the rising delinquency is
partly aided by the acquisition of a class C finance company United Finance Limited in FY2021, it nonetheless remains a
concern given the bank’s high credit growth of FY2021 and its plan to continue with high growth over the medium term
to ensure optimum utilization of capital.

Post-acquisition integration challenge– Since Nabil has recently acquired a class C finance (United Finance Limited) in
FY2021 and has recently entered an MOU for acquisition of class A Nepal Bangladesh Bank, handling the near-term
integration issues will remain a challenge for the bank. The consolidation of the portfolio under Nabil’s stringent
underwriting norms could stretch the asset quality and profitability indicators. The ability of the bank to successfully
handle the integration of human and non-human resources remains to be seen.

Uncertain operating environment – The economic impact of the pandemic is still evolving and its impact on the asset
quality of the banking system remains to be seen. Further, a major chunk of the borrowers has been availing extended
moratoriums, especially in impacted sectors like tourism and transportation (among others). This, along with rescheduling
opportunities for borrowers, has deferred the asset quality impact. While the Central Bank’s policy has been to
accommodate the impacted sectors/borrowers, their revival in the post-pandemic era remains to be seen. In the event
of the unanticipated elongation of the pandemic, a certain chunk of borrowers is likely to be unable to resume financially
sustainable operations.

The operating environment has weakened further for the borrowers due to the increased political uncertainty in recent
periods. However, the banking industry has continued to grow its portfolio at a pace of more than 20% in the last few
years, including the periods after the onset of the pandemic when the economic growth rate had contracted. This is also
likely to mask the asset quality impact to an extent and hence remains a major rating concern.

Analytical approach: For arriving at the ratings, ICRA Nepal has applied its rating methodologies as indicated below.
Links to applicable criteria:
Bank Rating Methodology
Issuer Rating Methodology
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. Nabil started off as joint venture bank with Emirates Bank International. The
latter divested its stake in Nabil, which was ultimately taken over by NB International, an Ireland based special purpose
vehicle associated with CG group1. The name was changed to Nabil bank, following the withdrawal of joint venture
partner Emirates Bank International in 1997. Head quartered in Kathmandu, Nabil is the leading bank in terms of net-
worth and market capitalisation as of mid-July 2021.

The major promoters of the bank are NB International, Ireland (48.68%) and Rastriya Beema Sansthan (9.42%). Including
NB International, family members of Chaudhary Group own majority (~52%) stake in the bank. Mr. Anil Keshary Shah is
the Chief Executive Officer of the bank. The bank’s equity share is listed in Nepal Stock Exchange (NEPSE).

Nabil has entered into an acquisition agreement with Nepal Bangladesh Bank Limited (NBB) on January 13, 2022, with an
initial share swap ratio of 100:43. The bank, post-acquisition will be the largest bank in terms of asset base, net-worth
and capitalisation. Further, Nabil also acquired United Finance Limited (UFL), a national level class C financial institution
at a share swap ratio of 100:35 and commenced its joint operation from July 11, 2021.

Nabil has presence throughout the country through its 135 branches and 185 ATMs. Nabil has market share of 5.29% in
terms of deposit base and 5.34% of total advances in Nepalese commercial banking industry as on mid-October 2021.
Nabil reported a profit after tax of ~NPR 4,528 million during FY 2021 over an asset base of ~NPR 277,432 million as of
mid-July 2021, against profit after tax of ~NPR 3,463 million over an asset base of NPR 226,916 million as of mid-July
2020. During Q1 FY2022, the bank reported profit after tax of ~NPR 1,112 million over an asset base of ~NPR 290,388
million as of mid-October 2021. Nabil’s CRAR was 13.58% with Tier I capital of 10.69% and gross NPLs stood at 1.13% as
of mid-October 2021. In terms of technology platform, the bank has implemented Finacle across all its branches.

Key financial indicators

July 2019 July 2020 July 2021 October 2021
Year Ended
(Audited) (Audited) (Audited) (Provisional)
Net interest income 7,159 6,984 8,076 2,242
Profit before tax 6,041 5,095 6,255 1,589
Profit after tax 4,239 3,463 4,528 1,112
Loan and advances 132,486 153,011 205,131 213,593
Total assets 192,804 226,916 277,432 290,388

Operating ratios
Yield on average advances 11.44% 10.34% 8.12% 8.33%
Cost of deposits 5.43% 5.32% 4.26% 4.49%
Net interest margin/ATA 4.05% 3.33% 3.20% 3.16%
Non-interest income/ATA 1.23% 1.02% 0.94% 0.98%
Operating expenses/ATA 1.64% 1.51% 1.83% 1.66%
Credit provisions/ATA 0.23% 0.41% 0.33% 0.25%
PAT/ATA 2.40% 1.65% 1.80% 1.57%
PAT/net worth 19.37% 14.12% 15.16% 13.07%
Gross NPLs 0.74% 0.97% 0.84% 1.13%

1Business conglomerate led by Mr. Binod Chaudhary (listed in Forbes magazine as Nepal’s only billionaire); CG group has stakes in
diversified sector mainly manufacturing, trading, hospitality and financial sector.
 July 2019 July 2020 July 2021 October 2021
Year Ended
(Audited) (Audited) (Audited) (Provisional)
0+ days delinquencies 6.82% 6.86% 13.87% 12.17%

Capitalisation ratios
Capital adequacy ratio 12.50% 13.07% 12.77% 13.58%
Tier-I Capital 11.40% 10.90% 10.67% 10.69%
Net NPLs/net worth 1.03% 1.95% 2.10% 3.75%

Liquidity ratios
Total liquid assets/total liability 28.56% 30.27% 23.46% 23.24%
Total advances/total deposits 72.90%# 68.08%# 89.84%* 88.64%*
Source: Nabil, ICRA Nepal Research; Amount in NPR million unless mentioned otherwise
*CD ratio as per recent NRB guidelines
#CCD ratio as per earlier NRB guidelines

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

For further details please contact:

Analyst contacts
Mr. Sailesh Subedi (Tel No. +977-1-4419910/20)
sailesh@icranepal.com

Ms. Kushum Bhattrai (Tel No. +977-1-4419910/20)

kushum@icranepal.com

Mr. Bipin Timilsina (Tel No. +977-1-4419910/20)

bipin@icranepal.com

Relationship contacts
Ms. Barsha Shrestha (Tel. No. +977-1-4419910/20)
barsha@icranepal.com

About ICRA Nepal Limited

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