INTERNATIONAL ratings agency Fitch has given contrasting ratings on the debt standing of National Commercial Bank (NCB) of Jamaica and TransJamaican Highway (TJH), operator of Jamaica’s Highway 2000 toll road.
Fitch has affirmed NCB’s Long-Term Foreign and Local Currency Issuer Default Rating (IDR) of B+ with a negative outlook, while TJH has gotten a BB- rating with a stable outlook on its senior secured notes.
At the same time, Fitch has been assigned NCB with a viability rating of B+. According to Fitch, “The negative outlook on NCB reflects that downside risks remain for NCB’s credit profile, given the economic implications of the coronavirus pandemic reflected in the negative outlook for the operating environment score.”
Fitch believes the deep recession of at least 10.5 per cent in 2020 will result in asset quality deterioration and will weigh on the bank’s profitability. NCB’s IDRs are driven by its viability rating, which reflects its stand-alone creditworthiness that is highly influenced by Fitch’s assessment of Jamaica’s operating environment and the bank’s company profile.
The international ratings agency believes “the operating environment impacted by the deep economic recession set challenges on the banking system’s financial performance, and consequently NCB’s financial performance”. It says NCB’s company profile is a key strength due to its strong, local competitive position as the largest bank in Jamaica with a consolidated market share of assets of 39 per cent and deposits of 33 per cent at September 2020.
NCB ENTERED PANDEMIC WITH REASONABLE ASSET QUALITY
Fitch is of the view that NCB entered the economic downturn with reasonable asset quality for its rating category. As of September 2020, the 90-day past due ratio slightly increased to 2.7 per cent in 2020, up from 2.5 per cent as at financial year 2019, mainly due to the deterioration of the consumer credit segment which is 45 per cent of the total portfolio.
Similarly, stage three loans increased to 3.1 per cent at financial year 2020, up from 2.5 per cent at 2019. Asset quality ratios remained relatively stable and benefited mainly from relief programmes for the consumer segment.
Fitch, in its assessment, reports that as of September 2020, 20 per cent of NCB’s loan portfolio was under the relief programme. The sound-impaired loan reserve coverage of 136 per cent provides protection in the current operating environment.
Fitch expects the bank’s non-performing loan portfolio ratio to increase in 2021 during the restructured loans season, while considering the significant exposure to sensitive sectors to the crisis such as tourism.
LOAN IMPAIRMENT LIKELY TO RISE
Operating profit to average total assets ratio decreased to 1.2 per cent at financial year 2020, down from the 3.04 per cent recorded in the previous financial year in 2019. This was as a result of the significant increase in loan impairment charges mostly due to the estimation of expected losses because of higher stage II loans and also from lower, non-interest income related to gains on the bank’s securities portfolio and the insurance business.
Fitch expects that profitability will remain under pressure and lower than pre-pandemic levels in 2021, reflecting high credit costs and lower business volumes. The bank’s capital ratio of tangible common equity to tangible assets reduced to 13.3 per cent at financial year 2020 from the 16.1 per cent recorded in 2019.
This reflected lower earnings, higher asset growth, and increased intangible assets. Fitch expects NCB’s loss-absorption capacity to remain sound in 2021, driven by sound reserves coverage and the expected re-capitalisation of total results.
The ratings agency assessed NCB’s liquidity position as being sound and strengthened as core deposits grew by 18 per cent for 2020. Accordingly, the loan-to-deposit ratio improved to 81 per cent at end-September 2020 (FYE 2019: 87.6%), as deposits increased their share in the total funding mix.
The bank benefits from a well-diversified and low-cost deposit base that covers more than one-half of the bank’s funding needs (57 per cent at FYE 2019), and also NCB has proven access to local and global capital and debt markets.
Despite the Government’s record of having provided extraordinary support to the banking system during prior crises, Fitch reports that NCB’s support rating of ‘4’ reflects uncertainties about the sovereign’s ability to provide support in light of its high level of indebtedness.
With its BB- rating, TJH fared better than NCB.
Fitch reports that while traffic on the toll road has been affected due to the effects of the coronavirus pandemic, the company’s debt situation has enough security margins to absorb the negative impact as expected and to maintain its credit quality at levels sufficient to keep the current rating.
In giving its rationale for the rating Fitch argues that, “the rating reflects the stability and resiliency of a commuting asset strategically located in the outskirts of Kingston, Jamaica’s capital city. The rating is also supported by a satisfactory rate-setting mechanism which allows tariffs to be adjusted annually by US inflation and the variations in foreigncurrency rate between the Jamaican dollar and the US dollar”.
TJH’s debt is senior secured with typical project finance features that include limitations on additional indebtedness. According to Fitch, the debt’s “rating case minimum and average debt service coverage ratio (DSCR) are at 1.6x and 2.0x, respectively, which are viewed as strong for the rating category according to applicable criteria”.
It says the transaction presents robust break-even values for its most important variables and no dependency on traffic growth in order to repay the rated debt. Furthermore, it withstands domestic economic shocks beyond those observed between 2008-2014 when the Jamaican economy deeply deteriorated, supporting a rating above that of the Jamaican sovereign (B+/ROS) but constrained by Jamaica’s country ceiling of ‘BB-‘.
NO GREAT IMPAIRMENT FROM COVID-19
Fitch points out that while the most recent available performance data may not have indicated impairment as a result of the pandemic, “material changes in revenue and cost profile are occurring across the transportation sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation” .
The toll road is the main link between the capital city of Jamaica, Kingston, and other populated urban and industrial centres, including the cities of Portmore and May Pen. The asset is currently the only high-speed roadway serving the western part of Kingston’s metropolitan area, with an estimated population of 1.4 million people along the corridor.
TJH 2020 PERFORMANCE
During 2020, the annual average daily traffic totalled 56,268 vehicles, which is above Fitch’s rating case projection of 53,357 vehicles. While Fitch expected a traffic decline of 20 per cent for 2020, actual traffic decline was 15 per cent.
Revenue achieved is slightly above Fitch’s expectation of US$44,2 million, as a result of a milder traffic contraction. Tariff increases were applied in September of 2020 instead of July of 2020 due to the coronavirus pandemic situation.