Fitch Ratings has downgraded National Development Bank (NDB) national long-term rating to AA- with a ‘Stable Outlook’ as a result of possible increase in bank’s risk profile due to a change in its business model.

“The downgrade reflects Fitch's expectation that NDB's risk profile will materially increase as a result of its changing business model, from being a well-capitalised, specialised project lender to a new entrant in a highly competitive domestic commercial banking sector.”

“Project loans have reduced as share of total loans to 14 percent in 2012 from 58 percent in 2005. Its shift towards SME and retail lending will, in Fitch's opinion, materially alter the bank's risk profile,
notwithstanding the diversification benefits provided by growth in these sectors,” Fitch Ratings said.

The rating agency further noted that NDB is still lagging its larger commercial banking peers, specifically in terms of its franchise in lending and deposits and that it may face challenges in gaining critical mass across key product segments.

However, Fitch noted that these risks are counterbalanced by the bank's satisfactory risk management policies, its prudent approach to provisioning, as well as by its satisfactory track record as a project lender.

Its historical track record as a project lender allows it to benefit from longer-term wholesale funding. Other present attributes from its current business, such as high capitalisation and a low non-performing
loan (NPL) ratio, are likely to diminish as NDB increasingly shifts to SME and retail lending.

NDB’s core Tier 1 capital adequacy ratio (CAR) was strong at 18.8 percent at end-2012 (2011: 14.4 percent), bolstered by a one-time capital gain on the disposal of its insurance subsidiary. However,
Fitch expects this ratio to reduce in the long-term in line with expected asset growth, but to remain satisfactory for the current ratings.

NDB's asset quality is strong compared with its rated peers. Its regulatory non-performing loan (NPL) ratio stood at 1.31 percent at end-2012, compared with a peer median of 3.1 percent.

Fitch has also downgraded the bank's outstanding subordinated redeemable debentures to 'A+' from 'AA-'.