Fitch Ratings has assigned National Development Bank PLC's (NDB, A-(lka)/Rating Watch Negative (RWN)) proposed Sri Lankan rupee-denominated Basel III-compliant subordinated debentures of up to LKR6 billion a final National Long-Term Rating of 'BBB(lka)'/RWN.

The final rating is the same as the expected rating assigned on 12 May 2023 and follows the receipt of documents conforming to information already received. This is with the exception of the reduction in the size of the issuance to LKR6 billion, from LKR10 billion under the draft documentation.

The proposed debentures will mature in five years and will be listed on the Colombo Stock Exchange. The bank plans to use the proceeds to strengthen its Tier 2 capital base as well as to support bank's loan growth.

The bank expects the proposed debentures to qualify as Basel III-compliant regulatory Tier 2 capital. The debentures include a non-viability clause whereby they will convert to ordinary voting shares subject to the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

Key Rating Drivers

Fitch rates the proposed Basel III Tier 2 notes two notches below the bank's National Long-Term Rating of 'A-(lka)'. This reflects Fitch's baseline notching for loss severity for this type of debt, and our expectations of poor recoveries. There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption features.

NDB's National Long-Term Rating is used as the anchor rating for this instrument because the rating reflects the bank's standalone financial strength and best indicates the risk of the bank becoming non-viable.

The RWN on the subordinated debt stems from the RWN on the corresponding National Long-Term Rating. Fitch downgraded NDB's National Long-Term Rating on 12 January 2023 to 'A-(lka)', from 'A(lka)', following the national scale recalibration and maintained the rating on RWN. The RWN reflects the potential for the bank's creditworthiness relative to other entities on the Sri Lankan national ratings scale to further deteriorate amid the likelihood of capital and funding stress as the default risk on domestic debt increases while access to foreign-currency funding remains constrained.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A downgrade of the bank's National Long-Term Rating will lead to a downgrade of the subordinated debt rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade of the bank's National Long-Term Rating will lead to an upgrade of the subordinated debt rating. However, there is limited scope for upward rating action given the RWN.

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