May 2009 Financial News

S&P lowers Republic Bank’s counterparty credit rating

May 20, 2009

The Standard & Poor’s ratings agency last week lowered its counterparty credit rating on Republic Bank Ltd (RBL) to ‘BBB-/A-3’ from ‘BBB/A-2’ as a result of concerns over the possibility that the bank’s related party loans to the CL Financial group could go sour.

The rating agency had placed Republic on credit watch on February 3 following the revelation by the Central Bank that it had agreed to bail out Clico and other subsidiaries of the CL Financial Group. CL Financial owns a 55 per cent stake in Republic Bank, which was worth $7.5 billion at yesterday’s $86 share price. S&P stated that Republic’s outlook is stable.

“The bank’s financial profile has recently deteriorated to a situation similar to that of 2004 and 2005, when it had a ‘BBB-’ rating,” said Standard & Poor’s credit analyst Leonardo Bravo. Counterparty credit rating evaluates of the creditworthiness of both public and private financial institutions and financial service entities—whether or not the rated company issues in the public debt markets. S&P stated on February 3, 2009, it put the ratings on RBL on credit watch with “developing implications” as the T&T government intervened in Clico Insurance Company Ltd, the largest insurance company in the country and RBL’s main shareholder.

The ratings on T&T-based RBL reflect the bank’s leading market position in the country, its stable financial performance, and the country’s adequate economic prospects in the medium-term. The bank’s geographic diversification in the Caribbean is also a long-term positive rating factor. “However, we see pressure on profits from increasing non-performing assets in 2009 and 2010, a balance sheet that relies on short-term funding, and strong competition in the Caribbean region as challenges. “The increase in non-performing assets, mainly due to large, related-party delinquencies, highlights the bank’s significant client concentration and the material impact that this could have on its financial profile.” “We think that the loan portfolio’s performance could remain under pressure in 2009 and 2010 due to an even more adverse economic environment in T&T.

Nonetheless, the bank has been able to maintain its deposit base and maintain a good loan-to-deposit ratio of less than 75 per cent amid the current difficult economic conditions. Adjusted capitalisation of more than 12 per cent is consistent with that of other banks in the ‘BBB’ category,” stated a release from Standard & Poor’s Credit Research. S&P Credit Research provides analysis on issuers and debt obligations of corporations, states and municipalities, financial institutions, insurance companies and sovereign governments. S&P stated that on February 3, when it placed RBL on credit watch, it expected the bank’s asset quality to remain stable, with non-performing assets at 2 per cent to 3 per cent of total assets, in 2008 and 2009.

The level of 4.3 per cent as of March 2009 is higher than expected, close to the 4.6 per cent level of 2004, and higher than the 3.5 per cent level of 2005, when the bank had a ‘BBB-’ rating. “We think that non-performing assets could continue increasing in 2009 and 2010 in a less favorable economy in T&T. We expect the economy to grow by a negative 0.5 per cent in 2009 and about 3 per cent in 2010. Given the concentration of the loan portfolio, a large client’s default would further pressure asset quality,” S&P stated.

Source: Trinidad Guardian-http://guardian.co.tt/business/business/2009/05/20/sp-lowers-republic-bank-s-counterparty-credit-rating
Date: 20-05-2009