Capital Intelligence announces credit rating action on National Bank of Yemen

The FSR is supported by NBY's high capital adequacy, continued profitability, good liquidity, and more advantageous position in the south of the country.

The Rating is constrained by the difficult environment, specifically severe weakness in the economy and the attendant risk to the Bank's financials.

NBY's stand alone financial profile and ratios are very good, but the Financial Strength Rating is currently lower than the profile would suggest because of the operating environment.

The Bank's Long- and Short-Term Foreign Currency (FC) Ratings were affirmed at 'B-' and 'C' respectively, reflecting the still very challenging operating environment. Accordingly, a 'Negative' Outlook is affirmed on the FC Ratings. The Support Rating is maintained at '3', reflecting the full government ownership, combined with the moderate capacity of the government to support the banking sector.

NBY, a wholly-owned Yemeni Government commercial bank, possesses a balance sheet with exposure mainly in the form of short-term Yemeni Treasury bills (T-bills), which formed around two-thirds of assets at end-September 2012. Central Bank of Yemen and other bank deposits are also significant relative to the balance sheet.

As a result, the capital adequacy ratio is extremely high given the zero risk -weight assigned to Yemeni T-bills. NBY has recorded a consistent record of profitability over the years, driven by interest earned on T-bills. Profitability remained relatively good to end-September 2012.

There remains significant credit risk in Yemen reflecting the ongoing economic and political challenges. All Yemeni commercial banks have been negatively impacted by the economic and security situation experienced by the country since early 2011. Nonetheless, there has been some slight recovery in the domestic environment in 2012, but many challenges remain.

NBY continues to be the best performing bank in Yemen, aided by a conservative management, which direct a well capitalised and liquid balance sheet. Non-performing loans (NPLs) rose in 2011, but declined to end-September 2012. However, NPLs are immaterial as the loan portfolio remains very small against total assets and capital. Nonetheless, the NPL ratio is high and is a reminder of the high risk operating environment.

NBY was established in 1969 in the former People's Democratic Republic of Yemen (South Yemen) as a state-owned institution to assume the business of a number of foreign banks that were nationalized at that time.

Following the unification of the two Yemeni states in May 1990, NBY extended its reach, but remains small by international standards, in part due to its conservative approach- more so than its competitors. As at end-September 2012, total assets amounted to YR120,567m (approximately $561m).