Wednesday, March 08, 2017 2.42 PM / S&P Global Ratings
• Diamond Bank's foreign currency liquidity is easing as the Central Bank of Nigeria improves the supply of U.S. dollar to the market.
• The bank has managed to maintain its capitalization just above the regulatory minimum, although earnings are vulnerable to ongoing high risk costs.
• We are affirming our global scale ratings on Diamond Bank at 'B-/C' and our national scale ratings at 'ngBB/B' and removing the ratings from CreditWatch with negative implications.
• The negative outlook reflects Diamond Bank's small cushionof capital above the regulatory minimums and ongoing asset quality and earnings pressure.
S&P Global Ratings said today that it had affirmed its long- and short-term counterparty credit ratings on Nigeria-based Diamond Bank PLC at 'B-/C'. The outlook is negative.
We also affirmed our long- and short-term Nigeria national scale ratings on the bank at 'ngBB/B'.
We removed the long-and short-term global scale and long-term national scale ratings from CreditWatch with negative implications, where we placed them on June 22, 2016.
We believe Diamond Bank's foreign currency liquidity risk has somewhat alleviated in early 2017, thanks to the Central Bank of Nigeria's increasing the supply of U.S. dollars to the market.
We understand this has helped the bank lower its outstanding off-balance-sheet liabilities to more manageable levels. We believe the liquidity of the U.S. dollar balance sheet to be tight,but refinancing doesn't appear to be as challenging as in 2016.
Nevertheless, in our opinion, Diamond Bank's regulatory capital adequacy ratio of 15.6% on Sept. 30, 2016, offers only a thin buffer above the 15.0% statutory minimum with which to absorb any unexpected losses or accommodate another devaluation of the naira.
We anticipate that the bank's loan-loss experience will remain a challenge for internal capital generation in 2016, and that the bank will likely sustain a weak risk-adjusted capital (RAC) ratio, according to our own RAC framework, in the 4%-5% range.
As of the third quarter of 2016, the bank recorded a cost of risk of 5.5% and loan-loss reserving dipped to around 62% (excluding the regulatory risk reserve), which we consider modest for the currently weak economic environment and depressed asset values in relation to liquidity in Nigeria.
The bank has a leading franchise position in retail and small business banking in Nigeria. This segment has helped Diamond Bank acquire new customers, increase transaction volumes (especially through electronic channels), and sustain funding costs at around 3%--one of the lowest in the sector.
However, this has not translated into advantages in extending loans to top-quality corporates in Nigeria, compared with its top-tier peers with similar funding costs.
The negative outlook reflects the combined pressure on capital and risk. We believe Diamond Bank will face sustained credit losses over the next 12-18 months of 4%-5%, which will keep earnings--and therefore also internal capital generation--at low levels over the same period.
Given the currently thin cushion above the 15% minimum regulatory capital adequacy, we believe there remains a one-in-three possibility that the bank could be put under regulatory forbearance, excluding any significant unanticipated management actions, should earnings be weaker than anticipated or if another naira devaluation takes place.
We would lower the ratings if the bank is placed under regulatory forbearance or if there is a reversion to high foreign currency liquidity risks.
We could revise the outlook to stable if the bank's capital adequacy, earnings, and capitalization improve, alongside the ongoing alleviation of U.S. dollar liquidity risks.
1. Diamond Bank Plc - Earnings Sink on Higher Loan Loss Expense