Reviews & Outlooks | |
Reviews & Outlooks | |
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Tuesday, October 06, 2020 / 5:52 AM /by Fitch Ratings / Header Image Credit: Vanguard News
Fitch Ratings has affirmed Access Bank
Plc's ' Long-Term Issuer Default Rating (IDR) at 'B' and removed it from
Rating Watch Negative (RWN). The Outlook is Negative.
The removal of Access's
Long-Term IDRs, Viability Rating (VR) and National Ratings from RWN reflects
Fitch's view of receding near-term risks to the bank's credit fundamentals from
the economic fallout arising from the oil price crash and coronavirus pandemic.
In our opinion, the impact of the economic
downturn on Access's
credit profile is largely contained at its current rating and it will take
several quarters before the full extent of the crisis on corporates and
households is seen in its financial metrics. Since the previous rating action
in March, regulatory forbearance on asset classification and banks' own debt
relief measures have significantly eased sector asset quality pressures.
Nevertheless, debt relief measures are temporary and with the eventual easing
of fiscal and monetary support from the Central Bank of Nigeria (CBN), there
remains a material risk that bank asset quality could deteriorate faster,
unless economic recovery gathers pace.
The Negative Outlook on Access's Long-Term IDR
reflects our view of sustained downside risks to the operating environment, the
heightened level of risk in doing banking business and resulting risks to its
capital as well as ongoing pressures on the bank's asset quality and earnings
over the next 12-18 months.
Key Rating Drivers
IDRS, VR, and Senior Debt Ratings
Access's IDRs and senior debt ratings are driven by
its intrinsic creditworthiness, as defined by its 'b' VR. Access's VR is
constrained by the volatile operating environment in Nigeria, which has a high
influence on the rating.
Access's impaired (IFRS 9 Stage 3) loans ratio
improved to 4.9% at end-1H20 (end-2019: 5.9%) due to improvements in risk
management practices, recoveries and write-offs. The bank's reserve coverage of
103% was among the highest in the sector at end-1H20.The quality and performance
of the loan book inherited from the Diamond Bank acquisition remains a relative
constraint on our overall assessment of asset quality.
Over the next few quarters, we expect a moderate
increase in Access's impaired (Stage 3) loan ratio with its customers exposed
to the recession, currency devaluation, US dollar shortages and distress in
certain key industry segments, especially the oil sector (at end-1H20: Access's
gross oil sector exposure formed 30% of gross loans and net exposure of 156% of
Fitch Core Capital). At end-1H20, the bank's gross loans that were subject to
debt relief was broadly in line with the peer group. The bank's stock of Stage
2 loans declined to 22% of gross loans at end-1H20 from 31% at end-2019. The
majority of these loans came from Diamond and while they may not migrate to
Stage 3 owing to prudent risk management, a longer track record of performance,
especially in the current credit cycle, would be an important rating driver.
Access will remain profitable in 2020 with 1H20
operating profit/risk-weighted assets at 3.8%, but performance metrics continue
to be weaker than direct peers. Under current conditions, like its peers,
Access will face the prospect of a prolonged period of lower earnings and
rising net impairment charges. More positively, the bank has seen a significant
decline in its cost of funding owing to an improving deposit mix
post-acquisition.
The bank's Fitch Core Capital (FCC) ratio of 14.3% at
end-1H20 (end-2019: 14.9%) is adequate for its risk profile but weaker than
direct peers partly due to the acquisition. We expect the bank's Tier 1 ratio
(end-1H20: 15.9%) and capital adequacy ratio (end-1H20: 20.4%) to remain
broadly stable over the next 12-18 months. Capital plans include higher
retained earnings, a reduction in risk-weighted assets (including asset sales)
and Tier 2 debt issuance. Access's dividend pay-out ratio (23.7% in 2019) is
among the lowest in the sector.
Access has a strong funding profile with low-cost
current and savings accounts reaching 66% of total deposits at end-1H20 thanks
to the acquisition. The bank will also benefit from the CBN lowering the floor
on saving rates. Customer deposits grew by 10% in 1H20 partly owing to the
expansion of the bank's digital channels and its financial inclusion
initiatives. The bank has good overall balance sheet liquidity but takes
foreign currency liquidity risk (and counterparty risk) through substantial
currency swaps with the CBN.
Support Rating and
Support Rating Floor
Sovereign support to banks cannot be relied on given
Nigeria's weak ability to provide support, particularly in foreign currency.
The Support Rating Floor of all Nigerian banks is 'No Floor' and all Support
Ratings are '5'. This reflects our view that senior creditors cannot rely on
receiving full and timely extraordinary support from the Nigerian sovereign if
any of the banks become non-viable
National Ratings
Access's National Ratings reflect its creditworthiness
relative to other issuers in Nigeria and are driven by its standalone strength.
They are lower than the highest rated Nigerian peers due to Access'
comparatively weaker profitability and capitalisation metrics. Access's
National Short-Term Rating of 'F1(nga)' is the lower of the two possible
options for the bank's 'A+(nga)' National Long-Term Rating under Fitch's
criteria, reflecting potential risks to funding and liquidity from market
instability.
Access's naira-denominated subordinated debt rating is
'A-(nga)', in line with the two-notch base case notching in our criteria.
Rating Sensitivities
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Best/Worst Case Rating
Scenario
International scale credit ratings of Financial
Institutions and Covered Bond issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a worst-case
rating downgrade scenario (defined as the 99th percentile of rating
transitions, measured in a negative direction) of four notches over three
years. The complete span of best- and worst-case scenario credit ratings for
all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario
credit ratings are based on historical performance.
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