Fitch Affirms Diamond Bank at ''B-''; Outlook Negative

Friday, February 9, 2018 /13:56 PM /Fitch Ratings 

Fitch Ratings has affirmed Diamond Bank Plc's Long-Term Issuer Default Rating (IDR) at 'B-'. The Outlook is Negative. Fitch has also affirmed all of Diamond's other ratings. A full list of rating actions is at the end of this rating action commentary. 

Key Rating Drivers

IDRS, Viability Rating and National Ratings
Diamond's IDRs are driven by the bank's intrinsic creditworthiness as defined by its Viability Rating (VR). Diamond's VR considers its vulnerable asset quality. Loan impairment charges are consistently above peers and impaired loans as a percentage of gross loans was 9.6% at end-9M17, well above the sector average for rated banks, as reported under IFRS. Reported impaired loans are not indicative of a very high level of problem loans. Around 20% of Diamond's loan portfolio is considered impaired under local prudential classification rules (90 days overdue). The bank has also restructured a sizeable proportion of its upstream oil portfolio. 

Asset quality is indicative of the challenging operating conditions in Nigeria, including tight liquidity in both local and foreign currency. Tight liquidity dates back to the sharp fall in oil prices, which has adversely impacted asset quality sector-wide. Liquidity in foreign currency is particularly tight at Diamond. The bank holds almost USD400 million of deposits from state oil enterprises, which should have been moved to the Central Bank of Nigeria under new federal regulations, but Diamond has been unable to meet this requirement given an acute shortage of dollars. 

High loan impairment charges (averaging around 5% of gross loans per year) undermine solid pre-impairment earnings, which are the strongest among mid-sized and small Nigerian banks. Strong pre-impairment earnings reflect a solid franchise, including a good base of retail deposits, providing a cheap local currency funding base. Cost efficiency is also stronger than peers. 

The Negative Outlook on Diamond's Long-Term IDR reflects a precarious foreign currency liquidity position and pressure on capital from asset quality weakness. 

Diamond's National Ratings are a reflection of its creditworthiness relative to the best credits in Nigeria. Diamond's National Ratings consider generally weaker financial metrics than peers. 

The senior debt rating is in line with the Long-Term IDR and has a Recovery Rating of 'RR4' indicating average recovery prospects. 

Support Rating and Support Rating Floor
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria's (B+/Negative) weak ability to provide support, particularly in foreign currency. In addition, there are no clear messages from the authorities regarding their willingness to support the banking system. Therefore, 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. 

Rating Sensitivities

IDRS, Viability Rating and National Ratings
Diamond's IDRs are sensitive to a rating action on its VR. Diamond's VR is sensitive to a material weakening of liquidity, particularly in foreign currency. It is also sensitive to a sharp deterioration in asset quality that would erode capital and threaten the bank's viability. An upgrade of the bank's VR would require a material improvement in the Nigerian operating environment and a significant improvement in the bank's financial metrics.

An upgrade of Diamond's IDRs may also result from sovereign support being factored into the bank's ratings. 

The Long-term Rating on Diamond's senior unsecured bond is sensitive to any change in Diamond's IDRs. 

Diamond's National Ratings are sensitive to a change in its creditworthiness relative to other Nigerian banks. 


Support Rating and Support Rating Floor
The Support Rating is potentially sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank. 

The rating actions are as follows: 
Long-Term IDR affirmed at 'B-'; Outlook Negative

Short-Term IDR affirmed at 'B'

Viability Rating affirmed at 'b-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

National Long-Term Rating affirmed at 'BB+(nga)'

National Short-Term Rating affirmed at 'B(nga)'

Senior unsecured long-term Rating affirmed at 'B-'/'RR4' 

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