Reviews & Outlooks | |
Reviews & Outlooks | |
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Tuesday, October 06, 2020 / 1:51 PM /by Fitch Ratings/ Header Image Credit: Umaizi
Fitch Ratings has affirmed Sterling
Bank Plc's Long-Term Issuer Default Rating (IDR) at 'B-' and removed it
from Rating Watch Negative (RWN). The Outlook is Stable. Fitch has also
upgraded Sterling's National Long-Term Rating to 'BBB(nga)' from 'BBB-(nga)'.
The removal of the RWN on Sterling's
Long- and Short-Term IDRs, Viability Rating (VR) and National Ratings 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 Sterling's
credit profile is tolerable at the current rating level 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.
Debt relief measures are, nevertheless, 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 Stable Outlook on Sterling's Long-Term IDR
reflects our view that the bank's rating has sufficient headroom at this level
to absorb moderate shocks from sustained risks to the operating environment,
the heightened level of risk in doing banking business and the resulting risks
to the bank's financial performance over the next 12-18 months.
The upgrade of Sterling's National Long-Term Rating
reflects the reduction in impaired loans and improved capitalisation in recent
years.
Key Rating Drivers
Issuer Default Ratings And Viability
Rating
Sterling's IDRs are driven by its standalone creditworthiness,
as expressed by its 'b-' VR. The VR considers the bank's exposure to Nigeria's
volatile operating environment, its small franchise, its high credit
concentration risks, and its adequate capitalisation, which provides some
capacity to absorb credit losses from the downturn. Asset-quality erosion has
been moderate to date.
Sterling is a small Nigerian bank, accounting for 3%
and 4% of domestic banking system assets and customer deposits, respectively,
at end-2019.
As for peers, credit concentration is a key risk.
Single-borrower concentration is high, with the largest 20 customer exposures
measuring at 289% of Fitch Core Capital (FCC) at end-1H20. Furthermore,
sectoral concentration is high, with exposure to the oil and gas sector (over
half of which is to the riskier upstream and midstream segments) representing
33% of gross loans or 169% of FCC. Fitch recognises that exposure to the
sector, particularly relative to capital, has reduced significantly in recent
periods, which is positive for the credit profile. Nevertheless, high exposure
to the upstream oil and gas sector poses a significant risk to asset quality in
the event of a prolonged period of low oil prices and production cuts.
Sterling's impaired loans (Stage 3 loans under IFRS 9)
declined significantly to 2.1% at end-1H20 (from 8.7% at end-1H19) due to the
migration of a large oil and gas exposure to Stage 2 following consistent
performance on restructured terms. Specific coverage of impaired loans (44% at
end-1H20) is considered adequate in view of collateral coverage and recovery
expectations.
Sterling has a large stock of Stage 2 loans (15.4% of
gross loans at end-1H20) that are concentrated by single-borrower and are
derived from troubled sectors such as upstream oil and gas, power, and
aviation. Fitch considers that these loans, in addition to a material
proportion of loans that are benefitting from debt-relief measures (18% of
gross loans at end-1H20; primarily repayment moratoria), may lead to pressure
on asset quality. Net loans were 48% of total assets, and other assets are of
moderate to low risk, dominated by cash items and Nigerian government debt.
Nigeria's sovereign rating is 'B' with a Stable Outlook.
Sterling has adequate profitability, as highlighted by
operating returns over risk-weighted assets that have averaged 1.3% over the
past four full years. Profitability metrics are considerably lower than
higher-rated peers' due to a relatively weak net interest margin and high
cost-to-income ratio. Operating returns over risk-weighted assets increased to
1.5% in 1H20 (on an annualised basis, from 1.4% in 2019) as a result of an
improved cost of funding despite large loan impairment charges incurred in
response to the economic impact of the pandemic.
Capitalisation has improved significantly in recent
years and Sterling's FCC ratio (16.4% at end-1H20) compares favourably with
most similar-sized peers'. However, capitalisation is considered in the context
of high country and credit concentration risks. Sterling's total capital
adequacy ratio (15.5% at end-1H20) is comfortably above the bank's 10% minimum
regulatory requirement. A solid pre-impairment operating profit should cushion
the impact on capital from a potential spike in loan impairment charges.
Funding is mainly in the form of a customer deposits.
Sterling's deposit base is considered less stable than peers' given the bank's
greater reliance on term deposits (31% of customer deposits at end-1H20) and
only a moderate volume of deposits that are sourced from individual and SMEs
(26% of customer deposits at end-1H20). Single-depositor concentration is high,
with the largest 20 depositors accounting for 19% of customer deposits at
end-1H20. Local currency liquidity coverage is comfortable, but foreign
currency liquidity is tighter than peers', particularly in view of very high
single-depositor concentration in foreign currency.
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
Sterling's National Ratings reflect its
creditworthiness relative to other issuers in Nigeria and are driven by its
standalone strength. They are at the middle of the scale, primarily reflecting
a weak financial profile compared with higher-rated banks and sound
capitalisation compared to lower-rated banks.
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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