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Thursday,
October 31, 2019 /02:46PM / By Fitch Ratings/ Header
Image Credit: @CNBC
Fitch Ratings has affirmed Nigeria-based Zenith Bank's Long-Term Issuer Default Rating (IDR) at 'B+' with a Stable Outlook and Viability Rating (VR) at 'b+'.
Key
Rating Drivers
IDRs,
National Ratings And VR
Zenith's Long- and Short-Term IDRs are driven by its standalone creditworthiness, as captured by its VR. Zenith's VR is highly influenced by the domestic operating environment, reflecting weak GDP growth, policy uncertainty and increasing regulatory risks.
Zenith's VR is among the highest assigned by Fitch to a Nigerian bank and reflects the bank's well-entrenched domestic franchise and market share. Zenith is particularly strong in the prime corporate segment with a growing focus on retail banking. The bank's franchise strength, management quality and clear strategy have allowed it to outperform peers through several cycles.
Zenith's financial metrics are also strong compared with peers. Solid earnings generation and profitability (operating profit/risk-weighted assets of 7.1% in 1H19) reflect good margins, high levels of non-interest revenue and good cost control. Loan impairment charges have increased moderately and reflect some asset quality deterioration.
Zenith's impaired loans/IFRS 9 Stage 3 ratio was 8.5% at end-1H19 (slightly up from 9.0% at end-2018) with loan loss allowance coverage at a comfortable 90%. Impaired loans rose in 2018 from consistently low levels due to a single large problem loan, highlighting the bank's sensitivity to credit concentrations by obligor and industry. With recoveries and write-offs our expectation is that the impaired loan ratio will start to decline by end-2020.
The bank's high capitalisation is a rating strength, with a regulatory total capital adequacy ratio of 23.4% at end-1H19. This is comfortably above the minimum 15% regulatory requirement (excluding its DSIB buffer). Strong profitability and high levels of internal capital generation (dividend payout ratio of 50%) underpin capitalisation.
Zenith is
primarily deposit funded and attracts low-cost corporate and institutional
deposits. However, some of these deposits are also confidence and price
sensitive, particularly its foreign currency domiciliary deposits (end-1H19:
27% of total customer deposits). As one of Nigeria's leading banks, Zenith has
good access to market funding. In September 2019, the bank redeemed USD392.6
million of its USD500 million senior unsecured bond due 2022, partly because of
its stronger liquidity position.
Zenith's National Ratings reflect the bank's strong creditworthiness relative to other
issuers in Nigeria.
Senior Debt
Senior debt
issued by Zenith is rated at the same level as the bank's IDRs because in our
view, the likelihood of default on these notes reflects that of the bank. Where
a bank has a Long-Term IDR of 'B+' or below, we usually assign a Recovery
Rating (RR) to the issue. The RR assigned to these notes is '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+/Stable) weak ability to provide support, particularly in foreign
currency. 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,
Support Ratings, National Ratings And Senior Debt
Zenith's IDRs are sensitive to a rating action on the bank's VR, which in turn is primarily sensitive to our assessment of the operating environment in Nigeria. This is because the bulk of the bank's activities are concentrated in the domestic economy and there is a high correlation between sovereign and banking sector risks.
Zenith's VR is also sensitive to significant deterioration in its asset quality and a resultant weakening of its loss absorption capacity. However, this is not our base case. Upside to the ratings is limited given the operating environment.
Zenith's National Ratings are sensitive to a change in the bank's creditworthiness relative to other Nigerian banks.
The Support
Rating and Support Rating Floor are sensitive to a change in assumptions around
the propensity or ability of the sovereign to provide timely support to the
bank. Given Nigeria's sovereign ratings, this is not our base case.
Ratings on
the senior debt will change in line with the bank's IDRs.
Environment,
Social And Governance Scores
The highest
level of environmental, social and governance (ESG) credit relevance for Zenith
is a score of 3. ESG issues are credit-neutral or have only a minimal impact on
the entity, either due to their nature or to the way in which they are being
managed by the entity.
The rating
actions are as follows:
Long-Term
IDR affirmed at 'B+'; Outlook Stable
Short-Term
IDR affirmed at 'B'
Viability
Rating affirmed at 'b+'
Support
Rating affirmed at '5'
Support
Rating Floor 'No Floor';
National
Long-Term Rating affirmed at 'AA(nga)'
National
Short-Term Rating affirmed at 'F1+(nga)'
Long-term
senior unsecured debt affirmed at 'B+'/RR4
Short-term
senior unsecured debt issues affirmed at 'B'
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