Reviews & Outlooks | |
Reviews & Outlooks | |
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Friday,
March 27, 2020 / 02:52 PM / by Fitch Ratings / Header Image
Credit: EcoGraphics
Fitch Ratings has downgraded the three-highest
rated banks in Nigeria, Zenith Bank
(Zenith), Guaranty
Trust Bank (GTB) and United Bank for
Africa (UBA), to Long-Term Issuer Default Rating (IDR) 'B' and Viability
Rating (VR) 'b'.
Fitch has also placed the Long-Term IDRs, VRs and
National Ratings of all 10 rated Nigerian banks (excluding Stanbic IBTC
Holdings (SIBTCH) and Stanbic IBTC Bank (SIBTC) - which are not assigned
VRs and IDRs) on Rating Watch Negative (RWN).
The RWN reflects our expectations that all Nigerian
banks will face material pressures from a weaker operating environment over the
next few months given the oil price crash, potential further devaluation of the
Nigerian naira and the impact of the COVID-19 pandemic on individuals and
businesses. While the full extent is not yet known, it is our view that 'b+'
VRs and 'B+' IDRs are no longer compatible with the deteriorated operating
environment.
Even before the current crisis, Fitch's sector
outlook for the Nigerian banking sector was negative, which reflected tough
operating conditions, including slow GDP growth, rising regulatory risks and
potential performance pressures. Fitch expects banks' credit profiles to suffer
from weaker asset quality and reduced profitability in the more severe downside
scenario.
Based on experiences from 2015/2016, we expect the
current oil price shock to adversely impact the oil and gas sector. This sector
accounts for around 30% of the banking sector' gross loans, of which a large
proportion was restructured during the previous crisis (some are still
classified as Stage 2 under IFRS 9). Our stress tests show that asset-quality
risks arising from deterioration of the banks' oil and gas exposures are the
biggest threat to their ratings. Additionally, we expect the non-oil segment to
be impacted by the slower economy, but also due to the COVID-19 crisis, which
could severely affect communities and industries. It would particularly test
the quality of consumer and SME loans.
Lower oil revenues also raise the prospect of a
material naira devaluation, which would put pressure on the banks' regulatory
capital ratios. However, given the banks' net long foreign-currency positions,
our stress tests show that in most cases the impact on Fitch Core Capital (FCC)
ratios is tolerable under several scenarios.
Nigerian banks have reasonable loss absorption
buffers, underpinned by strengthened capitalisation since the last crisis. In
the near term healthy earnings will continue to absorb larger credit losses but
future profits will be under pressure from slowing loan growth, reduced client
activity and higher levels of provisioning for expected credit losses under the
IFRS 9 accounting framework.
On balance, the near-term impact from the oil price
shock and COVID-19 on funding and liquidity is likely to be tolerable. The
primary risk is that lower oil revenues (and Nigeria's falling FX reserves)
could limit banks' access to foreign currency (FC) liquidity. Furthermore,
adverse global conditions could impede some banks in raising external
financing. Local-currency liquidity remains strong with banks funded mainly by
low-cost customer deposits.
The Central Bank of Nigeria (CBN) has announced
relief measures, which should alleviate some near-term asset-quality pressures.
These include requesting banks to restructure loan tenors and terms for
consumers and business that are most affected, particularly borrowers in the
oil and gas, agriculture and manufacturing sectors.
Fitch will resolve the RWN once it has assessed how
this economic shock impacts the banking system and the credit profiles of each
bank, as well as the banks' ability to adapt. Fitch expects to resolve the RWNs
in the next six months.
Key Rating Drivers
IDRs and VRs
The Long and Short-term IDRs of Nigerian banks are
driven by their standalone credit profiles as determined by their VRs.
Long-Term IDRs range from 'B' to 'B-', reflecting Nigeria's challenging and
volatile operating environment, which highly influences the banks' financial
and non-financial rating factors.
Asset-quality metrics, which have improved over the
last three years owing to restructuring, recoveries and write-offs, are likely
to deteriorate in 2020 due to the current shocks. This will also put increasing
pressure on earnings, profitability and capitalisation. The risks to funding
and liquidity are mainly from disruption in FC liquidity.
Support Ratings 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 FC. Therefore, the Support Rating Floor (SRF) of all
Nigerian banks is 'No Floor' and all Support Ratings (SRs) 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
The National Ratings reflect the creditworthiness
of the Nigerian banks relative to other issuers in Nigeria. The National
Ratings of SIBTCH and SIBTC are the highest in Nigeria, reflecting our view of
potential support from parent Standard Bank Group (BB+/Negative) if required.
The RWN on the 10 other commercial banks' National Ratings reflect our view
that their standalone credit profiles are weakening in the current downturn.
Senior Debt And Subordinated Debt
Where applicable, senior debt issued by banks is
rated at the same level as the bank's IDRs (or the National Long-Term Rating
for SIBTC) because in our view, the likelihood of default on these notes
reflects that of the bank.
Following the publication of Fitch's new Bank
Rating Criteria on 28 February 2020, the agency has downgraded Access Bank's
NGN30 billion subordinated bonds to 'A-(nga)' from 'A(nga)', two notches below
the bank's National Long-Term Rating. This reflects the revised baseline
notching for loss severity for this type of debt to two notches from one. Fitch
has placed Access' subordinated bonds on RWN, mirroring that on the bank's
Long-Term National Rating.
Rating Sensitivities
VRs, IDRs, National Ratings and Debt Ratings
Fitch will resolve the RWNs on the VRs and IDRs,
and their National Ratings by analysing the impact on each bank's overall
credit profile, and in particular on asset quality, performance, capital and
potentially liquidity and funding. We will also assess the timeliness and
effectiveness of respective managements' responses and adjustments in the
banks' strategies.
The resolution of the RWN will also factor in the
extent of the deterioration in the operating environment, as reflected in
particular by the performance of the overall economy, non-oil sector growth
prospects and credit demand levels for the sector.
Nigerian banks' ratings could remain at their
current levels if Fitch believes the operating environment is still supportive
of the current ratings, and in particular if asset quality holds up.
Given Nigeria's Country Ceiling of 'B+', SIBTCH's
and SIBTC's National Ratings could withstand up to a two-notch downgrade of
SBG's Long-Term FC IDR before they would be affected. Downside risk to the
ratings could also stem from a decline in SBG's willingness or ability to
provide support, or from a change in SBG's stake, resulting in a loss of
control.
Public Ratings With Credit Linkage To Other
Ratings
SIBTCH's and SIBTC's ratings are linked to the
ratings of SBG.
ESG Considerations
ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies).
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