Fitch Revises Bank of Industry's Outlook to Stable; Affirms IDR at 'B'

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Tuesday, October 06, 2020 / 10:30 AM /by Fitch Ratings / Header Image Credit: Naija247 News

 

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Fitch Ratings has revised Nigeria-based Bank of Industry's (BOI) Outlook to Stable from Negative, while affirming the bank's Long-Term Issuer Default Rating (IDR) at 'B'. The Outlook change follows a similar rating actions taken on Nigeria's sovereign on 30 September 2020 (see: 'Fitch Revises Nigeria's Outlook to Stable, Affirms at 'B'").

 

Related Link: Fitch Revises Nigeria's Outlook to Stable, Affirms at 'B'

 

Key Rating Drivers

IDRs, Support Rating Floor and National Rating

 

The affirmation of BOI's 'B' Long- and Short-Term IDRs, 'B' Support Rating Floor (SRF) and Support Rating of '4' reflects Fitch's view of potential support the bank could receive from the Nigerian authorities in case of need. The revision of the Outlook on BOI's Long-Term IDR to Stable mirrors the Outlook on the sovereign.

 

Fitch has equalised BOI's Long-Term IDR and SRF with the Long-Term IDR of the sovereign as it believes that the Nigerian authorities have a high propensity to support BOI. Our assessment primarily reflects (i) the bank's important and clearly defined policy role in funding economic growth in Nigeria; (ii) its 99.9% state ownership, split between the Ministry of Finance (94.8%) and the Central Bank of Nigeria (CBN; 5.1%); and (iii) the entirety of the bank's wholesale funding being either provided or guaranteed by the Nigerian state. However, Fitch also views the ability of the authorities to support BOI as limited as indicated by Nigeria's 'B' Long-Term IDR.

 

BOI is Nigeria's primary development bank, with the sole mandate of financing the country's emerging industrial sector. The bank works closely with federal and state governments, and Nigerian banks, to meet its developmental objectives. BOI plays an important role in supporting important government policies and in providing counter-cyclical loans since the onset of the economic crisis resulting from the coronavirus pandemic.

 

BOI has successfully managed to diversify its resources in recent years. In March 2020, the bank secured a EUR1 billion loan facility from a syndicate of commercial banks and multilateral development banks, which is fully guaranteed by the CBN. We expect that it will serve to expand BOI's lending to priority sectors.

 

BOI maintains a solid capital base (end-1H20: equity-to-asset ratio of 24.4%), which is prudent for the bank's exposure to the volatile operating environment. Profitability is not a key objective; however, BOI continues to generate reasonable returns on equity driven by healthy net interest margins and, so far, moderate loan impairment charges.

 

The affirmation of BOI's Long-Term National Rating of 'AA+(nga)' reflects the bank's unchanged creditworthiness relative to that of other credits in Nigeria.

 

Viability Rating

As is usual for development banks, Fitch does not assign a Viability Rating to BOI. This is because its business model depends on state support and, in our view, could not be carried out on a commercial basis.

 

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • The most immediate upside rating sensitivity for BOI's IDRs and SRF is an upgrade of Nigeria's sovereign ratings. An upgrade of BOI's Support Rating would follow a multi-notch upgrade of Nigeria's sovereign rating.
  • BOI's National Ratings are sensitive to a positive change in Fitch's opinion of its creditworthiness relative to that of domestic peers.

 

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • The most immediate downside rating sensitivity for BOI's IDRs and SRF is a downgrade of Nigeria's sovereign ratings.
  • BOI's ratings are also sensitive to a reduced propensity of the authorities to support the bank. This could be indicated by a change in BOI's policy role, such as a shift into commercial activities, or a material reduction in government ownership. Our assessment is that this is unlikely in the foreseeable future.
  • BOI's National Ratings are sensitive to a negative change in Fitch's opinion of the bank's creditworthiness relative to that of domestic peers

 

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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