Fitch Revises Zenith Bank's Outlook to Stable; Affirms at 'B' Plus


Wednesday, November 28, 2018 10:03 AM / Fitch Ratings


Fitch Ratings has revised the Outlook on Zenith Bank's (Zenith) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the rating at 'B+'. The bank's Viability Rating (VR) has been affirmed at 'b+' and Support Rating at '5'. Fitch has also upgraded Zenith's National Long-Term Rating to 'AA(nga)' from 'AA-(nga)'. A full list of rating actions is below.


Key Rating Drivers

IDRs, National Ratings And VR

The revision of the Outlook to Stable mirrors the recent rating action on the Nigerian sovereign. As with all Nigerian banks, Zenith's VR is constrained by the operating environment in Nigeria. The fragile economic recovery restrains banks' growth prospects and asset quality. The IDRs of Zenith are driven by its standalone creditworthiness, as defined by the VR. VR of Zenith reflects its position as one of the country's largest banks, as well as its sound financial metrics and reasonable capital buffers. The VR also takes into account a highly concentrated loan book. 

Zenith's VR is among the highest assigned by Fitch to a Nigerian bank. This reflects Zenith's established franchise in Nigeria where the bank controls an overall market share of around 16%. The franchise is particularly strong in the prime corporate segment. Given strong revenue generation capacity, Zenith's loss-absorption capacity is strong relative to peers' and management has demonstrated its ability to deliver good performance through volatile operating cycles. 

Fitch has a high opinion of Zenith's management team. Decision-making is well spread across a broad number of executives to minimise reliance on individuals. Achieving targets in a volatile operating environment can be difficult but Zenith's execution is strong relative to peers'. The bank's strategy is primarily to continue to service prime corporates operating in Nigeria. 

Under IFRS 9, Zenith's impaired loans/stage 3 ratio increased to 10.7% at end-1H18, from an IAS 39 ratio of 4.7% at end-2017. The increase can be explained by the adoption of the new standard that captures any regulatory forbearance and exposures that are 90 days past due but not impaired. Concentrations remain prominent, as is the case for many Nigerian banks. Lending to the oil and gas sector is in line with the market average at around 30% of total loans, and the top 20 loans represent around a quarter of total loans, which is lower than comparative figures reported by other large Nigerian banks. 

Zenith's loan loss allowance coverage of impaired loans ratio decreased to 104.8% at end-1H18 from 143.4% at end-2017, driven by the inclusion of stage 3 loans in the denominator. Despite the decrease, coverage of gross loans by loan loss allowances increased to 11.2% at end-1H18 from 6.7% at end-2017. Fitch views such high levels of coverage as appropriate given loan book concentrations in a sometimes volatile operating environment. 

Zenith's capital adequacy ratios are among the strongest in Nigeria and leverage ratios have historically proven stable. Nevertheless, capital ratios were subject to a one-off adjustment due to the implementation of IFRS 9. The bank's Fitch Core Capital (FCC) ratio declined to 21.7% at end-1H18 from 27% at end-2017 as IFRS 9's opening adjustment was equivalent to 362bp of end-2017 risk-weighted assets (RWAs). 

Zenith's overall profitability (operating profit/RWAs) of 6.7% remains superior to the sector average of 4.8% in 1H18. The bank's below-average margins are offset by a notably lower cost-to-income ratio, and by loan impairment charges (relative to pre-impairment operating profit) that remain lower than the sector norm. 

As with most Nigerian banks, customer deposits provide the bulk of funding (72% of total non-equity funding at end-1H18). Deposits from corporate customers represent on average 60% of total deposits. Zenith issued a five-year USD500 million senior bond in the international capital markets in June 2017. The bank's ability to access international market funding, even in times of stress for Nigeria's economy, is credit-positive, in our view, providing the bank with funding diversification and access to longer-term finance.

The Long-Term National Rating has been upgraded to 'AA(nga)' from 'AA-(nga)', reflecting a reassessment of Zenith's creditworthiness relative to the country's best credits and relative to peers operating 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. In addition, there are no clear messages of support from the authorities regarding their willingness to support the banking system. Therefore, the Support Rating Floor of all Nigerian banks is at 'No Floor' and all Support Ratings are at '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, VR And National Ratings

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 because the bulk of the bank's activities are concentrated in the domestic economy and correlations between the sovereign and banking sector are high. The Stable Outlook on the sovereign rating suggests changes are not expected in the foreseeable future. 

The VR of Zenith 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.


Support Rating And Support Rating Floor

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.


Senior Debt

Ratings on the senior debt will change in line with the bank's IDRs.


The rating actions are as follows: 

Zenith Bank Plc

Long-Term IDR affirmed at 'B+'; Outlook Revised to Stable from Negative

Short-Term IDR affirmed at 'B'

Viability Rating affirmed at 'b+'

National Long-Term Rating: upgraded to 'AA(nga)' from 'AA-(nga)'

Short-Term National Rating affirmed at 'F1+(nga)'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor' 

Long-term senior unsecured debt issues affirmed at 'B+'

Short-term senior unsecured debt affirmed at 'B'


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