GCR Affirms ProvidusBank Plc's Issuer National Scale Long Term Rating; Outlook Stable

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Tuesday, July 06, 2021 / 09:08 AM / By GCR Ratings / Header Image Credit: ProvidusBank Plc


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GCR Ratings ("GCR") has affirmed ProvidusBank Plc's national scale long and short-term issuer ratings of BB(NG) and B(NG) respectively; with a Stable Outlook.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

ProvidusBank Plc

Long Term issuer

National

BB(NG)

Stable Outlook

Short Term issuer

National

B(NG)

Rating Rationale

The ratings accorded to ProvidusBank Plc ("ProvidusBank", "the bank") reflect its limited competitive position, relatively stable funding structure, intermediate capitalisation, adequate liquidity, and moderate risk position.


ProvidusBank ranks among the tier 3 banks in Nigeria, having a limited track record of about five years in the local commercial banking space. The bank controls a moderate market share of 0.8% and 0.9% in terms of the industry total assets and deposits respectively at FY20. Furthermore, ProvidusBank's competitive position is constrained by its evolving brand franchise, short track record, and limited local geographical diversification (being a regional licenced bank). Given the small customer base, concentration risk is high, with the twenty largest obligors and depositors constituting 46.1% and 51.9% of gross loans and deposits respectively at FY20. Though the bank operates with a regional licence and has only 10 branches, management confirmed to be serving customers across the country through aggregators, who are into agency banking, fintech, among others.


Capitalisation is viewed at an intermediate level, with the GCR core capital ratio closing FY20 at 18.1% (FY19: 20.5%). However, note is taken of the regulatory capital adequacy ratio ("CAR"), which although exceeded the regulatory minimum at 10.5% at FY20, has a very thin buffer. Looking ahead, the bank is currently in the process of a capital raise of about N6.5bn and, accordingly, we expect to see a significant improvement in the CAR at end-December 2021 notwithstanding the bank's aggressive loan growth pace.


ProvidusBank risk position is viewed to be contained, evidenced by the gross non-performing loans ("NPL") ending strongly below the Central Bank of Nigeria tolerable maximum limit of 5% and the industry average of about 6% at 2.6% at FY20 (FY19:4.4%). However, we believe that the strength of the bank's risk management is yet to be fully tested given its relatively short track record. Credit losses of 3.2% at FY20 is considered somewhat elevated, albeit in line with industry average of 3%. Concentration by obligor is considered moderately high, having the single and twenty largest exposures accounting for 3.4% and 46.1% respectively of the loan book at FY20. We expect a more diversified loan book over the short to medium term, as the bank continues to strategically expand its lending activities. In addition, foreign currency ("FCY") risk is considered minimal, with FCY constituting only about 6% of the exposures at FY20.


Funding and liquidity position is assessed at an intermediate level. ProvidusBank is largely funded through customer deposits, which has constituted around 70% of the funding base over the review period. The deposit book, which grew by almost 200% in FY20, reflected the bank's focus on the low-cost deposits, as the average cost of funds for the year was below 3%. Liquidity is good, evidenced by the highly liquid nature of the balance sheet over the review period. As at FY20, GCR liquid assets covered total wholesale funding moderately by 2.2x, while the ratio of GCR liquid asset to total customer deposits stood at 69% (FY19: 41.3%). In addition, the matching of assets and liabilities maturities at FY20 reflected cumulative liquidity buffer across the various maturity bands.

Outlook Statement

The Stable Outlook reflects GCR's expectations that the regulatory CAR will be boosted once the retained earnings is capitalised, and ongoing capital raise is successfully concluded. We also anticipate a better GCR core capital ratio, supported by sound internal capital generation and adequate loan loss reserving.

Rating Triggers

An upward rating could be triggered following a sustained improvement in the regulatory CAR, moderation in credit losses, while maintaining liquidity at a sound level. We may lower the ratings if asset quality materially deteriorates and/or if the regulatory CAR remains at its current level.


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