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Moody's Affirms Ratings of Nigerian Banks Following Action On The Nigerian Government

Reviews & Outlooks	4042 VIEWS
Reviews & Outlooks
4042 VIEWS

Monday, December 09, 2019 / 04:36 PM / by Moody's Investors Service / Header Image Credit: Ecographics

Moody's Investors Service ("Moody's") has affirmed the B2 long-term local currency deposit ratings of the following Nigerian banks: Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Plc, Union Bank of Nigeria plc, Fidelity Bank plc, FCMB (First City Monument Bank) Limited and Sterling Bank Plc. The outlook on all the banks' long-term deposit ratings was changed to negative from stable.

The rating action follows Moody's decision to affirm Nigeria government's long-term issuer ratings of B2 and change its outlook to negative from stable on 04 December 2019.

Recall : Moody's Changes Nigeria's Sovereign Ratings Outlook to Negative From Stable; Affirms The B2 Ratings - Dec 05, 2019

Ratings Rationale

The affirmation of the ratings reflects the banks' financial profiles which have been generally resilient to the difficult operating environment in Nigeria. On average, the Nigerian banks benefit from good pre-provision profitability and capital positions; asset quality and foreign currency funding positions have improved over recent quarters, following the recession in 2016.

The change of outlook to negative from stable reflects the Nigerian banks' sizeable exposure to the sovereign debt securities and loans, averaging at 244% of the rated banks' capital bases as of June 2019, which links their credit profiles to that of the government. The rating agency also expects the banking sector to be challenged in maintaining the recent improving trend, particularly as regards asset quality, given the increasing bank lending in Nigeria's weak operating environment.

Affirmation Of Banks' Ratings

The affirmation of the ratings reflects Moody's expectation that Nigerian banks' profitability will remain resilient and the capital metrics stable over the next 12-18 months, with a tangible common equity as a percentage of Moody's-adjusted risk-weighted assets at about 16% in the next 12 months. Recent selective lending by banks has reduced the formation of new nonperforming loans (NPLs), which lessens the need for loan loss provisions and limits the erosion of profitability. Systemwide NPLs declined by 51% to NGN1.1 trillion as at 30 September 2019 from NGN2.2 trillion as at 30 September 2018, driven by a large decline in NPLs in the oil and gas sector. As result, the NPL ratio declined to 6.7% as at 30 September 2019 compared to 14.2% as at 30 September 2018. In addition, Nigerian banks are containing their operating cost as they migrate their clients to digital platforms and save on branch expansion.

The banks' foreign currency funding has also improved as banks cut back foreign-currency lending while building up foreign-currency deposits.

Negative Outlook Reflects Sovereign Outlook

The negative outlook on the banks' rating is primarily driven by the negative outlook on the Nigeria's government issuer rating given the banks' large holdings of Nigerian government securities which they hold for liquidity and investment purposes. The large stock of government securities and loans links the banks' credit profiles to that of the government. The rated banks' overall sovereign debt securities and loans exposure averaged 244% of their tangible capital bases as of June 2019. In view of the correlation between the sovereign and bank credit risk, the banks' standalone credit profiles and ratings are inevitably constrained by the rating of the government.

The rating agency also expects the banking sector to be challenged in maintaining the recent improving trend, particularly as regards asset quality, given the rising bank lending in Nigeria's weak operating environment. The rating agency expects GDP growth of just over 2% over the next few years, which will remain insufficient to create significant good quality lending opportunities for banks and it will unlikely improve borrowers' credit strength.

Moody's does not have any particular governance concern for the rated Nigerian banks, although the rating agency believes that their relatively high asset risks reflects banks' moderate risk governance culture. In terms of environmental considerations, Nigerian banks' high exposure to the oil and gas industry at about 28% of total loans as of October 2019 is an environmental risk that requires close monitoring, particularly as the transition to a low carbon economy accelerates.

What Could Move The Ratings Up/Down

Any deterioration in the creditworthiness of Nigeria would exert downward pressure on the banks' ratings, in view of their large holdings of sovereign debt securities. In addition, the banks could be downgraded if operating conditions are expected to worsen than is currently anticipated, constraining banks business activities while leading to higher asset risk and provisioning costs.

Conversely, any upwards rating momentum of the banks' ratings is limited given the negative outlook. However, some of the banks' outlooks could change back to stable if the sovereign rating outlook is stabilized and the banks maintain their resilient financial performance.

Bank-Specific Considerations

Access Bank Plc (Access)

The negative outlook reflects the negative outlook on Nigeria's government issuer rating, affecting the bank's credit profile as well as resulting in a lower ability to support the b3 baseline credit assessment (BCA). Access has a large exposure to the sovereign debt securities and loans at 338% of its tangible common equity at end of June 2019. Access's local currency deposit rating is B2 while the local currency national scale rating is A1.ng.

Access's b3 BCA reflects the bank's (1) relatively high asset risks, although improving, following the merger with Diamond Bank PLC (Diamond) and (2) higher leverage, with a total shareholders' equity-to-total assets ratio that is below peer average. These challenges are balanced against (1) our expectation that Access will extract long-term benefits from Diamond, particularly by improving its profitability (2) the bank's robust underwriting standards and risk management processes, and (3) the bank's deposit-based funding structure.

FCMB (First City Monument Bank) Limited (FCMB)

The negative outlook reflects the negative outlook on Nigeria's government issuer rating, affecting the bank's credit profile as well as resulting in a lower ability to support the b3 BCA. FCMB has a large exposure to sovereign debt securities and loans at 239% of its tangible common equity at end of June 2019. FCMB will likely be more exposed to negative pressure on its revenue generation capacity and its asset quality than its top-tier local peers due to its relatively small size and client base. FCMB's local currency deposit rating is B2 while the local currency national scale rating is A2.ng.

FCMB's b3 BCA reflects its (1) elevated credit risks stemming from high single-name and sector concentrations; and (2) relatively modest profitability levels compared with those of its top-tier local peers. These challenges are balanced against its (1) robust levels of tangible common equity compared with that of its global peers, (2) stable deposit-based funding structure, and (3) robust local-currency liquidity buffers.

Fidelity Bank plc (Fidelity)

The negative outlook reflects the negative outlook on Nigeria's government issuer rating affecting the bank's credit profile as well as resulting in a lower ability to support the b3 BCA. Fidelity has a large exposure to sovereign securities and loans at 196% of its tangible common equity as of June 2019. Fidelity will likely be more exposed to negative pressure on its revenue generation capacity and asset quality than its top-tier local peers due to its relatively small size and client base. Fidelity's local currency deposit rating is B2 while the local currency national scale rating is A2.ng.

Fidelity's b3 BCA reflects the bank's (1) relatively tight funding conditions, as reflected by its high, although improving, loan-to-customer deposit ratio; and (2) high proportion of foreign-currency loans. These challenges are mitigated by Fidelity's (1) relatively high provision coverage of NPLs; and (2) solid capital buffers with a tangible common equity-to-risk-weighted asset that is comparable to global peers, although the bank's capital buffer against the regulatory requirement is small.

First Bank of Nigeria Limited (First Bank)

First Bank's BCA of b3 reflects its (1) still-high stock of NPLs, although reducing, and (2) moderate capital buffers. These challenges are moderated by the bank's resilient pre-provision profitability and stable funding profile, which is supported by a large stock of liquid assets.

Guaranty Trust Bank Plc (Guaranty)

The negative outlook reflects the negative outlook on Nigeria's government issuer rating. Guaranty has a large exposure to government debt securities and loans at 136% of its tangible common equity at end of June 2019. Guaranty's local currency deposit rating is B2 while the local currency national scale rating is Aa3.ng.

Guaranty's BCA of b2 reflects its (1) resilient earnings generation capacity and robust capital buffers; (2) high liquidity buffers and its predominantly deposit funded balance sheet; and (3) robust franchise, which allows the bank to earn relatively higher margins and relatively low credit costs. These challenges are balanced against elevated single-name and sectoral concentration risks.

Union Bank of Nigeria Plc (Union)

The negative outlook reflects the negative outlook on Nigeria's government issuer rating, affecting the bank's credit profile as well as resulting in a lower ability to support the b3 BCA. Union has large exposure to government debt securities and loans at 211% of its tangible common equity as of June 2019. Union will likely be more exposed to negative pressure on its revenue generation capacity and asset quality than its top-tier local peers due to its relatively small size and client base. Union's local currency deposit rating is B2 while the local currency national scale rating is A2.ng.

Union's b3 BCA reflects the bank's (1) high asset risks and low coverage of NPLs by provisions, which increases the risk of capital erosion in case of loan losses; (2) weak efficiency and moderate profitability; and (3) still-tight, although improving, foreign-currency funding position. These challenges are moderated by the bank's stable deposit-based funding profile, particularly in local currency.

United Bank for Africa Plc (UBA)

The negative outlook reflects the negative outlook on Nigeria's government issuer rating. UBA has a large exposure to government debt securities and loans via its Nigerian operations that contributed 71% to its total assets as of June 2019. Total exposure to government securities was large at 231% of the bank's total shareholders' equity. UBA's local currency deposit rating is B2 while the local currency national scale rating is A1.ng.

UBA's b2 BCA reflects the bank's (1) moderate asset risk profile, supported by its relatively more diversified loan book than that of its local peers; (2) resilient profitability, which supports its capital buffers; and (3) predominantly deposit-funded balance sheet, which is supported by a solid pan-African franchise, and strong local-currency liquidity buffers. These strengths are counterbalanced by UBA's rising, although still moderate, dependence on confidence-sensitive funding.

Sterling Bank Plc (Sterling)

The negative outlook reflects the negative outlook on Nigeria's government issuer rating, affecting the bank's credit profile as well as resulting in a lower ability to support the b3 BCA. Sterling has a large exposure to government debt securities and loans at 275% of its tangible common equity as of June 2019. Sterling will likely be more exposed to negative pressure on its revenue generation capacity and its asset risk than its top-tier local peers due to its relatively small size and client base. Sterling's local currency deposit rating is B2 while the local currency national scale rating is A2.ng.

Sterling's b3 BCA reflects its (1) vulnerabilities in its asset quality because of high single-name and sector concentration risks; and (2) modest capital levels, especially in light of high asset risks and high foreign-currency loans. These challenges are balanced against the bank's deposit-based funding profile and stable local-currency liquidity.

Zenith Bank Plc (Zenith)

The negative outlook reflects the negative outlook on Nigeria's government issuer rating. Zenith has a large exposure to government debt securities and loans at 232% of its tangible common equity as of June 2019. Zenith's local currency deposit rating is B2 while the local currency national scale rating is Aa3.ng.

Zenith's BCA of b2 reflects the bank's (1) resilient earnings generating capacity and robust capital buffers, which together provide a buffer to withstand asset-quality deterioration; (2) high liquidity buffers and a predominantly deposit-funded balance sheet; and (3) robust franchise, which allows it to attract inexpensive deposits, relative to other Nigerian banks. These strengths are moderated by the bank's high proportion of more confidence-sensitive corporate deposits versus retail deposit.

List Of Affected Ratings

Issuer: Access Bank Plc

..Affirmations:

....Long-term Counterparty Risk Ratings (Local and Foreign Currency), affirmed B2

....NSR Long-term Counterparty Risk Ratings (Local and Foreign Currency), affirmed Aa3.ng

....Short-term Counterparty Risk Ratings (Local and Foreign Currency), affirmed NP

....NSR Short-term Counterparty Risk Ratings (Local and Foreign Currency), affirmed NG-1

....Long-term Bank Deposits (Foreign Currency), affirmed B3, outlook changed to Negative from Stable

....Long-term Bank Deposits (Local Currency), affirmed B2, outlook changed to Negative from Stable

....NSR Long-term Bank Deposits (Foreign Currency), affirmed A3.ng

....NSR Long-term Bank Deposits (Local Currency), affirmed A1.ng

....Short-term Bank Deposits (Local and Foreign Currency), affirmed NP

....NSR Short-term Bank Deposits (Foreign Currency), affirmed NG-2

....NSR Short-term Bank Deposits (Local Currency), affirmed NG-1

....Long-term Counterparty Risk Assessment, affirmed B2(cr)

....Short-term Counterparty Risk Assessment, affirmed NP(cr)

....Long-term Issuer Ratings (Local and Foreign Currency), affirmed B2, outlook changed to Negative from Stable

....Short-term Issuer Ratings (Local and Foreign Currency), affirmed NP

....Baseline Credit Assessment, affirmed b3

....Adjusted Baseline Credit Assessment, affirmed b3

....Senior Unsecured Regular Bond/Debenture (Local Currency), affirmed B2 , outlook changed to Negative from Stable

....NSR Senior Unsecured Regular Bond/Debenture (Local Currency), affirmed A1.ng

..Outlook Action:

....Outlook changed to Negative from Stable

Issuer: FCMB (First City Monument Bank) Limited