Nigeria-Based Diamond Bank 'B- and B' And 'ngBB and ngB' Ratings Affirmed; Outlook Negative


Thursday, June 21, 2018 03:20 PM /S & P Global Ratings 

·     We expect Diamond Bank PLC's asset quality to remain a rating weakness over the next 12 months, despite the improved macroeconomic environment in Nigeria.


·   The bank will likely convert its banking license into a national license, thereby reducing the minimum regulatory capital requirement to 10% from 15% and decreasing the risk of a breach.

·   As a result, we are affirming our 'B-/B' and 'ngBB/ngB' ratings on Diamond Bank.

·   The negative outlook reflects the uncertainties related to recoveries on the bank's loan portfolio and the potential pressure on its foreign currency liquidity due to a large upcoming bond maturity.

S&P Global Ratings said today that it has affirmed its 'B-/B' long- and short-term issuer credit ratings on Nigeria-based Diamond Bank PLC. The outlook remains negative. 

At the same time, we affirmed our 'ngBB/ngB' long- and short-term Nigeria national scale ratings on the bank. 

The rating action reflects our expectations that Diamond Bank's asset quality metrics will remain under pressure over the next 12-18 months, following the rapid transition of loans through the arrears buckets in 2017. 

The deterioration of the bank's operating environment over the past two years and its significant concentration in vulnerable sectors have pushed its nonperforming loans (NPLs; including impaired loans and loans more than 90 days overdue but not impaired) to 42.5% of total loans at year-end 2017 compared with 26.8% at year-end 2016. Loan loss reserves (excluding regulatory risk reserves, which we include in our calculation of total adjusted capital) covered only a modest 17% of total NPLs at year-end 2017, which compared poorly with peers'. 

However, a high concentration of NPLs in the natural resources sector, improving oil prices and production, and an adequate level of collateral are helping loan recovery prospects. We expect credit losses to remain high at around 5% of total loans for the next 12-18 months, since the bank aims to improve its NPL coverage by loan loss provisions. If we do not observe any improvement in the bank's asset quality indicators over the next 12-18 months, the ratings would come under pressure. 

Following Diamond Bank's successful disposal of its West African subsidiaries, and imminent disposal of its U.K. subsidiary, we expect it will convert its license into a national banking license. The bank is also in the process of reducing its corporate lending activity and leveraging technology to develop its retail lending business. In this regard, Diamond Bank has established partnerships with several parties to enhance its digital banking offering. 

The conversion to a national license will reduce the bank's minimum capital requirement to 10% from 15%, thereby also decreasing the risk of breaching this requirement over the next 12-18 months. As of Dec. 31, 2017, the bank's regulatory capital adequacy ratio was 16.7%, up from 15.1% in 2016. Its risk-adjusted capital ratio had reached 5.3% at year-end 2017, following the exit from West Africa. 

However, we expect it will stabilize at 4.4%-4.7% over the next 12-18 months on the back of high impairment charges and the implementation of International Financial Reporting Standard No. 9. 

Systemwide U.S.-dollar liquidity pressure in Nigeria has abated, in our view, largely thanks to improved foreign currency reserves. Over the next 12 months, Diamond Bank will have to repay its maturing Eurobond principal of $200 million. Although the bank has a plan to repay the Eurobond in May 2019, any delays or other shock could weigh on the ratings. The bank's local currency funding and liquidity remain stable, supported by its strong retail franchise,which results in relatively low funding costs. 

The negative outlook reflects the uncertainties related to recovery prospects for the bank's loan portfolio and potential pressure on its foreign currency liquidity due to the Eurobond maturing over the next 12 months. We could lower the ratings if we do not see a significant improvement in the bank's asset quality indicators through recoveries, or if the bank's U.S. dollar liquidity tightens following repayment of the Eurobond. 

We could revise our outlook to stable if the bank shows significant improvement of its asset quality indicators and maintains adequate U.S. dollar liquidity buffers.

Proshare Nigeria Pvt. Ltd.

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