Outlooks On Six Nigerian Banks Revised To Negative After Same Action On Sovereign

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Friday, March 06, 2020 / 06:37 PM / by S& P Global Ratings / Header Image Credit: EcoGraphics        

 

  • On Feb. 28, 2020, S&P Global Ratings revised its outlook on Nigeria to negative on weakening foreign-exchange (FX) reserves stemming from a current account deficit, and rising debt levels amid weak economic growth.
  • We do not rate financial institutions in Nigeria above the foreign currency sovereign ratings, due to the direct and indirect effect sovereign distress would have on banks' operations.
  • We are therefore revising to negative from stable our outlooks on six banks and affirming our 'B/B' long- and short-term issuer credit ratings.
  • At the same time, we are lowering by one notch our long- and short-term national scale ratings on five of the six banks.

 

S&P Global Ratings today revised its outlooks to negative from stable on Access Bank PLC (Access), Ecobank Nigeria Ltd. (ENG), Guaranty Trust Bank PLC (GTBank), Stanbic IBTC Bank PLC (Stanbic IBTC), United Bank for Africa Plc (UBA), and Zenith Bank PLC (Zenith). We affirmed our 'B/B' long- and short-term global scale issuer credit ratings on these entities. We also lowered to 'ngA-/ngA-2' from 'ngA/ngA-1' our Nigeria national scale ratings on Access, GTBank, Stanbic IBTC, UBA, and Zenith.

 

The rating actions follow the outlook revision on the foreign currency rating on Nigeria on Feb. 28, 2020, (see "Nigeria Outlook Revised to Negative On Falling Foreign Exchange Reserves; 'B/B' Ratings Affirmed). We do not rate financial institutions in Nigeria above the foreign currency sovereign ratings, due to the direct and indirect effects that sovereign distress would have on banks' operations. The banking sector is exposed to inherently high economic imbalances because of Nigeria's reliance on oil and its sensitivity to currency depreciation and high inflation. This leaves banks vulnerable to asset-price shocks and asset-quality problems.

 

Related Link: Nigeria's Outlook Revised To Negative On Falling Foreign Exchange Reserves

 

We revised our outlook on the sovereign to negative because of risks stemming from further FX pressures, ongoing weak economic performance, and rising government domestic and external debt. We estimate the 2019 current account deficit widened to 1.5%, owing largely to an increase in the goods and services import bill. This, and a lack of external issuances, caused reserves to decline to about $38 billion in January 2020. Furthermore, to counter declining reserves the Central Bank of Nigeria (CBN) continued to sell CBN bills to nonresidents and banks. In October 2019, local nonbank participants were restricted from participating in CBN auctions resulting in a large portion of CBN bills being held by nonresidents. These holdings could be subject to changing foreign investor sentiment and a potential sell-off, thereby creating risks to current reserve levels. Given these risks, we have added CBN bills (and overdraft facilities from the central bank to the general government) to general government debt. Therefore, our estimate of general government debt, net of liquid assets, is now 39% of GDP in 2020-2023.

 

Nigeria's growth rates remain low relative to peers' with similar wealth levels, and GDP per capita is declining. The extension of bank credit to the private sector is still weak, although in its most recent measure to boost credit, the CBN encouraged banks to increase lending by maintaining a minimum loan-to-deposit ratio of 65%. Nigeria's private-sector leverage is low in absolute terms and compares well with peers'. We expect that private-sector credit will average less than 20% of GDP over 2020-2021. This is explained by banks' muted risk appetite in current economic conditions. That said, we could see some momentum in retail lending stemming from banks' digital transformations to transactional banking. As a result of the above, we anticipate higher credit growth of 10%-15% in 2020-2021, stemming both from the CBN's regulatory intervention and an appetite for new business growth from the banking sector. Credit growth could accelerate even further provided oil prices do not decline below our base-case assumption of $50 per barrel. The banking sector's asset quality is likely to improve gradually, with credit losses normalizing at about 2% through 2021. This will in turn support banks' profitability and capitalization. Banks will continue to focus on loan recoveries and closely monitor their restructured loans, which should normalize at about 10% of total loans in 2020.

 

We continue to think the sector will remain stable as long as banks can navigate unpredictable regulatory changes. The sector's profitability trend has been positive through the cycle and earnings volatility has stayed generally in line with banks' competitive positions in the system. Return on equity averaged 13.7% for rated banks during 2015-2018 and we forecast it will average 17%-20% in 2020-2021. We expect core earnings will continue to be resilient at 2.5%-3.0% of average adjusted assets in 2020 despite multiple regulatory pressures. We anticipate sector-wide pressure on revenue following the recent regulatory intervention to restrict banks from participating in government securities auctions.

 

We believe banks' regulatory capitalization is less at risk today than it was in 2016. Systemwide pressures on U.S. dollar funding and liquidity eased when the CBN introduced the Nigerian Autonomous Foreign Exchange Fixing Mechanism in 2017, while external liabilities of the public and financial sectors have been rising substantially.

 

We see a stable economic risk trend, reflecting the banking sector's slow asset-quality recovery. We forecast the banking sector's credit losses will moderate at about 2% of total loans amid broadly flat or marginally positive credit growth in real terms in 2020-2021. We could improve our view of economic risk in Nigeria if we see more robust economic growth, which in turn would support lending growth.

 

The industry risk trend is stable, reflecting our expectation that competitive dynamics, while intensifying, will support a stable and profitable banking sector over the next 12-24 months. Nigerian banks are better positioned to adopt the additional buffer for domestic systemically important banks now given that they implemented International Financial Reporting Standards 9 in 2018 using their regulatory risk reserves. Furthermore, although systemwide pressures on U.S. dollar funding and liquidity have eased, we consider banks' net external position remains a tail risk given the managed FX regime.

 

Outlooks

Access Bank PLC, Guaranty Trust Bank PLC, United Bank for Africa Plc, and Zenith Bank PLC

The negative outlooks on Access, GTBank, UBA, and Zenith reflect that of Nigeria.

 

Downside scenario.  We would lower the ratings on the banks if we were to take a negative rating action on Nigeria (B/Negative/B). This could happen if Nigeria's international reserves decline markedly, external debt rises significantly faster than our current assumptions, or if our projections of gradual fiscal consolidation do not materialize.

 

Upside scenario.  We would revise the outlook to stable if we take a similar action on the sovereign, all else being equal. This could happen if FX reserve levels rose, or fiscal deficits were to reduce faster than we project.

 

Ecobank Nigeria Ltd.

The negative outlook on ENG reflects that of Nigeria. It also reflects our expectation of group support over the next 12 months.

 

Downside scenario.  We would lower the rating on the bank if we lowered the rating on Nigeria. This could happen if Nigeria's international reserves decline markedly, external debt rises significantly faster than our current assumptions, or if our projections of gradual fiscal consolidation do not materialize. We would also lower the ratings if we observed a significantly lower likelihood of extraordinary support from the parent, Ecobank Transnational Incorporated.

 

Upside scenario.  We would revise the outlook on the bank to stable if we take a similar action on the sovereign, all else being equal. This could happen of FX reserve levels rose, or if fiscal deficits were to reduce faster than we project.

 

Stanbic IBTC Bank Plc

The negative outlook on Stanbic IBTC reflects that on Nigeria. It also reflects our expectation of group support over the next 12 months.

 

Downside scenario.  We would lower the rating on the bank if we lowered the rating on Nigeria. This could happen if Nigeria's international reserves decline markedly, external debt rises significantly faster than our current assumptions, or if our projections of gradual fiscal consolidation do not materialize. We would also lower the ratings if we observed a significantly lower likelihood of extraordinary support from the parent, Standard Bank Group.

 

Upside scenario.  We would revise the outlook on the bank to stable if we take a similar action on the sovereign, all else being equal. This could happen of FX reserve levels rose, or if fiscal deficits were to reduce faster than we project.


Proshare Nigeria Pvt. Ltd.

 

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4.      Moody's Changes Nigeria's Sovereign Ratings Outlook to Negative From Stable; Affirms The B2 Ratings

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10.  Nigeria in the New Decade: Priority for Accelerated Growth, Job Creation and Poverty Reduction

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