| Reviews & Outlooks |    1010 VIEWS  |
| Reviews & Outlooks | |
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Tuesday, April 07, 2020 09:34
AM / by S & P Global Ratings / Header Image Credit: Ecographics
S&P Global Ratings today lowered its long-term global scale
issuer credit ratings to 'B-' from 'B' on Access
Bank PLC (Access Bank), Ecobank Nigeria
Ltd. (Ecobank Nigeria), 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' short-term global
scale issuer credit ratings on these entities. We also lowered our Nigeria
national scale ratings to 'ngBBB' from 'ngA-' and affirmed our 'ngA-2'
short-term national scale ratings on Access, GTBank, Stanbic IBTC, UBA, and Zenith.
Related Link: Nigeria
Long-Term Rating Lowered To ''B-'' On Weakening External Position - Mar 27, 2020
We affirmed our 'B-/B' global scale long- and short-term ratings
on First
Bank of Nigeria Ltd. (FirstBank), Ecobank Transnational Inc.
(ETI), Fidelity Bank
PLC (Fidelity), and First City Monument Bank (FCMB).
We lowered our long and short-term national scale ratings to 'ngBBB-/ngA-3'
from 'ngBBB/ngA-2'on Fidelity, FCMB, and FirstBank.
Furthermore, we affirmed our 'ngBBB-/ngA-3' national scale ratings on FBN Holdings PLC (FBN
Holdings).
The rating actions follow the March. 26, 2020, lowering of the
foreign currency rating on Nigeria to 'B-' due to the country's weakening
external position tied to lower oil prices (see "Nigeria
Long-Term Rating Lowered To 'B-' On Weakening External Position Tied To Sharp
Fall In Oil Prices; Outlook Stable,"). 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, solvency, and liquidity. The banking sector is exposed to
high credit risk because of Nigeria's reliance on oil and its sensitivity to
currency depreciation and high inflation.
Given Nigeria's high reliance on oil revenue--over 85% of goods
exports and about half of fiscal revenue--lower oil prices in 2020 will
significantly hurt its external and fiscal positions. We estimate the economy
will expand by about 1.5% in 2020 (our previous estimate was 2.2%) and average
2.0% in 2020-2023. Risks remain on the downside to our forecast given the
rapidly evolving implications of COVID-19 for the global economy. Even our
revised base case of 1.5% growth in 2020 would result in significant pressure
on banks' asset quality and earnings because of their material exposure to the
sector, averaging 30% for rated entities.
An additional shock to asset quality and earnings would come from
our expectation of a weakening Nigerian naira (NGN) in 2020. Lower
foreign-exchange (FX) inflows tied to lower oil receipts are likely to present
policy challenges to the Central Bank of Nigeria (CBN) in the near term with
regard to exchange-rate and foreign-exchange-reserve policy. Since partially
liberalizing the naira (through the Nigerian Autonomous Foreign Exchange Fixing
Mechanism--NAFEX) in April 2017, the exchange rate has depreciated only
marginally. The CBN lowered its official exchange rate by about 15% in March
2020. However, we forecast the naira will weaken to NGN410/$1 in 2020 as FX
reserves will decline to close to $32 billion in 2020.
The 2016 oil price shock led to a significant restructuring of
banks' oil and gas exposures, particularly the downstream sector which depends
on government subsidies. We estimate that the effect of the current crisis will
be somewhat mitigated by the restructuring, which saw banks use lower
break-even prices of $25 per barrel (/bbl)-$40/bbl and restructure their
exposures using a pre-funded debt service reserve account that provides
three-to-six months of payment buffers during times of stress. That said, we
expect restructured loans to increase to 15%-18% in 2020, from about 10% in
2019, given our lower oil price assumptions. We expect nonperforming loans
(NPLs) will rise again to about 10% for rated banks compared with an estimated
6.3% in 2019. We forecast credit losses will increase to about 2.5% in 2020 and
normalize at 2% in 2021, compared with a record high of 5% following the 2016
crisis.
As a result, the sector's profitability will be weaker on the back
of higher impairments and lower net interest margins, due to a combination of
pressure on asset quality and limited participation in the CBN's securities
auctions. However, we still expect top-tier bank's financial performance to be
resilient with return on equity averaging 15%-16% in 2020, compared with about
8% for mid-tier banks.
We believe that the risk of banks breaching minimum capital
adequacy ratios could re-emerge if the naira weakens by more than 20%, which is
higher than our current assumption for 2020.
Rated banks have repaid most of their Eurobonds. In addition,
foreign-currency-denominated customer deposits account for about 20% of banks'
total deposits at year-end 2019 and are generally stable. Naira liquidity is
manageable for banks and the CBN has some flexibility to release additional
liquidity through the cash reserve requirement, which sits at a high 27.5%. The
extension of bank credit to the private sector will likely be subdued, despite
the CBN introducing a minimum loan-to-deposit ratio of 65% to boost credit
growth.
For these top-tier banks, we expect performance will
remain resilient despite clear pressure on earnings stemming from lower net
interest margins and higher credit losses. We continue to assess these
entities' stand-alone creditworthiness above the sovereign ratings.
For UBA, we project that higher impairments
will affect its bottom line and push its risk-adjusted capital (RAC) ratio (our
measure of bank capitalization) to weaker levels of 4.3%-4.5% in the next 12-24
months. For Access Bank, we expect RAC will remain weak
at below 4% through 2021, largely stemming from an increase of risk-weighted
assets following the acquisition of Diamond Bank in 2019. Although Access Bank managed to resolve distressed
loans inherited from the acquisition, we believe it will face challenges in
deploying its new capabilities and capitalizing on its larger customer base.
This will weigh on earnings in 2020, but we expect it will continue to manage
it capital adequacy at similar levels to peers with at least a 300 basis point
(bps) buffer. Furthermore, for GTBank a combination of weaker
profitability in 2020 and maintenance of its dividend policy is likely to
decrease the RAC ratio to about 6.5% by 2021, from an estimated 7.4% at
year-end 2019.
The stable outlooks on Access Bank, GTBank, UBA, and Zenith reflect that on Nigeria.
Downside scenario: We would lower the ratings on the banks over the next 12 months if
we observed increasing risk that Nigeria would not meet its capacity to repay
commercial obligations, either due to declining external liquidity or a
continued reduction in fiscal flexibility, which will likely affect banks' U.S.
dollar funding and liquidity positions.
Upside scenario: We would raise the ratings on the banks over the next 12 months if we were to take a positive rating action on Nigeria. This could happen if Nigeria experiences much stronger economic performance than we currently expect, or if external financing pressures prove to be temporary, all else being equal.
Our assessment of the group's stand-alone
creditworthiness reflect its weaker-than-peer-average credit losses and NPL
ratios. However, its starting point in the current crisis is stronger than
2016, since the group restructured and wrote-off a large portion of its NPLs.
We forecast our RAC ratio will remain weak, below 4% through 2021, while the
capital adequacy ratio (CAR) will likely be managed with a 200 bps buffer. We
equalize our ratings on the holding company despite its structural
subordination because there is no debt at FBN Holdings. We generally maintain a
two-notch difference between the operating company and nonoperating holding
company (NOHC) rating to reflect structural subordination.
The stable outlook on FirstBank, the main operating
bank of NOHC FBN Holdings, reflects our view that the
bank will maintain its regulatory capital (CAR) above the minimum requirement
of 15% and broadly stable liquidity profile over the next 12 months. The
outlook on FBN Holdings reflects that on the bank.
Downside scenario: We would lower the ratings on FirstBank over the next 12 months if
it breaches its minimum regulatory requirement stemming from a depreciation of
the naira beyond our expectations and a sharp deterioration of its asset
quality, or if we observe pressure on its U.S. dollar liquidity position due to
tighter supply in the sector.
We would lower the ratings on FBN Holdings if we
lowered the ratings on FirstBank or if we saw any emergence of leverage at the
NOHC level.
Upside scenario: A positive rating action on FirstBank over the next 12 months
would depend on the same action on Nigeria and the bank improving its
asset-quality indicators, all else being equal.
We would not raise the ratings on FBN Holdings if we raised the ratings on FirstBank, reflecting our view of the structural subordination of NOHC creditors.
The stable outlook on Ecobank Nigeria reflects that on
the sovereign.
Downside scenario: We would lower the rating on the bank over the next 12 months if
we lowered the rating on Nigeria. We would also lower the ratings if the bank
is in breach of its minimum capital adequacy ratio stemming from higher credit
losses than we forecast, combined with a significant weakening of the naira, or
if we observed pressure on the bank's U.S. dollar liquidity position as a
result of tighter supply in the banking sector.
Upside scenario: We would raise the ratings on the bank over the next 12 months if
we take a similar action on the sovereign, all else being equal, including our
expectation that it will remain core to the group.
The stable outlook on ETI reflects our expectation that the
group's asset quality and financial performance will remain broadly stable over
the next 12 months. We expect that the group can maintain adequate liquidity at
the holding company level in response to its high double leverage.
Downside scenario: We would lower the ratings on ETI in our forecast horizon if liquidity
buffers that mitigate its double leverage significantly diminished.
Upside scenario: We consider an upgrade of ETI to be unlikely within our forecast
horizon of 12 months.
The group's asset quality has historically been less resilient through the cycle. That said, we still expect our RAC ratio to be about 6% in 2022. We assess the SACP at 'b-' and no longer add any notches of support because of the sovereign rating cap. However, we continue to view it as strategically important to its South African parent, Standard Bank Group.
The stable outlook on Stanbic IBTC reflects that on the
sovereign.
Downside scenario: We would lower the ratings on the bank over the next 12 months if
observed increasing risks that Nigeria would not meet its capacity to repay
commercial obligations, either due to declining external liquidity or a
continued reduction in fiscal flexibility. We would also take action if we
observed pressure on the bank's U.S. dollar liquidity position as a result of
tighter supply in the banking sector.
Upside scenario: We would raise the ratings on the bank if we take a similar action
on the sovereign, all else being equal, including our expectation of group
support from its parent Standard Bank Group over the next 12 months.
Our 'b-' SACP reflects the banks' relative position in
the competitive Nigerian banking sector, with smaller market share and higher
cost of funds, as well as its vulnerability through the cycle. We expect credit
losses and asset quality will be under pressure, but to a lesser extent than
experienced during the 2016 crisis following a series of restructurings and
write offs. We forecast RAC will remain weak at 4.0%-4.5% for Fidelity and
4.0%-4.5% for FCMB. However, we do not see material
pressure on the CAR if the naira weakens by 10% against the U.S. dollar.
The stable outlooks on Fidelity and FCMB reflect our expectation that the banks
will maintain stable capital adequacy and adequate liquidity over the next 12
months.
Downside scenario: We would lower our ratings on either bank if they breach their
minimum capital adequacy ratios due to a significant depreciation of the naira,
or if we observed pressure on their U.S. dollar liquidity positions as a result
of tighter supply in the banking sector.
Upside scenario: A positive rating action is unlikely in the next 12 months and
would require a material improvement in macroeconomic conditions in Nigeria,
all else being equal.
Related Links
Related News - Rating Agencies on Nigeria
Related News - Rating Agencies on Banks
Related News - Rating Agencies on Selected
Companies and Notes
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