Guaranty Trust Bank
Fitch Ratings has affirmed Guaranty Trust Bank Limited's (GTB) Long-Term Issuer Default Rating (IDR) at 'B' and Viability Rating (VR) at 'b'. The Outlook is Stable.
The Stable Outlook reflects Fitch's view that risks to GTB's credit profile are captured at the current rating level, with sufficient headroom, under our base case, to absorb the fallout from operating-environment pressures.
Key Rating Drivers
IDRS and VR
The ratings of GTB are driven by its intrinsic creditworthiness, as defined by its 'b' VR. The VR takes into consideration its business concentration and sensitivity to Nigeria's volatile operating environment, which is mitigated by solid capitalisation, healthy asset quality, solid through-the-cycle profitability and a deposit-driven funding profile.
GTB is the fifth-largest banking group in Nigeria by asset at end-1H21. Its loan book forms a small proportion of total assets (33% at end-1H21) but is concentrated by borrower and sector. GTB's impaired (stage 3 under IFRS 9) loan ratio fell to 6% at end-1H21 from 6.4% at end-2020, due to recoveries and write-offs. We expect only modest asset-quality deterioration over the next 18 months, notwithstanding its material oil and gas exposure and significant Stage 2 loans, given higher oil prices and sound collateralisation.
Oil and gas loans formed 43% of the loan book at end-1H21 and were mainly to the upstream sector. However, this book performed well in 2020, partly reflecting higher-than-expected oil prices and financial hedges taken out by borrowers to reduce the risk of lower oil prices. Nevertheless, we believe a prolonged period of lower prices would put heightened stress on borrowers and on GTB's asset quality - although this is not our base case.
Stage 2 loans were a significant 16% of gross loans end-1H21 and largely comprised lumpy restructured loans (18% of gross loans in total) concentrated in the oil and gas sector. Reserves coverage of Stage 2 loans was 7%.
GTB's profitability is a rating strength and remains robust, despite weakening in 1H21, due to lower yields on securities (end-1H21: 23% of total assets), and competition for corporate customers, as a result of which lending margins contracted in 1H21. Profitability is underpinned by wide margins and consistently low loan impairment charges.
Operating profit/risk-weighted assets fell to 6.3%, well below the bank's 9% four-year average, but still outperformed most peers'. Non-interest income, mainly from fees, rose in 1H21 and should continue to relieve some pressure on earnings, as should group diversification initiatives from cross selling via the holding company, Guaranty Trust Holding Co.
Capitalisation is a rating strength. GTB's Fitch Core Capital (FCC; 26% at end-1H21) is at the higher end among peers' and the bank's capital adequacy ratio (24%) provides a solid buffer over regulatory requirements. Its tangible leverage ratio (a high 15.5%) also outperforms peers'. Capitalisation is supported by high pre-impairment profit, which provides a solid buffer (1H21 annualised: equal to 11% of average loans) to absorb losses through the income statement.
Nevertheless, capitalisation remains sensitive to naira devaluation due to GTB's dollarised balance sheet (end-1H21 foreign-currency (FC) loans: 53%), borrower concentration and a high amount of Stage 2 loans. Furthermore, while its Nigerian sovereign securities exposure is significantly below peers', it is high relative to the bank's equity.
The bank is predominantly deposit-funded. Its funding mix continues to benefit from a large base of low-cost current and savings accounts, which formed 87% of total deposits at end-1H21. Its loans/deposits ratio was 47%. We expect funding costs to start to rise as customer demand for T-bills and term deposits increases, in line with a recent uptick in yields. Naira liquidity is ample, supported by large cash placements at the Central Bank of Nigeria and, predominantly, Nigerian government securities. FC liquidity is adequate despite scarcity in the Nigerian economy.
The National Ratings of GTB reflect its creditworthiness relative to that of other issuers in Nigeria and are driven by its standalone strength. Its creditworthiness is high among peers', reflecting a strong company profile and solid financial metrics, including above-peer-average capitalisation. GTB's National Short-Term Rating 'F1+' is the only option for an 'AA(nga)' National Long-Term Rating under Fitch's criteria.
Support Rating And Support Rating Floor
Sovereign support to banks cannot be relied on given Nigeria's weak ability to provide support, particularly in FC. The Support Rating Floor of all Nigerian banks is 'No Floor' and all Support Ratings are '5'. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.