Fitch Affirms Sterling Bank Plc at ''B-''; Outlook Stable


Sunday, February 11, 2018 /08:55 AM /Fitch Ratings 

Fitch Ratings has affirmed Nigeria-based Sterling Bank Plc's Long-Term Issuer Default Rating (IDR) at 'B-' and National Long-Term Rating at 'BBB-(nga)'. The Outlook is Stable. 

A full list of rating actions is at the end of this rating action commentary. 

Key Rating Drivers

IDRS, Viability Rating and National Ratings

Sterling's IDRs are driven by its standalone creditworthiness as defined by its Viability Rating (VR). The VR is constrained by challenging operating conditions in Nigeria, the bank's modest franchise and developing business model, weaknesses in its financial profile, and its higher risk appetite than peers. These factors are counterbalanced by Sterling's coherent strategy, especially its business transformation initiatives, and strong management team. 

Sterling's financial profile is characterised by high credit concentrations, variable earnings and profitability, modest capital buffers based on its risk profile, and its structurally weak funding and liquidity profile. 

Sterling has high exposure to the oil and gas sector, representing 43.2% of gross loans at end-9M17, mainly to mid-sized corporates. Around 38% of the bank's loans at end-9M17 were in foreign currency, exposing it to currency volatility. Sterling's impaired loans ratio (based on IFRS) increased to 3.5% at end-9M17 from 1.7% at end-2016, arising mainly from the troubled oil and gas sector. Based on prudential requirements (all loans that are 90 days overdue), Sterling's NPL ratio was 6.1% at end-9M17. We believe Sterling's asset quality remains highly sensitive to loan concentrations by industry and obligor despite its impaired loans ratio and NPL ratio being below sector averages. 

There is inherent instability in Sterling's funding base. 40% of the bank's customer deposits are from corporates, which, in our view, are price-sensitive and less stable. These deposits are also predominately short-term, exposing the bank to significant structural asset-liability maturity mismatches. Additionally, the deposit base is highly concentrated. 

Sterling is addressing funding and liquidity risks by raising market funding, demonstrating good access to borrowed funds and debt securities issuance. Positively, we also note that the bank has successfully attracted more stable retail deposits, including strong growth in 'non-interest-bearing' deposits (albeit from a low base). With the rollout of the new strategy and franchise development, we expect structural weaknesses in the customer deposit base to be resolved over time. 

We believe the bank's capital buffers are low (Fitch Core Capital Ratio of 13.2% at end-9M17), particularly due to its sensitivity to concentration risks. Sterling reported a Basel II total capital adequacy ratio of 11.4% at end-9M17, a modest buffer against its regulatory minimum of 10%. In addition to higher retained earnings and by repositioning its balance sheet, the bank is expected to raise subordinated debt in the domestic market (which counts towards Tier 2 regulatory capital) to improve capital buffers. 

In the medium term, we expect Sterling's prospects to improve as the franchise strengthens with the expansion of its retail/SME and 'non-interest-bearing' lines and business reorganisation. 

Sterling's National Ratings reflect Fitch's opinion of its standalone creditworthiness relative to the best credits in the country. The National Long- and Short-Term Ratings of 'BBB-(nga)' and 'F3(nga)' take into account Sterling's overall risk profile relative to other Nigerian banks, including its limited franchise and weak financial metrics. 

Support Rating and Support Rating Floor

Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria's (B+/Negative) weak ability to provide support, particularly in foreign currency. In addition, there are no clear messages from the authorities regarding their willingness to support the banking system. Therefore, 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. 

Rating Sensitivities

IDRS, Viability Rating and National Ratings

The bank's IDRs are sensitive to rating action on its VR. This would most likely be triggered by material deterioration in asset quality that would add further pressure to Sterling's already weak capital position. Any pronounced instability in Sterling's funding profile could also put negative pressure on the bank's VR. 

The bank's National Ratings are sensitive to changes in its standalone creditworthiness relative to other Nigerian entities. 

Support Rating and Support Rating Floor

The Support Rating is potentially sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank. 

The rating actions are as follows: 

Long-Term Foreign-Currency IDR affirmed at 'B-'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'B'

Viability Rating affirmed at 'b-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

National Long-Term Rating affirmed at 'BBB-(nga)'

National Short-Term Rating affirmed at 'F3(nga)'


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