Tuesday, October 06, 2020 / 1:51 PM /by Fitch Ratings/ Header Image Credit: Umaizi
Fitch Ratings has affirmed Sterling Bank Plc's Long-Term Issuer Default Rating (IDR) at 'B-' and removed it from Rating Watch Negative (RWN). The Outlook is Stable. Fitch has also upgraded Sterling's National Long-Term Rating to 'BBB(nga)' from 'BBB-(nga)'.
The removal of the RWN on Sterling's Long- and Short-Term IDRs, Viability Rating (VR) and National Ratings reflects Fitch's view of receding near-term risks to the bank's credit fundamentals from the economic fallout arising from the oil price crash and coronavirus pandemic.
In our opinion the impact of the economic downturn on Sterling's credit profile is tolerable at the current rating level and it will take several quarters before the full extent of the crisis on corporates and households is seen in its financial metrics. Since the previous rating action in March, regulatory forbearance on asset classification and banks' own debt-relief measures have significantly eased sector asset quality pressures. Debt relief measures are, nevertheless, temporary and with the eventual easing of fiscal and monetary support from the Central Bank of Nigeria (CBN), there remains a material risk that bank asset quality could deteriorate faster, unless economic recovery gathers pace.
The Stable Outlook on Sterling's Long-Term IDR reflects our view that the bank's rating has sufficient headroom at this level to absorb moderate shocks from sustained risks to the operating environment, the heightened level of risk in doing banking business and the resulting risks to the bank's financial performance over the next 12-18 months.
The upgrade of Sterling's National Long-Term Rating reflects the reduction in impaired loans and improved capitalisation in recent years.
Key Rating Drivers
Issuer Default Ratings And Viability Rating
Sterling's IDRs are driven by its standalone creditworthiness, as expressed by its 'b-' VR. The VR considers the bank's exposure to Nigeria's volatile operating environment, its small franchise, its high credit concentration risks, and its adequate capitalisation, which provides some capacity to absorb credit losses from the downturn. Asset-quality erosion has been moderate to date.
Sterling is a small Nigerian bank, accounting for 3% and 4% of domestic banking system assets and customer deposits, respectively, at end-2019.
As for peers, credit concentration is a key risk. Single-borrower concentration is high, with the largest 20 customer exposures measuring at 289% of Fitch Core Capital (FCC) at end-1H20. Furthermore, sectoral concentration is high, with exposure to the oil and gas sector (over half of which is to the riskier upstream and midstream segments) representing 33% of gross loans or 169% of FCC. Fitch recognises that exposure to the sector, particularly relative to capital, has reduced significantly in recent periods, which is positive for the credit profile. Nevertheless, high exposure to the upstream oil and gas sector poses a significant risk to asset quality in the event of a prolonged period of low oil prices and production cuts.
Sterling's impaired loans (Stage 3 loans under IFRS 9) declined significantly to 2.1% at end-1H20 (from 8.7% at end-1H19) due to the migration of a large oil and gas exposure to Stage 2 following consistent performance on restructured terms. Specific coverage of impaired loans (44% at end-1H20) is considered adequate in view of collateral coverage and recovery expectations.
Sterling has a large stock of Stage 2 loans (15.4% of gross loans at end-1H20) that are concentrated by single-borrower and are derived from troubled sectors such as upstream oil and gas, power, and aviation. Fitch considers that these loans, in addition to a material proportion of loans that are benefitting from debt-relief measures (18% of gross loans at end-1H20; primarily repayment moratoria), may lead to pressure on asset quality. Net loans were 48% of total assets, and other assets are of moderate to low risk, dominated by cash items and Nigerian government debt. Nigeria's sovereign rating is 'B' with a Stable Outlook.
Sterling has adequate profitability, as highlighted by operating returns over risk-weighted assets that have averaged 1.3% over the past four full years. Profitability metrics are considerably lower than higher-rated peers' due to a relatively weak net interest margin and high cost-to-income ratio. Operating returns over risk-weighted assets increased to 1.5% in 1H20 (on an annualised basis, from 1.4% in 2019) as a result of an improved cost of funding despite large loan impairment charges incurred in response to the economic impact of the pandemic.
Capitalisation has improved significantly in recent years and Sterling's FCC ratio (16.4% at end-1H20) compares favourably with most similar-sized peers'. However, capitalisation is considered in the context of high country and credit concentration risks. Sterling's total capital adequacy ratio (15.5% at end-1H20) is comfortably above the bank's 10% minimum regulatory requirement. A solid pre-impairment operating profit should cushion the impact on capital from a potential spike in loan impairment charges.
Funding is mainly in the form of a customer deposits. Sterling's deposit base is considered less stable than peers' given the bank's greater reliance on term deposits (31% of customer deposits at end-1H20) and only a moderate volume of deposits that are sourced from individual and SMEs (26% of customer deposits at end-1H20). Single-depositor concentration is high, with the largest 20 depositors accounting for 19% of customer deposits at end-1H20. Local currency liquidity coverage is comfortable, but foreign currency liquidity is tighter than peers', particularly in view of very high single-depositor concentration in foreign currency.
Support Rating And Support Rating Floor
Sovereign support to banks cannot be relied on given Nigeria's weak ability to provide support, particularly in foreign currency. 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.
Sterling's National Ratings reflect its creditworthiness relative to other issuers in Nigeria and are driven by its standalone strength. They are at the middle of the scale, primarily reflecting a weak financial profile compared with higher-rated banks and sound capitalisation compared to lower-rated banks.
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.
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