Thursday, September 20, 2018 / 09:26 AM / S & P Global Ratings
S&P Global Ratings today affirmed its 'B' long-term and 'B' short-term issuer credit ratings on Nigeria-based Zenith Bank PLC (Zenith). The outlook is stable. At the same
time, we affirmed our national scale ratings on the bank at 'ngA/ngA-1'.
The affirmation reflects our view that Zenith will continue to display better asset quality indicators than its domestic peers and sound revenue generation over the next 12-18 months despite the generally slow economic recovery in Nigeria.
As of June 30, 2018, Zenith had total assets of Nigerian naira (NGN) 5.3 trillion (approximately $15.3 billion), making it the second-largest bank in Nigeria. It has a strong corporate franchise in the country and displayed both healthy revenue generation and earnings stability, despite the challenging operating conditions in Nigeria over the past couple of years.
We assess Zenith's capital and earnings as moderate. The bank's S&P Global Ratings' risk-adjusted capital (RAC) ratio before adjustments reached 5.4% at end-2017, compared with 5.1% a year earlier. We expect this ratio will be 5.2%-5.5% over the next 12-18 months. We factor into our RAC calculation our expectations that loan growth will be 3% in 2018 and 10% in 2019, and that interest margins will show a slight increase (balancing our expectation of a reduction in expensive fixed deposits and redemption of its $500 million Eurobond in April 2019). We also consider Zenith's good fees and commission generation, and its dividend payout ratio of about 50%.
Zenith's asset quality metrics improved somewhat in the first half of 2018, with credit costs declining to 0.9% and coverage by loan loss reserves increasing to 229% (following the implementation of International Financial Reporting Standards [IFRS] 9 and including Stage 1 and Stage 2 provisions).
This compares with credit costs of 4.3% and a coverage ratio of 143% at year-end 2017. In the six months to June 30, 2018, nonperforming loans (NPLs) declined in absolute terms, but increased in relative terms. It accounted for 4.9% of the loan book, compared with 4.7% at year-end 2017. Although restructured exposures increased to around 12.6% of total loans at mid-2018, compared with 11.8% a year earlier, we expect asset quality indicators to remain broadly stable, because we do not anticipate material migrations of these exposures to NPLs. We therefore believe that the bank's cost of risk will stabilize at around 1.2% in the next 12-18 months.
Zenith is mainly deposit-funded, which has resulted in a stable funding base. It recorded a stable funding ratio of 151.4% on the back of a healthy proportion of deposit funding at mid-2018. Broad liquid assets covered 1.9x of total wholesale funding and net broad liquid assets accounted for 64.2% of short-term customer deposits at the same date. However, given the short-dated nature of the bank's deposit profile, which is a feature it shares with its domestic peers, Zenith's deposit base is confidence-sensitive.
The stable outlook on Zenith reflects that on Nigeria, and our expectation that the bank's earnings and asset quality metrics will remain broadly stable over the next 12-18 months.
We would lower the ratings on the bank if we lowered the ratings on Nigeria, or if we see a material deterioration in the bank's asset quality indicators.
An upgrade appears remote in the next 12 months, because it would hinge on an upgrade of Nigeria or a material strengthening of the bank's capitalization, all other factors remaining equal.