Wednesday, November 07, 2018 02:06 PM / S & P Global Ratings
S&P Global Ratings lowered its long- and short-term issuer credit ratings on Nigeria-based Diamond Bank PLC to 'CCC+/C' from 'B-/B'. The outlook is negative.
Furthermore, we lowered our long- and short-term Nigeria national scale ratings on the bank to 'ngBB-/ngB' from 'ngBBB-/ngA-3'.
At the same time, we lowered our issue rating on the bank's senior unsecured debt to 'CCC+' from 'B-'.
The rating action reflects that we consider Diamond Bank to be currently dependent on favorable business, financial, and economic conditions to meet its financial obligations.
We believe that Diamond Bank will have to set aside higher provisions than we initially expected, following the adoption of International Financial Reporting Standard No. 9 (IFRS 9), which implies weaker asset quality than we expected and exerts significant pressure on the bank's capitalization.
Following Diamond Bank's successful disposal of its West African subsidiaries, and imminent disposal of its U.K. subsidiary, we expect it will convert its license into a national banking license. The license conversion would mean a lower minimum capital adequacy ratio (10% versus 15% currently) and lower risk of breach. However, the timing is uncertain, and we consider that there is significant pressure on its capital position. Moreover, four of the bank's 13 board members have resigned recently, which could create instability if left unresolved in the near term.
As of Dec. 31, 2017, the bank's regulatory capital adequacy ratio reached 16.7%. It dropped to 16.3% in Sept. 30, 2018, on the back of IFRS 9 implementation and amortization of tier-2 capital instruments. The initial implementation of IFRS 9 resulted in the bank taking a Nigerian naira (NGN) 2.5 billion (approximately $7 million) deduction from retained earnings at June 30, 2018.
However, we believe that the bank will have to take higher provisions for IFRS 9, using the NGN31 billion of regulatory risk reserves that it holds under the local prudential guidelines. Based on peers' experience and the bank's weak asset-quality indicators, we estimate the impact will significantly exceed the regulatory risk reserves and estimate that our risk-adjusted capital (RAC) ratio will reach 3.4%-3.9% in the next 12-24 months compared with 5.3% at year-end 2017.
The impact will be somewhat tempered by the capital gain when the sale of the bank's U.K. subsidiary is finalized. We expect the bank's credit losses to average 5% over the same period, while nonperforming loans (NPLs; including impaired loans and loans more than 90 days overdue but not impaired) will remain above 35% in the next 12-24 months after reaching 40% at Sept. 30, 2018.
Overall, we think the bank will display losses in the next 12-24 months. In May 2019, Diamond Bank will have to repay its maturing Eurobond principal of $200 million. The bank plans to use its foreign-currency liquidity and the proceeds from the sale of its U.K. subsidiary for the repayment, among other sources. Any delays or unexpected developments could exert downward pressure on the ratings.
Following the recent resignation of board members, the bank could face some outflows of deposits, but the granularity of its deposit base and its historically good retail franchise are mitigating factors.
The negative outlook reflects the pressure on the bank's capitalization from weaker-than-expected asset-quality indicators, and on its foreign-currency liquidity due to a large upcoming maturity in May 2019. We could lower the ratings if provisioning needs proves higher than what we currently expect, leading to a decline in capitalization as measured by our RAC ratio (below 3%) or a breach in the local regulatory requirements.
We could also lower the rating if the bank is unable to secure sufficient foreign-currency funding for the repayment of its Eurobond. When the latter is repaid, we may revise the outlook to stable if the banks' asset quality and capitalization improves, and the make-up of its board stabilizes.
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