S&P Global Ratings today said it affirmed its 'B-/B' and 'B/B' long- and short-term issuer credit ratings on Togo-based Ecobank Transnational Inc. (ETI) and Ecobank Nigeria Ltd.(Ecobank Nigeria), respectively. The outlook on both entities is stable.
The affirmation of our ratings reflects our view that the group's strong pan-African footprint and strengthened management and governance will support its profitability going forward. This is balanced against the group's constrained asset quality indicators and capital position.
We think its unique pan-African franchise has attracted a stable base of institutional investors, including Nedbank, Qatar National Bank and South Africa-based Public Investment Corporation, which have positively affected the group's corporate governance and risk management. We believe the International Finance Corporation's sale of its 14.1% stake to Arise Invest B.V. reflects continued interest from global investors in Ecobank group and will further support the group's broader business stability. In our view, the diverse shareholder structure, combined with the group's strong management team, will ensure the group's adequate positioning and enable it to benefit from the supportive economic conditions in the West African Economic and Monetary Union (WAEMU), its largest market, improving economic conditions in Ghana, and more stable conditions in Nigeria.
Ecobank group benefits from a sizeable customer base (19 million as at June 30, 2019) and a strong competitive position in its core markets, ranking among the top three banks in 14 of the countries in which it operates. This wide franchise will continue to support the group's stable and diversified funding base and low cost of funds, which compare favorably with regional peers. The group's subsidiaries are primarily funded with short-term deposits (88% of the funding base), comprised of retail and nonfinancial corporate current and savings accounts.
We expect loan growth to resume within the next 12 months. This, in conjunction with higher nonoperating revenue and reduced cost of risk compared with prior years, will support earnings growth. We expect the bottom line figures to improve, in conjunction with the continued retention of 100% of net profits until 2020, after which we expect a dividend payout of approximately 40% of net profit. This will help improve capitalization slightly and should lead to an average risk-adjusted capital (RAC) ratio before diversification of 3.5% in 2019-2021, up from 3.1% at year-end 2018. The group's subsidiaries are all compliant with their respective minimum capital adequacy as prescribed by their respective regulators. More specifically, following the $150 million recapitalization of Ecobank Nigeria in 2018/2019, we note that its capital adequacy ratio has increased to 16.2% as of June 30, 2019. We understand the bank's capitalization requirements currently do not incorporate the additional 1% domestic systemically important bank (D-SIB) buffer above its 10% minimum capital adequacy ratio. We estimate the group has sufficient capital to meet the additional requirement if the Central Bank of Nigeria introduces the measure in 2020.
The need to inject capital at Ecobank Nigeria, stemming from the naira devaluation, the $250 million effect of International Financial Reporting Standards 9 (IFRS 9), and additional outlays for regulatory compliance, resulted in double leverage increasing to 150% at year-end 2018, from 114% in 2017. We consider this ratio very high, however, we believe that this risk is adequately covered by available foreign currency liquidity of approximately $600 million. We forecast double leverage will reduce to 130% by 2019 and below 120% by 2020, in line with management's targets, on the back of increased dividends and cash flows from its subsidiaries.
The outlook on Ecobank Nigeria and ETI is stable, reflecting our expectation that the group's asset quality and financial performance will gradually improve over the next 12 months. The outlook also incorporates our expectation that the group would maintain adequate liquidity at the holding company level in response to its high double leverage.
We would lower our ratings on Ecobank Nigeria if we took a similar rating action on Nigeria (B/Stable/B). We would also lower our ratings if we considered the Nigerian subsidiary less core to the group due to prolonged weaker financial performance.
We would lower the ratings on ETI if liquidity buffers that mitigate its double leverage significantly diminished.
An upgrade of ETI would require, in addition to double leverage reducing to more manageable levels below 120%, a significant improvement in its asset quality indicators or a strengthening of its RAC above 7%. We consider an upgrade of ETI not very likely within our forecast horizon.
An upgrade of Ecobank Nigeria would require a significant strengthening of the group's asset quality or capitalization and a similar action on Nigeria.