Reviews & Outlooks | |
Reviews & Outlooks | |
3009 VIEWS | |
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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.
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