S and P To Lower ETI Ratings If Significant Increase in Double Leverage Above 120% Is Noticed

Proshare

Thursday, October 04, 2018 /07:49 AM /S & P Global Ratings


Highlights: 

  • We expect Ecobank group's financial performance to gradually improve over the next 12-24 months on the back of more stable macroeconomic conditions in key markets of operations.

 

  • We consider that Ecobank Nigeria Ltd. remains a core subsidiary for the group.

 

  • We are therefore affirming our 'B-/B' issuer credit ratings on the group's nonoperating holding company Ecobank Transnational Inc. and our 'B/B' issuer credit ratings on Ecobank Nigeria Ltd.

 

  • The stable outlook reflects our expectation that the group's financial profile will remain broadly unchanged and that double leverage at ETI will not increase.

 

S&P Global Ratings affirmed its 'B-/B' long- and short-term issuer credit ratings on Togo-based Ecobank Transnational Inc. (ETI) and its 'B/B' long- and short-term issuer credit ratings on Ecobank Nigeria Ltd. (ENG). The outlook on both is stable. 

The affirmation reflects our expectation that Ecobank group's financial performance will improve gradually over the next 12-24 months, with lower problematic assets and slightly higher profitability on the back of more stable macroeconomic conditions in key operating markets. 

The group returned to profitability in 2017 because of a significant decline in cost of risk and reduced operating costs. We expect the group's asset quality indicators to continue improving over the next 12-24 months, including nonperforming loans (NPLs; loans overdue by more than 90 days) falling to around 7%-8% of total loans and coverage of NPLs by provisions increasing above 90%. 

To that end, the group is strengthening its credit risk management framework and monitoring processes. Under our base-case scenario, the group will also maintain

relatively elevated credit provisions at around 2.6% of total loans as it strengthens its NPL coverage ratio and transitions to International Financial Reporting Standard (IFRS) 9. 

Coverage of NPLs by provisions improved to 81% in the first half of 2018 from 52% at year-end 2017, incorporating $299 million of IFRS 9 provisions. We still view the group's weak loss experience and exposure to moderate coverage of NPLs compared with peers as negative for its credit profile. 

We expect the group's return on equity will average 15% over the next 12-24 months, which would somewhat support a stabilization of the group's risk-adjusted capital (RAC) ratio around 3.3%-3.6% over the same period, assuming no dividend distribution. We see capitalization as a weakness for the group's overall credit profile. 

Our ratings reflect the group's strong footprint in Africa and the new management team's efforts to address the group's asset quality issues, stabilize its financial profile, and shift its strategy toward a targeted country-by-country approach rather than geographic expansion as a priority over earnings. 

The funding base of the group and its subsidiaries is in line with peers', andthe group maintains a reasonable level of liquidity, in our opinion. All of the group's subsidiaries are largely funded by short-term customer deposits (total deposits accounted for 90% of the funding base and 173% of total loans on June 30, 2018), with a preference for retail and nonfinancial corporate current and savings accounts to lower the cost of funds. 

There is fungibility of liquidity within the group. Furthermore, at 134% as of June 30, 2018, the group's stable funding ratio compares well with peers'. The group's broad

liquid assets-to-short-term wholesale funding ratio was at 7.7x at end-June 2018, while its net broad liquid assets covered 46% of short-term deposits at the same date. 

Overall, we assess the group credit profile at 'b'. Our rating on ETI, the non-operating holding company, is only one notch below the group credit profile(rather than the standard two notches), since we do not see ETI as currently vulnerable to nonpayment, or dependent upon favorable business, financial, and economic conditions to meet its financial obligations in the next 12 months. 

In addition, the group's double leverage has stabilized around 100%, which we consider as moderately high. We understand that the group targets a double leverage ratio close to 100% over the next 12-24 months. We also consider ENG a core subsidiary of the Ecobank Group. ENG accounted for approximately 30% of total group assets at year-end 2017. Therefore, our ratings on ENG reflect the wider group credit profile. 

The stable outlook on ETI and ENG reflects our expectation that the group's asset quality and financial performance will gradually improve over the next 12 months. It also incorporates our expectation that ETI will maintain its double leverage at manageable levels. 

We would lower the rating on ENG if the group's RAC ratio fell below 3% or if the group exhibited a higher cost of risk than we currently expect. We would also lower the rating on ENG if we took a similar rating action on Nigeria. Finally, we would lower the ratings on ETI if we were to notice a significant increase in double leverage above 120%. 

An upgrade of ENG or ETI appears unlikely over the next 12 months and would require a significant strengthening of capitalization or asset quality.


Proshare Nigeria Pvt. Ltd. 


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