Development Bank of Nigeria earns triple “A” credit rating

Agusto & Co., a Pan-African Credit Rating and Research Agency have upgraded the rating assigned to Development Bank of Nigeria Plc (DBN) to ‘AAA’.

This was contained in the 2021 Final Rating Report recently released by the rating company. The new rating tagged DBN as “A development finance institution of impeccable financial condition and overwhelming capacity to meet obligations as and when they fall due.”

The rating rationale, according to the report, takes into cognisance the support of the Bank’s shareholders – the Ministry of Finance Incorporated, Nigeria Sovereign Investment Authority (NSIA), African Development Bank (AfDB) and the European Investment Bank (EIB). The rating also considers the support of other international development finance institutions such as the French Development Agency (AFD), KfW, the German Development Bank and the World Bank who provide funding and technical support in addition to strengthening governance.

Agusto & Co. report listed DBN’s strength to include “good shareholder support, good asset quality, good corporate governance, good capitalisation, good liquidity profile, and experienced management team,” all of which combined to earn The Bank an AAA status.

The report stated that despite the global economic implications of covid-19, DBN maintained its commitment to nurturing MSMEs in Nigeria, while also holding on to a strong credit position. “DBN is a wholesale financial institution that grants loans to eligible participating financial institutions (PFIs) for on-lending to Micro and Small Scale Enterprises (MSMEs) and small-sized corporations. Despite the COVID-19 pandemic, DBN increased its financial support to Micro and Small Scale Enterprises (MSMEs) and small-sized corporations through participating financial institutions (PFIs) during the financial year ended 31 December 2020. As a result, the Bank’s gross loans spiked by 109.6% to ₦215.1 billion as at FYE 2020. As at the same date, approximately 136,000 MSMEs have directly benefited from the financial support of DBN, higher than circa 101,000 MSMEs in the prior year.

“DBN maintained its nil impaired credit position reflecting the strength of its wholesale lending model and the resilience of the credit risk management. Subsequent to the year-end, the Bank disbursed loans to four newly onboarded PFIs, all of which are considered investment grade counterparties. DBN intends to further expand the pool of eligible PFIs to increase financial support to MSMEs. We believe the expansion will further test the resilience of the credit risk management policy of the Bank.”

The report added that though profitability is not a core mandate of the Bank, DBN’s profitability remains acceptable despite the coronavirus disruptions that tested the financial services system in 2020, while the bank was also able to maintain notable shareholders’ funds.

“However, a reduction in the pricing of new loans in line with the prevailing economic realities and the lower yield on investment securities resulted in a 44% decline in the pre-tax profits to ₦18.3 billion in FY 2020. Similarly, pretax return on average assets (ROA) reduced to 3.8% (FY 2019: 8.7%) while pre-tax return on average equity (ROE) stood lower at 10.9% (FY 2019: 22.9%). In the near term, we anticipate an improvement in profitability (albeit marginally) as the pricing of loans is adjusted to reflect the rising interest-rate climate.

“As at FYE 2020, DBN’s shareholders’ fund stood at ₦176.9 billion (FYE 2019: ₦159.6 billion), well above the ₦100 billion regulatory minimum for wholesale financial institutions. Although the Basel II ratio dipped to 75.2% (FYE 2019: 140.5%) due to the spike in the loan book, it remained comfortably above the regulatory threshold of 10%. In our view, capitalisation will remain good to sustain the Bank’s near term growth ambitions. We also believe that the Bank can leverage the relationship with existing shareholders to further support the capital base if needed.

“Based on the aforementioned, Agusto & Co. hereby attach a stable outlook to the rating of Development Bank of Nigeria Plc. Our outlook reflects the expectations that DBN’s asset quality, capital, liquidity profile and financing capacity will remain good while strong shareholder support will be maintained. We also expect the loan portfolio to grow in line with the core mandate notwithstanding the weak macroeconomic fundamentals,” the report said.

Development Bank of Nigeria was established by the federal government in collaboration with the World Bank (WB); African Development Bank (AfDB), German Development Bank (KfW), French Agency for Development and European Investment Bank, to alleviate financing challenges facing Micro, Small and Medium Scale Enterprises (MSMEs) in Nigeria.

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