Fitch Ratings has given specific reasons for its latest rating action on Nigerian Banks. According to the rating agency, the downgrade of Ecobank reflects Foreign Currency (FC) liquidity risks that may stem from any Capital Adequacy Ratio (CAR) breach, including due to the accelerated repayment of its US$300 million Eurobond as a result of breach of covenant.
Ecobank Nigeria’s (ENG’s) Issuer Default Rating (IDR) and National Ratings are now driven by its VR and underpinned by potential support from its ultimate parent, Togo-based Ecobank Transnational Incorporated (B-/Stable), as expressed by its SSR of ‘ccc+’.
Stanbic IBTC Holding’s and Stanbic IBTC Bank’s (SIBTC’s) National Ratings are driven by potential support from their ultimate parent, South Africa-based Standard Bank Group Limited (SBG; BB-/Stable). The IDRs and national ratings of the 10 other banks and two holding companies are driven by their standalone creditworthiness, as expressed by their VRs according to Fitch.
Fitch maintained the Rating Watch Negative (RWN) on FCMB and Union Bank of Nigeria (UBN), reflects its view that, while estimated to have remained compliant with their CAR requirements (15% and 10%, respectively) following the devaluation of the naira, the banks are at risk of breaching the requirement.
This is due to further capital pressure emanating from further naira depreciation and credit losses considering already high Stage 2 and Stage 3 loans (end-3Q23: 31% of gross loans for FCMB; currently estimated at over 40% for UBN).
The RWN on UBN’s Long-Term IDR also continues to reflect uncertainty surrounding the background to the recent intervention by the CBN (see: “Fitch Places UBN on RWN Following CBN Intervention”), the potential for further regulatory actions that may contribute to a CAR breach and the negative implications for the bank’s standalone credit profile, particularly relating to corporate governance risks and liquidity pressures arising from potential funding instability.
Fitch expects to resolve the RWNs in the next six months when prospects for CAR compliance and, in the case of UBN, the implications of the CBN intervention are clear.
“The affirmation of the other Nigerian banks’ and BHCs’ long-term IDRs and national ratings reflects Fitch’s view that these issuers are likely to remain compliant with their respective regulatory minimum CAR requirements despite the devaluation, with sufficient buffers and pre-impairment operating profits to tolerate a further moderate naira depreciation and the second-order effects of a challenging economic environment on loan quality, “ it stated.
The VRs of Zenith Bank, UBA, GTCO and GTB are one notch below their implied VRs of ‘b’, reflecting the operating environment/sovereign rating constraint. ENG’s VR is one notch below its implied VR of ‘b-’ due to the following adjustment: Weakest Link – capitalisation and leverage.
A sovereign downgrade could result in a downgrade of the VRs if Fitch believes that the direct and indirect effects of a sovereign default would likely erode capitalisation and FC liquidity insofar as to undermine viability.
The rating agency further noted that a downgrade of the VRs (including the resolution of the RWN on FCMB and UBN) could result from the combination of the naira devaluation and a marked increase in the problem loans ratio, resulting in a breach of minimum CAR requirements without near-term prospects for recovery.
A downgrade of UBN’s VR may also result from further regulatory intervention, such as the imposition of restrictive measures on the bank’s activities, fines or other regulatory findings, which contribute to a breach of the bank’s minimum CAR requirement. A downgrade of UBN’s VR may also result from funding instability, such as deposit outflows or additional liquidity sources becoming unavailable to the bank, as a result of the CBN intervention.
The RWN on FCMB’s and UBN’s ratings will be removed and the ratings affirmed at their current levels if Fitch determines that the banks will remain compliant with their respective CAR requirements with sufficient buffers to accommodate further naira depreciation and asset-quality pressures. In the case of UBN, the affirmation would also require CBN intervention and funding stability risks receding.
“The capitalisation and leverage scores of GTCO, GTB and UBA of ‘b-’ are below the ‘bb’ category implied scores due to the following adjustment reason: risk profile and business model (negative).
“In accordance with Fitch’s policies FCMB appealed and provided additional information to Fitch that resulted in a rating action that is different to the original rating committee outcome, “ it stated.
Jaiz Bank has an ESG Relevance Score of ‘3’ for Exposure to Social Impact, above sector guidance for an ESG relevance score of ‘2’ for comparable conventional banks. This reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on the entities.
UBN’s has an ESG Relevance Score of ‘4’ for Governance Structure (in contrast to a typical ESG relevance score of ‘3’) due to the recent dissolution of the board and management by the CBN. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance according to Fitch is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.
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